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Forecasting the future

If only we could

I hear two competing theories about what our post-pandemic world will be like.  I will sum them up as either reversion to the mean or the pandemic will change everything. But as a recent opinion piece in the NYTimes claimed, no one actually knows anything!

But if you are forecasting a business, you need more direction than that. As much as humans hate uncertainty, businesses hate it more!  But as I wrote about last time, we are in a time of uncertainty and we have to deal with it. If you haven’t read Phillip Tetlock’s book Superforcasting, you should.

But how can market researchers help the businesses they serve come up with forecasts?  It’s tempting to just ask their customers what they will do, but just like the rest of us, they don’t know. No one does. I hate when market researchers ask people questions that are impossible.

But what they can answer are questions about some factors that are going to influence what the world will look like post-pandemic.

So far, I have come up with the following factors:  the length of time the pandemic is front and center, pent-up demand, the new financial realities post-pandemic, substitutability of what we do during the pandemic and the degree of trauma and fear that remains. These will vary by location and importantly by age. Each will affect your product category in a different way. These can be used to build scenarios, as recommended by Ray Poyter, as I discussed in my last blog.

Here's more detail on each of the major factors:

This may be obvious, but the longer the pandemic affects our lives, the bigger the impact. Habit formation matters. We are well past the 21-day period needed to form new habits.  The habits are now formed.  This supports the view that the pandemic will change everything. But not so fast, there are other factors to consider.

This is countered by the pent-up demand factor.  People are lonely and going stir crazy.  Just because people haven’t gotten haircuts for the past two months and have been going to meetings and school online doesn’t mean that they won’t return to their previous behavior when able to. In fact, we see the first cases of people after stay at home orders are lifted getting haircuts.   And going to the beach and getting ice cream. Not going to school – yet. But, as I learned when I worked on a product that had a pent-up demand, pent-up demand doesn’t last. You run out.

Then there are the new financial realities.  The hospitality industry business model will have to change, and profitability will be affected. That may result in pricing changes, so that fewer people can afford the product, or profitability decreases as it absorbs the cost of cleaning and social distancing.  It’s unclear whether workers will need to be paid more; certainly people who believe that “essential workers” are underpaid are lobbying to increase their pay, but there may be such pent-up demand among unemployed workers that it may override any caution workers feel about being put in danger of catching the coronavirus.

The new financial realities apply in other industries as well.  Consumers will probably have less money because of the recession and a potential period of unemployment. And changing the supply chains to deal with the disruption and the costs of social distancing may cause costs to increase, which is a different financial reality.  Recently we have achieved a historically low cost for products, which has opened up financial space for the service sector to grow. That may retreat, at least somewhat. Things like massages and spa days may decline as disposable income decreases.

The degree of trauma and fear is still another factor.  The degree to which it will affect future purchasing behavior is going to vary by location and by age.  Those who are the most risk (the elderly, the immunocompromised) and those in areas with the highest infection rates will have the greatest effect on their behavior.  Personally, knowing people who died or who caught the disease will have a greater effect than just knowing it happened elsewhere. Trauma and fear change behavior and aren’t rational. Their effects will persist. But I have found a counter example; that of the polio epidemic. I am old enough to remember getting vaccinated for polio, but don’t remember the panic that I read about. So perhaps there is a decay rate for trauma and fear.

Children’s stage of development will also have an effect.  Psychologists say that those who are in the formative years (approximately 14 to 25, where the pre-frontal cortex isn’t fully developed) will show the greatest effect on future behavior.  This may affect their saving and spending behavior.  My mom was in that age range during the Great Depression and exhibited stockpiling/hoarding her entire life.  She talked about people she knew losing money in stocks and having to kill and eat the entire pig that they raised.   On the other hand, my father-in-law was of a similar age, but it had a different affect on him. His life story had other traumatic events (PT boat in the Pacific during WWII) which make the story more complicated, but his philosophy was to live for the moment and not worry about the future the way my mom did. So, my prediction, is that there will be different segments, with different reactions, even among this age range.

 

Finally, there is substitutability.  Services that are being used instead of the things we used to do, like Zoom for meetings and schools, meet the need to a certain degree but aren’t perfect substitutes.  Kindle instead of physical books is another not perfect substitute. I resisted using my gifted Kindle but find myself using it much more in the lockdown period because of limitations on libraries. I don’t find the Kindle perfectly substitutable.  It’s better than nothing, but not perfect.

I hope this post is helpful in trying to figure out what is actually going to happen. Of course, as we all know, forecasts are probably perfectly wrong, but the more we can be concrete in our input and assumptions, the greater likelihood that they could be better.

Let me know if you have any other ideas to add.

Edited to add: I just heard a podcast by Nate SIlver of 538.com that gave me another idea. He mentioned the idea of fatigue. He specifically said that it is tiring to act altruistically, and that people are getting tired of doing the right thing for other people, but I might expand that to include fatigue with doing things that take a lot of effort - like wearing a mask.  

 

 

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