Treasury News Network

Learn & Share the latest News & Analysis in Corporate Treasury

  1. Home
  2. Risk Management
  3. Financial Risk Management

Cash flow forecasting needs Actively Open Minded Thinkers

The standout presentation at the ACT Annual Conference in Liverpool last month was by Tim Harford, author of The Undercover Economist column in the Financial Times, who just stood up and talked, without notes or any props at all, about how to forecast. It was stunning.

Keynes v. Fisher 

He started by describing the differences in the careers and approaches to forecasting between two famous economists - John Meynard Keynes and Irving Fisher. Both were enthusiastic investors because they felt, by using different techniques, they could see into the future. They were extremely successful in the 1920’s and also changed the statistical basis of economics with their new indices and techniques. Keynes had a clear investment strategy: forecast the boom and the bust moving in and out of different cyclical sections of the economy which is what he did through the 1920s. Then in 1928 our two heroes were, even though they didn’t know it, (Tim tells a good story) “Standing on the brink of a precipice.” Then came the Wall Street crash which wiped out 89% of the value of the Dow which took four years to unfold, and continued into the great depression. This was the single most important peace time event in the 20th century AND the two leading economists MISSED IT.

Fisher ploughed on investing, believing his indices could not be wrong as everything is forecastable. He died a bankrupt. 

Keynes saw things rather differently, he thought of investing “as high stakes gambling” which made him a more agile and flexible investor. In his classic book on the general theory of economics, when discussing the price of copper, interest rates, and the possibility of war of war 20 years hence, he wrote, “About these matters, there is no scientific basis on which to form any probablity whatsoever. We simply do not know.”  

Keynes, who died a millionaire, is famous for something (which Harford suspects he didn’t actually say): “Perhaps, when the facts change, I change my opinion.” But it still makes sense when making any forecast.

Open minded thinking

Harford wove into his talk about forecasting, the findings from work by Philip Tetlock who asked leading experts to make measurable forecasts in their field and then waited 18 years to see if they were right. Tetlock published his results in 2005, which were basically: “a chimp from Chester has as much chance of being right as these experts and will be cheaper.”

Tetlock followed this survey with a study of 20,000+ people, of all kinds, again asking them quantifiable questions. This study (published last year) showed that:

  • we are mostly bad at forecasting
  • some people are not and they seem to get better over time not worse (Tetlock calls them super forecasters) who did a substantially better job than most experts
  • being an expert doesn’t make you a good forecaster
  • super forecasters have a good sense of when they could make a forecast and when they couldn’t, i.e. if they didn’t know they would say so, when they did know they would give a forecast; it is critical to know when you are being smart and when being stupid (Harford thinks this is really is really tough to do)
  • super forecasters exhibit a behaviour which Tetlock calls: actively open minded thing

Actively open minded thinkers:

  • criticise themselves a lot, constantly asking themselves: what if I am wrong?
  • look for disconfirming evidence, not continulally trying to shore up their believes/forecasts
  • love getting into arguments about the topic, not to crush somebody, but to test their beliefs so they might learn something
  • like changing mind (unlike most people).


Harford, summed up the difference between Keynes and FIsher: “Keynes changed his mind, FIsher didn’t.” Keynes moved to a Warren Buffet buy and hold strategy. 

But why did Keynes change his mind and FIsher didn’t? Harford believes that there are two reasons:

  • Context: FIsher was completely exposed because he had published his forecasts and hugely invested based on them and couldn’t back away, while Keynes was making forecasts privately and had failed before, so no big deal to abandon his strategy.
  • Character: Irving thought world was understandable from statistics and analysis with enough data he could see into the future, while Keynes was much more flexible and ready to change.

CTMfile take: Tetlock on his web-site warns against confident forecasters who won’t change their minds. Is your cash flow forecasting team made up of Actively Open Minded Thinkers?

Like this item? Get our Weekly Update newsletter. Subscribe today

Also see

Add a comment

New comment submissions are moderated.