By Shane Bender
“The fox knows many little things, but the hedgehog knows one big thing.” – Greek poet Archilochus
Are you someone who believes in Big Ideas and governing principles about the world and behave as though they are physical laws?
Or are you a fox that believes in many little ideas and therefore takes many approaches toward a problem?
In Nate Silver’s book The Signal and the Noise, he discusses that Isaiah Berlin wrote an essay dividing the experts into 2 categories – the hedgehog or the fox. Why does this matter? In the world of forecasting, it is important to know that foxes are much better at forecasting. The problem is that the charismatic and colorful personalities that we hear from most often are usually hedgehogs.
Below are 3 key characteristics I believe are important in putting together a good forecast. Since I am a CFO, I am going to focus mostly on business forecasts.
Foxes will look at different scenarios and assumptions as they are not sure about anything specific. Hedgehogs tend to stick to one approach and try to make all data fit into their way of thinking. Data is changing all the time when putting together a financial forecast. A forecast is outdated as soon as you finish it. The customers, employees, operating expenses, and vendor relationships are changing regularly. We have to be willing to change our mind and take new data to improve our forecast.
Many years ago, I was an Assistant Controller for a large electronics distribution company. The company’s sales mirrored the GDP growth and decline of the telecommunications industry. We passed around a graph throughout the company and parent company. At one point, I heard an executive say they didn’t want to see this graph anymore. The company made changes and began to diversify into different industries.
Learn From Your Mistakes
Foxes are willing to accept mistakes and take the blame for them. Hedgehogs will tend to blame some other reason or circumstance for a bad forecast. Each month I update the financial forecast and compare to last month. I make adjustments and learn from any mistakes. With time and experience, the forecasts start to get more accurate as you make better assumptions. What good is it to make excuses when building a forecast? A good forecast has check figures to make sure the data is represented correctly. Sometimes, there is a bad assumption or illogical forecast. Through proper analysis, we can decrease our mistakes. I think if you don’t have any mistakes in the forecast, you are not improving it and therefore are probably not forecasting accurately.
Foxes are much more cautious in their predictions and provide scenarios and probabilities to explain the forecast. Hedgehogs will stand firm with their predictions and not change them. Sometimes it is important to do scenario analysis to see how a business looks at different revenue or expense levels. Forecasts change all the time. We can’t be worried or be too proud about what others think. “When the facts change, I change my mind,” the economist John Maynard Keynes famously said. All that is necessary is that we keep a record of our forecast and compare the new one to the old forecast and be able to explain the changes.
So Why Does This Matter?
When it comes to putting together a good financial forecast, we should be flexible, cautious, and learn from our mistakes. There is a place for hedgehogs when building consensus around a big idea or getting people excited about the future. Biased hedgehogs are much more exciting on television and influential with the media. I just would not have them put together your financial forecast. When it comes to making decisions about costs, hiring, and revenue, you need the attitude of the fox.
If you want to learn more about forecasting for business and nonprofits, check out my award-nominated book and audiobook Forecast your Future: How Small Businesses Exchange Stress and Chaos for Cash and Clarity.