How to operate in uncertain times.

• Author: Kavanagh, Shayne C.
• Position: Dance with Chance: Making Luck Work for You - Book review

Dance with Chance: Making Luck Work for You

By Sypros Makridakis, Robin Hogarth, and Anil Gaba

OneWorld Publications

2010, 360 pages, $14.95

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The thesis of Dance with Chance is that accurate forecasting is very difficult, even impossible in some situations, so we must accept uncertainty and plan for it accordingly This is an intriguing proposition, considering that the book's lead author, Spyros Makridakis, is a leading forecasting science scholar--hence, the book's argument is not made by someone who takes the value of forecasting lightly. Several points are essential to understanding the basic argument Makridakis and his colleagues make:

* The future is never the same as the past, so extrapolating past patterns into the future will never be completely accurate.

* Complex statistical models fit historical data well but don't necessarily forecast well.

* Simple statistical models often outperform complex models because they don't attempt to over-fit historical data and the associated anomalies--they just forecast the basic trend forward.

* Human judgment is a notoriously bad form of prediction, even when the judgments are made by "experts."

* Neither statistical models nor human judgment capture the extent of uncertainty in their forecasts, and both are surprised by large errors and events.

Dance with Chance reviews examples in the fields of medical science, finance, business, and personal happiness to demonstrate the difficulty of making accurate predictions and the prevalence of random variation in determining many outcomes. For example, popular management science literature is replete with stories of companies that have experienced superior performance and the management techniques that are the supposed secrets to their success. However, long-term studies of the companies that have been featured in some of the best-known books in this genre show that these firms return to average performance, or worse, when looked at over a number of years. In the relatively brief period when they were scrutinized, however, their performance looked good, and theories were developed to explain their success. Witness Toyota--for a number of years, it was regarded as a paragon of corporate efficiency and productivity. However, recent problems have placed it at No. 33 on Fortune magazine's well-known list of most admired companies, down from No. 3 in 2009. Who would have predicted that?

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This leads to the message of Dance with...