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Four ways to improve rational decision-making and forecasting

Getting the right cash flow data and using the right systems is part of the key to successful cash forecasting and decision-making but these soft skills will enhance treasury forecasting.

Yesterday CTMfile published this associate article by Cashforce's Nicolas Christiaen, which looks at some of the success factors for good cash flow forecasting. When it comes to treasury cash flow forecasting, the emphasis is very much on getting the right flows of financial data from different parts of the company into the right systems and using the right tools to analyse the data. But that is only part of the picture of what helps to create valuable forecasts. In this podcast published by Knowledge@Wharton, two University of Pennsylvania professors, Barbara Mellers and Michael Platt, discuss their work on the traits of the “superforecasters”. Some of their conclusions also have relevance to the treasury world:

1. Appreciate complexity

Barbara Mellers says: “There’s only two ways to get a forecast wrong. That is if you say zero or one. There’s a whole range of possibilities that don’t necessarily mean you’re wrong in between that.” We all have a tendency to see problems in binary terms of either yes or no, in or out, up or down, etc. This over-simplifies, so in terms of trying to predict an outcome, it might be advantageous to consider all the possible combinations that might occur between two opposed positions. As the professors say several times during the podcast, “the world is an incredibly difficult place to predict”. With regards to treasury, there are numerous factors at play even in day-to-day cash flow forecasting, that treasury professionals really need to take note of complexity.

2. Rational thinking and open-mindedness

The professors found during their research that emotion plays a big part in decision-making and in forecasting. Trying to keep emotion out of the equation helps to see things in a more objective way, so that decisions are less likely to be swayed and forecasts less likely to be biased one way or another. Rather than allowing emotion to govern decision-making, decision-makers should try to see things through the eyes of other individuals (possibly those who disagree with them), which is part of the process of taking a more rational approach. Mellers says: “When we look at the best forecasters, whom we call superforecasters in the research that we’ve done, they tend to be much more analytical, much more rational. They score higher on measures of actively open-minded thinking.”

3. Emotions are important signals

However, the researchers add that it's not so simple to just keep emotions at bay when making decisions and emotions are important in that they signal that we ought to be paying attention to something. Michael Platt says: “It’s a simple and intuitive notion to think of our emotional self and our rational self as being completely separated. In fact, our brains integrate those processes every time you make a decision. Emotions are important. They’re an important part of the forecasting process.”

4. Better team work

Mellers says: “... in our research, we found with randomized control trials that people make significantly better forecasts when they’re working in teams than when they’re working by themselves.” The researchers found that when people work in teams, they are connecting and communicating with others and even people with good forecasting skills are able to produce better results by working with other skilled colleagues. There could be a number of explanations for this, such as not wanting to disappoint team members and the desire to help others. The presence of others could also be a mitigating factor in decision-making and forecasting, meaning that a more considered or moderate position is taken.

CTMfile take: Overall, the research discussed here suggests that the best forecasters are rational, open-minded and are good at interacting with their colleagues in teams. These would all be important soft skills for treasurers to bear in mind, even as they rely on systems and analysis to forecast cash needs and make key decisions.  

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