Selling Seeing Scenarios: Why Bother With More Than One Scenario?
Genevieve Signoret
(Hay una versión en español de este artículo aquí.)
We’re working feverishly on our new set of global macro scenarios. But I wanted to take a quick timeout to remind you why we even go the bother of taking a multi-scenario approach. After all, it does create more work for us.
First let me quote from our web site:
We forecast and invest under perpetual uncertainty and thus visualize, model, narrate, and strategize under multiple scenarios for the global economy and asset markets.
Our method is as follows. We analyze current macroeconomic and market dynamics. We identify and assume away tail risks through a list of assumptions underlying all scenarios. We visualize two or three paths that the economy and markets could take moving forward, describe them through contrasting assumptions that distinguish across scenarios, and assign them subjective probabilities . We sometimes refer to these assumptions as “pivotal”, meaning that our forecast pivots between two or three paths depending on which cluster of assumptions materializes.
When we say we write stories, we mean it: our scenarios have timing, sequence, even drama. But they’re unrealistic. After all, they’re the basis for our quantitative models, and modeling requires gross simplification.
We narrate detailed stories not to entertain and certainly not to suggest that we can see the future but to force ourselves and our clients to think through how various economic and market forces interact, and to look at two ways things could play out. We call it “imagining alternative futures” and think that it’s the best way to sharpen our awareness of interactions, opportunities, and risks.
After all, our end purpose is portfolio positioning across asset classes to meet an uncertain future.
Uncertainty is our business. Scenarios are our tool.
Why do we find this complicated approach so useful? I’ll give you six reasons:
- It is intellectually honest. It forces us to humbly declare from the get-go that we do not know what the future holds.
- It impels us to fully disclose to our readers the key risks to our central-scenario forecast. We identify for ourselves and our clients all major modeling assumptions made along the way.
- It compels us to seriously engage with views that conflict with our own. When we write down a “risk scenario” (versus our central scenario), often we are narrating the forward view of analysts we suspect to be wrong. To do so, we have no choice but to take their “wrong view” seriously and, with self-enforced open-mindedness, question our own prior beliefs.
- It forces an interdisciplinary approach—to envision rich alternative scenarios, we must consult experts outside our field.
- It sharpens our awareness of risks. Because each scenario assumes away particular risks, step one in our exercise is to thoroughly scan the horizon for risks.
- It keeps our minds uncluttered. Data bombard us. If we hold two or three competing theories as to which trajectory the world is on, as data points hit us, we can hold each up to our competing hypotheses and decide which it confirms or refutes. That is, the approach helps us cope not only with uncertainty but also with complexity.
By the way, you can see this approach in action by signing up for our September 8 webinar taking place at 9:00 AM Mexico City time. This international event will be held in English. We’re calling it “Our Outlook and Your Wealth”.