Raluca
Aug 16, 20221 min
Business plans,
Valuation models,
Recovery plans,
Are all based on multi-year projections.
📉Financial professionals are used to building or analysing such forecasts.
⚖What is more, these require or imply making the same long term analysis for macro and sectorial conditions.
🔦We are expected to spot micro and mega trends.
😚I must admit this is probably what I like most about being a financial analyst.
😚And yet let me be realistic. This it's also the most flawed expectation of this role.
😒We were wired by evolutionary conditions to think short term and behavioural studies have repeatedly proved this.
😶Long term scenarios are just so theoretical, so impersonal that we can't really consider them, we can't conceptualise them... unless we make a conscious effort.
🤫Without this realisation we are prone to underestimate the probability for material changes in assumptions.
🤫We discuss about long term growth rates or margins rather mechanically and end up putting too much weighing on historical data or models.
📌It's difficult to REALLY grasp our own future, let alone future economic conditions. If we add to this that sometimes our forecasts involve far away economies or sectors on which we don't have any "real-life" involvement the problem is componded.
📌We need specific techniques to nudge us to internalise and REALLY consider whatever is in the future.
✅ I have discovered in language ways of directing my mind consciously to overcome this limitation.
✅I learned to frame my questions when building assumptions in ways that allow me to ponder long term forecasts differently.
✅I need a diclipine and deliberate process to think differently about the far future. It's not in our mind's nature.
How do you ensure your dilligence for such estimates?