Early warning (Part 4)

April 22, 2013

One problem with conducting early warning research is that the things you’re looking for not appear major at the time they occur. Think of a tsunami. What we are really concerned about is when a wave will hit a particularly shore area and how big it will be when it hits. To estimate that, we have to understand where and when the tsunami wave started, when it was merely a swell in the ocean. To understand that, in turn, we have to determine where and when the underlying seismic event, typically an earthquake, occurred and how that will affect the water above. In short, the most important event, the seismic event, is the least visible and furthest away. In addition, not every seismic event causes a swell in the ocean, and every such swell in the ocean results in a tsunami.

What is the lesson for early warning systems? It is that you look too far ahead, you cannot possibly see the impact of current events on the future. Conversely, if you look too closely at the present, you cannot really understand what will happen in the future.

To make that cryptic statement little clearer, I direct your attention to book review about Strange Rebels: 1979 and the Birth of the 21st Century. That book makes the case in 1979 was a “turning point” in world history, particularly with respect to the forces of the marketplace and of religion. The author argues that the election of Margaret Thatcher, the beginning of the Deng Xiaoping’s liberalization of the Chinese economy, Ayatollah Khomeini’s establishment of the Iranian Islamic Republic, the election of Pope John Paul II, and the Afghanistan fight against the army of the Soviet Union, with the support of the United States, all began new, powerful trends that profoundly affect our world today.

Whether or not you agree with that analysis is not relevant. The question is whether, in 1979, you could’ve seen that these events would have the impact 34 years later that they have had. The answer — of course not.

The lead time between these events and their global impacts is too long into and too indirect. So, in conducting your early warning work, do not be tricked into looking for and analyzing such long-term trends. If you can do so accurately, you should seek employment as a fortune teller.

What you have to do is look for important (not necessarily large) changes in existing trends that will impact your firm within the next five to no more than 10 years. Very few companies care to look out beyond 10 years. Why?  Because today’s management will not be there in 10 years. As a matter fact it may not be there in five years. So providing management with a prediction, even if it is correct, of events that will impact the firm in 15 or 20 years is worse than useless; from management’s point of view, it is basically noise. And what do you do with noise? You block it out.

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