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In treasury, it’s better to be rational than intelligent

We humans are innately bad at predicting the future but here are some ways in which treasury could benefit from the study of people with above-average forecasting skills.

Research by a group of US academics, the majority from the Wharton School of Business, suggests that humans are innately bad at predicting the future, whether it's a global event or something related to one's work or personal life. They state that, across a wide range of tasks, “research has shown that people make poor probabilistic predictions of future events”. But the research also found that 2 per cent of the population are considerably better at forecasting the future – so what makes these 'superforecasters' special? The research explores their characteristics and identified four driving forces behind superforecaster performance:

1. Cognitive abilities and styles

The best forecasters in the research scored the highest in intelligence tests, suggesting they have quicker processing skills and are better at detecting patterns. They tend to have a better range of vocabulary and a better understanding of domestic and global politics. They also tended to have a secular, agnostic/atheistic worldview, in which they see their own beliefs as testable hypotheses, and they were more likely to carry on seeking further information. They also had a competitive streak and were more likely to see unusual events in terms of statistical probabilities and coincidence, rather than explaining unusual events with ideas of fate or destiny.

2. Task-specific skills

The best forecasters were more sensitive to what is needed to do well in a task. They are also more sensitive to the complexity, or granularity, of predicting an outcome. The research says: “One possibility is that superforecasters are better at translating complex qualitative causal judgments into probability judgments because they are more knowledgeable, more scope sensitive, and capable of finer grained distinctions along the probability scales.”

3. Motivation and commitment

The researchers write that “highly skilled performance depends on intense, focused, and long-term commitment”, meaning that there really is no substitute for studying and deliberate practice. Those who perform better than others are fully aware that skills are learned through practice rather than being innate and likewise with superforecasters, they realise that their skills can be learned, rather than being a supernatural skill they were born with.

4. Enriched environments

Placing people in groups according to performance, so that the best forecasters sit together in a small team, is another way to increase motivation and get better outcomes. The superforecasters tend to seek out more information on a given topic and are more likely to share information with their peers, creating an enriched environment with a greater number and diversity of views and data. They were also more likely to engage in questioning and responding to their peers.

CTMfile has already written about this topic and about the characteristics of superforecasters that could be of relevance to corporate treasury: Four ways to improve rational decision-making and forecasting 

Adding further weight to the idea that people with above-average forecasting skills can be nurtured (rather than being born with special future-predicting powers), is a presentation recently given by one of Credit Suisse's Michael Mauboussin, head of global financial strategies. He recently attended a meeting of NeuGroup’s Assistant Treasurers’ Group of 30 (AT30) and this write-up of his talk on superforecasters states that companies can take action to improve the rational quotient (RQ) of employees, by proactively providing feedback and training. The logic is that enhancing the focus on rationality will improve the individuals' forecasting skills.

Mauboussin also talked about some of the characteristics of people who are especially good at forecasting and, importantly, they have a keen sense of self-awareness and a good understanding of what they do and don't know. They also have an open mind and are receptive to opinions that differ from their own, which maybe indicates that they are less likely to suffer from bias. If groups of employees are required to make decisions with an element of predicting the outcome of future events, Mauboussin said that better decisions will be made if the group is relatively small (maximum six) but diverse in terms of gender, race, education and specialist knowledge. Importantly, communication needs to be balanced and all members of the group need to be heard equally.

CTMfile take: These are interesting ideas that could be implemented in the treasury space. Treasury decision-making groups could benefit from the notion of pushing individuals to seek other views and information, from having balanced work groups and especially from the idea of nurturing rational skills through feedback and training.

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