Over the weekend, President Donald Trump signed an executive order that imposed an additional 25% tariff on Canadian and Mexican imports and an additional 10% tariff on imports from China. As we write this, the tariffs on both Mexico and Canada have been placed on 30-day holds following President Donald Trump’s negotiations with Mexican President Claudia Sheinbaum and Canadian Prime Minister Justin Trudeau.

Adaptive Forecasting

The intention of this week’s blog post is not to discuss the political landscape, the ins and outs of the tariffs, or to make any predictions as to what is next. Instead, it serves as a reminder that the socio-political atmosphere is continuously changing.

For family business directors, it is critical to keep a pulse on current developments and understand the different implications that may impact or change their industry moving forward.

Maintaining an adaptive forecast is one of the best practices for being able to pivot during unpredictable times.

A forecast is a tool; to be a good tool, it must be adaptable to changing facts. Inflation, tariffs on goods sold, labor market trends, and global fluctuations have made it difficult to forecast how one’s company will operate in a rapidly changing economy.

Rather than stress about the exact measures, managers should aim for consistent measurement, understand the drivers of their selected metrics, and maintain adaptability in their budget and forecast process.

As family business managers and directors re-evaluate their projections, we wanted to revisit some of the mental biases that can potentially skew forecasts.

Illusion of Control

According to Psychology Today, the Illusion of Control is a “mental bias leading people to overestimate the control they have over the outcome of events .” While this bias is generally considered to have positive impacts on individuals’ mental health, it can quickly become hazardous when family business managers begin to forecast future results for a new project.

While looking in the rearview mirror can be insightful, we often ascribe far too much of the outcome (good or bad) to our interventions and far too little to events outside our control. In doing this, we assume that we have learned from the past and will do better this time.

Even if we have genuinely learned some valuable lessons from the past that will allow for better execution, our impact is often much smaller than we think.

In the context of forecasting, the result is a tendency to build overly optimistic forecasts.

Availability Bias

The availability bias describes how we tend to assign too much weight to observations that are easy to recall from our memory.

For family business managers, the availability bias manifests itself when scenarios that have either happened before or are easily imagined get assigned too much weight in a probability distribution. We construct mental probability distributions not based on statistical likelihood but on the ease with which we can quickly come up with examples of particular outcomes.

Successful family businesses have a history of good outcomes, which managers unconsciously draw upon when assessing the likelihood of future outcomes.  This can contribute to overly optimistic forecasts.

Desirability Bias

The desirability bias describes the tendency to accept things as true that we want to be true.

Since family business managers naturally want their proposed project to have a good outcome, the desirability bias suggests that they will screen out evidence or data that does not support the desired outcome (project success) while emphasizing and highlighting evidence and data that does support the desired outcome.

Understandably, this tendency can lead to unrealistic projections.

Extrapolation Bias

Most everyone has heard (and generally agrees with) the phrase “past performance does not guarantee future results,” but extrapolation bias tends to convince people otherwise.

This bias arises when people assign too much weight to recent events.

After seeing a coin flip land on heads five times in a row, people will begin to extrapolate that trend into their expectations for future outcomes of the coin flip, even though the outcomes of future flips are independent of the result of the previous coin flip.

When it comes to forecasting, family business managers can fall victim to the extrapolation bias when they rely too heavily on last year’s high revenue growth and assume the growth will continue over the forecasted period, even when there is no evidence supporting the higher growth rate.

Final Thoughts

As the world continues to spin and the markets evolve, maintaining an adaptive forecast process can help family business directors keep the ship on course.

While forecasting is not a perfect science, being aware of these common mental biases when projecting future performance can help family business directors find the right strategy that considers the attributes of the business, the industry, and your family.

Not sure where to start? Our family business advisory professionals can help; give us a call to discuss your needs in confidence today.