Overcoming obstacles to effective scenario planning

Article from McKinsey & Company by Drew Erdmann, Bernardo Sichel, and Luk Yeung

Some pointers that I've got are:
1. Availability bias
2. Probability bias
3. Stability bias
4. Optimism, over-confidence bias
5. Social bias

On Availability bias

• Counter the tendency to make decisions based on what you already know: Availability bias
• Scenario planning begins with intelligence gathering to understand and define a strategic problem. A planning team identifies emerging trends and potential disruptions that may affect the business. The output is typically a long list of trends, along with a high level assessment of each trend's potential impact.
• At this point, the process is most susceptible to the tendency people have to base decisions on information readily accessible in the decision maker's mind - an availability bias. For example, it's easy to fall into the trap of focusing on trends within your own industry or geography or on only part of a problem, perhaps because that's where information is more easily gathered. All these lead to blind spots. 
• When scenario planners make an effort to understand the confluence of technological, economic, demographic, and cultural trends within and beyond their own countries, they're more likely to generate valuable counter intuitive ideas. 

On Probability bias 

• Beware giving too much weight to unlikely events: Probability neglect
• As scenario planning progresses, attention turns to the unknowns. The company evaluates and prioritises emerging trends by their potential impact and their degree of uncertainty and then builds scenarios around the handful of residual uncertainties that typically emerge from the process. 
• The challenge here is that attempts to quantify what is intrinsically uncertain often lead to over scrutiny and analysis paralysis. Low probability events can also easily be dismissed as outliers or overemphasied, creating a false sense of precision. Assigning low probability events excessive weight, or completely ignoring them, is a phenomenon called probability neglect. 
• In scenario planning, it's critical to avoid the temptation to rush to model trends and uncertainties before assessing them qualitatively to set them in perspective and generate intuitions about how trends may collide and interact. This assessment should embrace several realities: some elements of the future are so uncertain they can't be quantified with any precision; simply evaluating the uncertainties relative materiality to the business is valuable. 

On Stability bias

• Counter assumptions that the future will look just like the past: Stability bias
• As managers build scenarios, the implications for each uncertainty are extrapolated into the future to project different outcomes, and the combination of those outcome becomes the basis for scenarios. The challenge, when managers anticipate the future, is to overcome a natural tendency to assume that it will look a lot like the past.
• Properly executed, scenario planning prompts participants to convert abstract hypotheses about uncertainties into narratives about tangible realities. It can thus help decision makers to experience new realities in ways that are both intellectual and sensory, as well as both rational and emotional. Good narratives not only help us perceive alternative futures but also inspire us to act in response to them. 
• This experiential aspect is essential, and it's here that a critical mistake often occurs: decision makers outsource the creation of scenarios to junior team members or external vendors and reengage only in the final stages. This is problematic because when senior leaders aren't part of the process of developing scenarios, they are less likely to make sense of or act on them. Their natural bias towards stability is therefore more likely to hold sway. 

On Optimism, over-confidence bias

• Combat overconfidence and excessive optimism
• Once scenarios are defined, decision makers turn their attention to identifying the risks and opportunities that each scenario presents and compare them with those of the current business plan. At this point in the process, they will develop a new portfolio of potential strategic actions and contingency plans - as well as a clear understanding of the organisational, operational, and financial requirements of each. 
• Countless business initiatives fail because executives underestimate uncertainty and the chances of failure - and instead move directly to action. Many organisations reinforce this kind of behaviour by rewarding managers who speak confidently about their plans more generously than managers who point out how things might go wrong. Overoptimism and overconfidence lead to projects that run over budget or time, to mergers and acquisitions that fall short of estimated cost and revenue synergies, and to business plans with unreasonable growth expectations. 
• Overoptimism and overconfidence can be countered by scenario planning but can also infect it. To stay on the right track, managers should avoid the temptation to choose the scenarios they deem most likely and to focus planning efforts solely on them. A good reality check is whether your scenario planning forces executives to consider unpalatable through plausible scenarios. 

On Social bias

• Encourage free and open debate: social bias
• Make scenario planning part of a company's modus operandi rather than a one-off exercise. In fact, without institutional support, the biases described previously can be reinforced and amplified by the social biases of groupthink and "sunflower management" (the tendency for groups to align with the views of their leaders). Embedding an awareness of uncertainty, scenarios and biases gives people the language and license to keep one another in check. 

Yours,
Something Small Thinking Big