Mental Models- The Basis of Intutive Forecasting

     MENTAL MODELS- THE BASIS OF INTUITIVE FORECASTING

 1.  Intuition is putting the experience and knowledge available with an individual in the subconscious part of the brain into day to day decision making. Forecasting is presenting a picture of the future. While presenting a picture of the future one is normally presented with a number of scenarios and possibilities. Some are more likely than others and some less likely but all are possible. In forecasting there is no certainty. The attachment of probability to an outcome depends upon the facts, models , variables under consideration and the weight age given to these variables in the given situation and then in a major part to  the experience and past knowledge of the variables and their interpretations available with the individual.

2. Intuition is the way in which we translate our experience into judgments and decisions. It is a set of hunches, impulses, insights, gut feelings, anticipation and judgments stemming from previous events in one’s life.

“The intuitive mind is a sacred gift and the rational mind a faithful servant. We have created a society that honors the servant and has forgotten the gift”

                                                                                                      Albert Einstein

3. We have been taught that these ideas have been reinforced in our minds that more data or information coupled with better analysis based on latest models and tools leads on to better decision making. There is enough evidence to suggest that when people ignore intuition and base their decisions on purely empirical data and models the quality of decision suffers. In a survey about 90% of the CEO’s candidly admitted that their decisions are based on intuition and justified later on by data and facts.

4. Herbert Simon introduced the concept of “bounded rationality” to explain why it is impossible to make any important decision by gathering and analyzing all the facts. There are too many facts and too many combinations of the facts. The more complex the decision and more variables it involves , the faster the complications add up thus making the process of decision making that much complex and cumbersome  and with this goes up the level of uncertainty, thus making the probability of decision going wrong that much possible. Human mind is capable of only a limited amount of data storage, permutation and combinations and processing.
5.  As diversity adds up it becomes increasing difficult to arrive at a decision. It is here that a pattern of situations which one has acquired over the years come to his rescue. It is these patterns, which stem from his experience base help and guide him to come to rational decisions. There is of course a difference between using an informed and uninformed patterns. One needs to ignore and avoid using uninformed patterns by a deliberate process and attempts and use more and more of informed patterns. Informed patterns are those which are formed in the brain by actual experience and have been reinforced by their use whereas uniformed patterns are those which are formed not by personal experience but by experience of others and are untested or are formed from single experience.

6. These patterns are nothing but repeated experiences that are formed subconsciously which are linked together in the form of a pattern in the brain. Therefore it is possible to link to these patterns in the subconscious part of the brain by a deliberate effort to recognize the links that binds these patterns. When one is faced with a situation and a decision is required, it is these links and patterns that are activated and thus provide one to recognize a past pattern in the subconscious brain and thus the brain throws up a solution to the situation based on these past experiences in the form of gut feeling, hunches, insights and impulses. What is required by an individual is to recognize these hunches, insights thrown up by these patterns and deliberately use them to arrive at a reliable and prudent decision. By repeating these efforts over and over again one develops a skill to use to acquire and use them and thus make it a habit of using them in the decision making process. The more skill you develop, that much shorter will be the time taken to arrive at a decision.

7. As one gains more experience and skill one also develops the skill to develop more and more new form as well as modified and improved form of these patterns and sets in motion a form of chain reaction. This leads to an increase in the information data base and the decisions tend to be more and more realistic. When one encounters a new situation then the brain throws up a number of similar situations and it is here the experience of the person in using these patterns comes into play and allows him to either to create a solution or to present him with a decision based on a number of patterns, thus allows a person to improvise a solution.  This also allows either the information base to increase or allows one to modify the old patterns to suit the new situation.

8. We form these patterns and links about everything and whatever can be perceived by our five senses. We make mental patterns or models about market, competition, persons, behavior, relationships and even physical things. Some of these are static model while others are dynamic model, like, markets, preferences, customers, atmosphere, etc. When we make a dynamic model we generally tend to reduce the scale to a small manageable, easily comprehensible and understandable. This reduced scale patterns are neither wholly accurate not do they correspond completely to the reality. This is dependent upon our ability to comprehend the main variables and their relationship with other less important variables. Generally a person uses main variables and tends to discard or even eliminate smaller variables. One tends to use simplicity in order to sacrifice some finer details.

9. These simplified patterns are essential since they simplify a large and complicated world into a simple basic form for us to understand. It stems from the fact that our brain can comprehend, see and make patterns and store a limited amount of information.

Myth Of Continuity

                                        MYTH OF CONTINUITY

1. Models are evident everywhere, whether they are in forecasting, operations, decision making or financial decisions. Besides these theoretical or physical models, there are other model which we use everyday in different situations without realizing that we are using them and are used as a matter of habit. These mental models can be described as the standard operating procedures of the brain and are part of our mental reasoning process. Mangers use these models every day to make routine decisions on a  day to day basis without realizing that they are using these mental models and actually it has become a habit with them.

2. These mental are required if the managers are to make rational and reasonable decisions, which conform to the rule, values, traditions, customs, etc. of the organizations. The only problem and sometimes a plus point also is that once used they become self sustaining and self conforming. If these are in synchronization with the present day reality and values, then they allow the manager to make realistic and prudent decisions and if they are not in synchronization with the reality then the manger starts making poor and faulty decisions. It is possible that some models may while others may not in synchronization and then such situation leads to a mix of good and poor decisions.

3. The basic premise in all these models is the concept of continuity or the assumption that all environmental conditions remain the same and they have been in the past based on which the model was formulated or acquired. But environmental conditions never remain the same, but keep changing sometimes very slowly and sometimes at a fast pace. There are situations in which no past model or experience exist and which one encounters for the first time. In such a case there is no past reference and one is forced to improvise or create a solution and to make a new model based on new inputs or modify the old models accordingly. It, therefore, implies that the models are required to change as per changing situations if the decisions are to remain prudent and reasonable. As the pace pf change increases one starts loosing confidence in his ability to make good decisions because these models have not kept pace with the changing circumstances. It is, therefore, essential that a manager develops the ability to perceive these new changes that are being imposed on the environment or past environmental conditions.

4.  The managers will have to develop an intuitive sense in order to anticipate these changes and to incorporate them into these mental models and amend or change them to suit the present day conditions. If we continue with the myth of continuity and assume that things will remain the same, then there is nothing to stop us from making poor decisions. Old model need to be changed or modified or even discarded and newer models created if one has to be a successful decision maker and continue to make reasonable and reliable decisions.

5. When we are looking at a solution or trying to anticipate things, then we generally try to use analogy as a tool. This looking for an analogy in the past is the natural outcome of the state of continuity. But what we forget is that the analogy is to be viewed in the context of conditions which were present at that time. If conditions are the same then the analogy will lead to reliable and prudent decisions but when they are not the same then it may lead to disastrous results. What is required is to view the analogy in its totality rather than just the main points or similarities.

6. For any mental model to be successful, it should change keeping pace with the environment to which it is applicable.  Every mental model has some general shortcomings and it is advisable to keep them in mind while using such models.  These are:-

(a) They are simplified version of reality.

(b) They are most effective in an era of continuity.

© Their effectiveness is very greatly dependent on the accuracy and reliability of the inputs given to them.

(d) The answers provided by these models need to be interpreted by the managers making the decisions and are therefore subject to interpretation errors.

(e) Inappropriate model may be used in a situation.

(f) Wrong perception of reality.

(g) Time frame in which the decisions are required to be made will reflect in the type and authenticity of the outcome.

(h)  Mental stress of the decision maker.

(i) Limitations and pressure exerted by the surroundings.

(j)  Loyalty to old models and a sense of confidence in them and a general reluctance or lethargy in order to modify or change them.

(l) Human bias.