The Winter 2017 edition of Foresight magazine includes my commentary on the article Changing the Paradigm for Business Forecasting by Michael Gilliland from SAS. Both are behind a paywall (though a longer version of Michael’s argument can be read on his SAS blog), but here is a brief summary.
According to Gilliland, business forecasting is currently dominated by an “offensive” paradigm, which is “characterized by a focus on models, methods, and organizational processes that seek to extract every last fraction of accuracy from our forecasts. More is thought to be better—more data, bigger computers, more complex models—and more elaborate collaborative processes.”
He argues that our “love affair with complexity” can lead to extra effort and cost, while actually reducing forecast accuracy. And while managers have often been seduced by the idea that “big data was going to solve all our forecasting problems”, research shows that even with complex models, forecast accuracy often fails to beat even a no-change forecasting model. His article therefore advocates a paradigm shift towards “defensive” forecasting, which focuses on simplifying the forecasting process, eliminating bad practices, and adding value.
My comment on this (in about 1200 words) is … I agree. But I would argue that the problem is less big data, or even complexity, than big theory.
Our current modelling paradigm is fundamentally reductionist – the idea is to reduce a system to its parts, figure out the laws that govern their interactions, build a giant simulation of the whole thing, and solve. The resulting models are highly complex, and their flexibility makes them good at fitting past data, but they tend to be unstable (or stable in the wrong way) and are poor at making predictions.
If however we recognise that complex systems have emergent properties that resist a reductionist approach, it makes more sense to build models that only attempt to capture some aspect of the system behaviour, instead of reproducing the whole thing.
As an example, consider the question of predicting heart toxicity for new drug compounds, based on ion channel readings. One technique is to employ teams of researchers to build an incredibly complicated mechanistic model of the heart, consisting of hundreds of differential equations, and use the ion channel inputs as inputs. Or you can use a machine learning model. Or, most complicated, you can combine these in a multi-model approach. However my colleague Hitesh Mistry at Systems Forecasting found that a simple model, which simply adds or subtracts the ion channel readings – the only parameters are +1 and -1 – performs just as well as the multi-model approach using three large-scale models plus a machine learning model (see Complexity v Simplicity, the winner is?).
Now, to obtain the simple model Mistry used some fairly sophisticated data analysis tools. But what counts is not the complexity of the methods, but the complexity of the final model. And in general, complexity-based models are often simpler than their reductionist counterparts.
I therefore strongly agree with Michael Gilliland that a “defensive” approach makes sense. But I think the paradigm shift he describes is part of, or related to, a move away from reductionist models, which we are realising don’t work very well for complex systems. With this new paradigm, models will be simpler, but they can also draw on a range of techniques that have developed for the analysis of complex systems.