Prediction vs forecast

AT the start of each year, we always read and hear about predictions and forecasts from pundits and analysts, such as “The 10 Marketing Predictions for 2023” or “Economic Forecasts for 2023” or “Top Technology Predictions for 2023.” In fact, there are several pubic fora where business and political leaders converge for an annual bout of crystal-ball gazing.

Many use the terms “prediction” and “forecast” interchangeably and loosely to mean any statement about the future. It’s also common misconception that prediction is the same as forecast. This perception isn’t entirely incorrect, but a bold prediction may be subject to misinterpretation when taken out of context and may lead to dire consequences.

For example, in the field of seismology, earthquakes cannot be predicted but can be forecasted. An expert “predicting” an earthquake to occur this year may cause panic among people. Similarly, an authority who “predicts” the stock market will reach unprecedented levels may prod amateur and unknowing investors to pour in their savings into the market only to lose them later.

Still, a good many perceive predictions as definitive and absolute, like a fortune teller who can magically predict your true love story with only a quick glimpse of your palm. That’s why it’s important to distinguish between predictions and forecasts in the way we communicate and perceive anything about the future.

This is aptly done by author and statistician, Nate Silver, in his book The Signal and the Noise: Why So Many Predictions Fail-but Some Don’t, where he etymologically described prediction as “associating it with fatalism, fortune-telling, and superstition…that we might interpret these signs so as to gain an advantage from them.” On the other hand, the term forecast “came from English’s Germanic roots, unlike predict, which is from Latin. Forecasting reflected the new Protestant worldliness rather than the otherworldliness of the Holy Roman Empire. Making a forecast typically implied planning under conditions of uncertainty. It suggested having prudence, wisdom, and industriousness…”

A more technical distinction is that a prediction is a specific statement or estimate about the future, usually a specific point in time, like predicting who will win in the boxing match of Pacquiao. Analysts, marketing people, and others issue bold prediction statements to catch people’s attention and draw them to their ideas, such as “marketing or technology predictions.” When we see such kinds of predictions, most likely these are mere trends, that is, general direction of what is already happening, developing or changing. An example of a “prediction” statement I came across which is actually a trend is “cloud computing adoption will continue to rise.” We should be wary in using business predictions in our decision-making and planning.

On the other hand, a forecast is a probability statement or estimate about an occurrence in the future, usually covering a longer time scale. When communicating to our shareholders, customers, and other stakeholders, we often use forecasts to mean an estimate of occurrences, may it be stock price, economic growth rates, market share, etc. over a more generalized time points such as next six months, next five years, or next decade. This is to level-set expectations on the outcome, that is, it is an estimate over a time period.

Forecasts are more useful in strategic discussions and decision-making about what the useful variables and factors are and what potential outcomes may exist. But we should consider and evaluate multiple forecasts, blend it with our experience and insight, to come up with our own. For example, when estimating the inflation rate for this year, we can evaluate multiple forecasts from analysts and economists.

Forecasts and predictions follow the principles of probability in “hits” and “misses.” No one have openly predicted the fall of FTX. But as reported by nymag.com, “a small, loosely connected group of investors and researchers saw the broader economic carnage in crypto markets in the first half of 2022 and asked the difficult, if retrospectively obvious, question: How did this one guy have so much money when everyone else in his industry was going broke?” Majority missed and made huge losses in crypto, while some got their “hit” and avoided the losses.

Forecasts or predictions, the key is still evaluating both with prudence, and using them as aids in decision-making with prudence, coupled with your insight, experience, and wisdom.

Reynaldo C. Lugtu, Jr. is the founder and CEO of Hungry Workhorse Consulting, a digital and culture transformation consulting firm. He is a fellow at the US-based Institute for Digital Transformation. He teaches strategic management in the MBA Program of De La Salle University. The author may be e-mailed at [email protected]