THE INTERNATIONAL JOURNAL OF APPLIED FORECASTING

THE INTERNATIONAL JOURNAL OF APPLIED FORECASTING

ARTICLES by FORECASTERS
for FORECASTERS: issue 63
Into the (Largely) Unknown: A Simple Way to
Handle Uncertainty

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 Forecasting Principles & Methods

Into the (Largely) Unknown:

A Simple Way to Handle Uncertainty
STEVE MORLIDGE AND PAUL GOODWIN

“Doubt is not a pleasant condition, but certainty is absurd.” —Voltaire

PREVIEW In this first of a two-part article, Steve Morlidge and Paul Goodwin make a strong
case for the use of possibility distributions to estimate likelihoods of different outcomes (e.g.,
sales levels) in situations, such as new-product introductions, where there are no past data to
provide guidance.
When we face decisions relating to an uncertain future, it’s best not to pretend that
we can make precise forecasts about what will transpire: there’s no value in being
precise about our ignorance. In these cases, simple, transparent methods that formally
recognise our lack of knowledge, and the fuzziness that accompanies it, come into
their own.

INTRODUCTION: a host of other factors can disturb these

DEGREES OF PREDICTABILITY
I n February 2021, NASA landed the
Perseverance rover on Mars in the pre-
cise location they had planned many years
before. Despite a seven-month journey of
nearly 300 million miles to a planet where
gravitational and atmospheric conditions
are vastly different to those on Earth, the
spacecraft behaved exactly as predicted.
In situations like this, centuries of sci-
entific research and the invariant laws of
nature mean that we have more or less
full knowledge of the conditions we are
facing. Get the mathematics right, and we
can make predictions with virtual certain-
ty. (Though even sophisticated mathema-
ticians aren’t immune to elementary er-
rors: NASA lost a $328 million spacecraft
in 1999 because of a confusion between
metric and imperial measures.)
Back on Earth, electricity suppliers need
to estimate the demand for energy in the
short term. If their forecasts are wrong,
the lights might go out or inefficient
power stations might be brought online
unnecessarily. But existing data show
there are regular patterns in electric-
ity demand – daily, weekly, and monthly.
Weather conditions, sporting events, and
patterns but, to an extent, many of these
disturbances are predictable. If we can
assume that there will be no fundamen-
tal disruptions to the system, past data
can be used to estimate probabilities for
future demand. This is the realm where
statistics and forecasting can excel.
In both these cases it is possible to make
predictions with confidence, either be-
cause we have scientific knowledge or
synthetic or statistical knowledge derived
from a reference class of similar events –
what has happened in the past. Of course,
even here we can never be 100% confi-
dent; past data can be deceptive when it
does not include rare and highly impactful
events (so-called black swans) such as the
unprecedented market crash of October
1987 (Taleb, 2007 p.18), or unparalleled
weather conditions.
But there are many occasions where we
have little or no knowledge because that
which we are interested in is completely
novel. We have no past data on the suc-
cess, or otherwise, of sending astronauts
to Mars or the long-term effect of micro-
plastics on human health. Likewise, many
important business decisions are made
with little certainty about the outcome,

14 FORESIGHT 2021: Q4
for example whenever we launch an in-
novative product or enter a new territory.
In scenarios like those described by
Scoblic and Tetlock (2021) in the previ-
ous issue of Foresight, there is another
factor that makes prediction much more
difficult. Forecasts made by an electricity
company are unlikely to change people’s
behaviour – most people will be unaware
of them. But some forecasts do have this
power, and this quality of reflexivity can
mean that a forecast will be wrong as
soon as it is made.
In several elections in the UK, it is thought
that opinion-poll-based forecasts of a
clear victory by one political party caused
many of its supporters to stay at home on
polling day, thinking their vote was not
needed. The result: a less clear-cut vic-
tory than the one forecast (Norris, 2001)
or even a surprise victory for the other
party. Medium-term business forecasts
are explicitly reflexive because they are
used to steer the performance of a busi-
ness. For example, a firm can take action
to try to ensure that a projected decline in
turnover does not come about.
RISK AND UNCERTAINTY
Frank Knight, the University of Chicago
economist, in 1921 drew a sharp distinc-
tion between circumstances where we can
measure the chances of events occurring
and those where we lack sufficient knowl-
edge to allow us to quantify the prospect
of such events. Knight argued that in the
first situation, where we can use prob-
abilities, we face risk. In the second, we
face a fundamentally different challenge:
uncertainty.
In cases like this, we may have to admit
that we have little or no idea what might
happen, either because we could know
but we (currently) don’t or because the
future is fundamentally unknowable.
Much of the future will be affected by
developments in technology, geopolitics,
economic shocks, and situations where
human agency plays a major role (e.g., the
reactions of a competitor). These are all
areas where it may be wise to make such
an admission.
Key Points
■ In many decisions, such as whether to launch
a revolutionary new product or to invest in
a potentially groundbreaking technology,
we have no relevant past data and little
knowledge to guide us on what future
outcomes might be. The lack of a reference
class of past similar events makes it difficult to
estimate probabilities for these outcomes.
■ In these circumstances, possibility theory offers
a simple and flexible alternative approach
that enables us to make quantitatively based
statements, despite the lack of precision
inherent in our estimates of the future.
■P
 ossibility theory is based on the idea of
fuzzy sets, which allow imprecise or vague
information to be represented in mathematical
terms and hence treated formally. Fuzzy-
set theory and possibility theory have been
applied in a wide range of fields, including
facial recognition, control of subway systems,
medical diagnosis, database querying, and
fault diagnosis in satellites.
■ In this and a follow-up article, we demonstrate
how the approach can be applied to a range
of decisions when the future we face is highly
uncertain.
In these situations of uncertainty, we
cannot use the probability tools of con-
ventional forecasting. When there is no
reference data upon which to base calcu-
lations or judgments, probabilities do not
have any meaning. But does that mean
that, in conditions of uncertainty, there is
no place for calculation or rationality? If
that were the case, human beings would
be in trouble. We believe that there is a
solution, and it involves building on the
heuristics that we use in everyday life to
deal with uncertainty.
We start with the fact that in life we are
rarely totally ignorant about the pros-
pects for the future. We usually know
enough to construct a plausible narrative
(or set of narratives) about what might
happen or be the case. And intuitively we
https://foresight.forecasters.org FORESIGHT 15
 know when a new fact is consistent with
this narrative. When it isn’t, we are sur-
prised or shocked and talk about some-
thing “straining the bounds of credibil-
ity.” And as time goes by and we acquire
knowledge, the central narrative should
change and the bounds of what is conceiv-
able will narrow. If this sounds familiar,
it is because it isn’t too different from a
process that we are very familiar with:
the scientific method. This always starts
off with a judgement called a hypothesis
which is subsequently tested and refined
empirically. This suggests that it should
be possible to operationalise and quantify
this approach to dealing with uncertainty,
starting with a narrative that is
• Plausible
• Internally consistent
• Capable of being empirically tested or
falsified.
However, we need to be careful here.
People are brilliant at inventing narratives
to explain disparate events. This is espe-
cially the case when the narrative is self-
serving or in accord with the way we want
to see the world. And when disconfirming
facts arrive, we tend to resist changing our
views, selectively seeking evidence that
favours what we believe. Scientists often
hold on to their preferred theories even
as strong evidence against them mounts,
only changing their minds when the case
against them is overwhelming (Kuhn,
1962). Approaches that encourage people
actively to seek, and take account of, dis-
confirming evidence – testing narratives
to destruction – can act as an antidote to
this tendency. In forecasting teams, such
devil’s advocates can play a valuable role
in challenging narratives that otherwise
might be accepted without question.
The good news is that, even when pros-
pects are uncertain, many business prob-
lems at least lend themselves to precise
questions, such as how much of this new
product will we sell or what net present value
(NPV) will this business project generate?
The challenge that we are currently faced
with is that, if the new product or proj-
ect is unique, we cannot credibly answer
these questions with exact probabilities
16 FORESIGHT 2021: Q4
because we have no reference class to
inform our judgments, and as a result we
may be swayed by factors such as wishful
thinking or political bias.
But if it were possible to specify our be-
liefs in a way that enabled us to quantify
judgements about plausible outcomes, it
could enable us to test and refine them,
have informed discussions, and make ra-
tional decisions – even in the absence of
definitive knowledge.
POSSIBILITY THEORY
In situations like this, where we have some
knowledge but not enough to estimate
probabilities, possibility theory can offer
a way forward (Dubois and Priad, 2011).
Possibility theory is based on the idea of
fuzzy sets, which allow imprecise or vague
information to be represented in mathe-
matical terms and hence treated formally
(Zadeh, 1999). We often naturally think
in terms of concepts that are ill-defined.
For example, we may describe someone as
“young” or the weather as “warm.” Both
the set of ages considered to be “young”
and the set of temperatures that might be
considered “warm” have fuzzy boundar-
ies. Is 61 degrees Fahrenheit warm, or 68
degrees?
Fuzzy Sets
In these cases, fuzzy-set theory allows
us to assign a number to represent the
plausibility that a given temperature con-
forms to the term “warm.” If we do this
for all temperatures, we have a possibil-
ity distribution. Like probability theory,
possibility theory uses a scale ranging
from 0 to 1, where a value 0 is ascribed to
potential states that are considered to be
highly implausible in the context of the
current narrative, while 1 represents out-
comes that are the most credible or would
be totally unsurprising if they occurred.
Suppose a friend phones to tell you that,
where she is, the weather is “warm.” This
could suggest the following possibilities:
0 for 35 degrees Fahrenheit, 0.5 for 55
degrees, 1 for 75 degrees, 0.75 for 85
degrees, and 0 for 115 degrees. (We’ll dis-
cuss later how numbers like these can be
derived.)
Possibilities vs. Probabilities
Possibility theory offers greater simplicity
than probability theory. Unlike probabil-
ity theory, for example, the possibilities
for a set of mutually exclusive and exhaus-
tive outcomes are not constrained to sum
to one. Indeed, several alternative out-
comes can each be assigned the maximum
possibility of 1. Moreover, when a new
plausible future event is identified, pos-
sibility theory recognises that this does
not necessarily reduce the plausibility of
other possible events, unlike the case with
probability theory. Nevertheless, while
possibility distributions are more ap-
propriate than probability distributions
when our information is imprecise, there
are analogies and some weak connections
between the two concepts (Zadeh, 1999).
Fuzzy-set theory and possibility theory
have been applied in a wide range of fields,
including facial recognition, control of
subway systems, medical diagnosis, data-
base querying, and fault diagnosis in sat-
ellites. And it turns out that the ideas we
used to treat a vague term such as “warm”
can also be applied when we have to make
decisions relating to an uncertain future
– for example, in areas like investment
appraisal. So these ideas are not entirely
new: over 60 years ago, the Liverpool
University economist G.L.S. Shackle
(1961) formulated surprise theory, which
involves estimating values that reflect the
extent to which you would be surprised
by a given outcome if it occurred.
The rest of this article describes how pos-
sibility theory can be applied to business
decisions when we are facing uncertainty
about the future. In a subsequent article,
we will discuss a range of real-world ap-
plications for this approach.
APPLYING POSSIBILITY DISTRIBUTIONS
A commonly used possibility distribution
has a triangular shape like that shown in
Figure 1 (Borges and colleagues, 2018),
which displays possibilities for the fuzzy
set of what a new product might achieve
in sales during its first year after introduc-
tion. The bounds of the set are 6,000 and
20,000 units, each having zero possibility,
Figure 1. A Possibility Distribution for a New Product’s First-Year Sales
while the most plausible level of sales is
judged to be 8,000 units.
This simple triangular shape makes it
arithmetically easy to calculate areas
within the triangle and thus quantify
possible ranges of outcomes, such as sales
exceeding particular levels. Calculating
a single value to represent the distribu-
tion (its so-called centre of gravity) is also
straightforward, even when the distribu-
tion is skewed. Crucially, the triangular
shape makes no assumptions about the
(uncertain) nature of the distribution
of possibilities around the most plau-
sible outcome, and so limits the degree
of speculative judgements that are taken
into account. Note that distributions with
other shapes are also used in practice. For
example, a uniform shape would be ap-
propriate where all values between the
minimum and maximum are considered
to have possibilities of 1. Alternatively,
a range of middle values may all have the
maximum possibility, leading to a distri-
bution with a trapezoidal shape (Shaheen
and colleagues, 2007).
Suppose that sales of 9,000 units are
needed for the product to break even. The
possibility distribution can be used to de-
termine a success score of turning a profit in
its first year. This possibility is represented
by the shaded proportion of the area un-
der the triangle in Figure 1. To make this
calculation, we need first to determine
the area of the whole triangle: since a tri-
angle’s area is half its base times its height
(the height being 1), the triangle’s area is
½ (20,000-6,000) = 7,000.
https://foresight.forecasters.org FORESIGHT 17
aa triangle’s
triangle’s area
area isis half
half its
its base
base times
times its
its height
height (the
(the height
height being
being 1),
1), the
the triangle’s
triangle’s area
area isis ½
½
(Most plausible sales – Lowest sales)
(20,000-6,000)
(20,000-6,000) == 7,000.
7,000.
A representative value of the fuzzy set of possible sales can be found by calculating the
One
One way
way to
to calculate
calculate the
the shaded
shaded area
area isis way to calculate the shaded area is
One possible
distribution’s centre of gravitysales
(CoG),can beis found
which bytocalculat-
analogous the mean of a probability
distribution. ing the distribution’s centre of CoG
Because we have a triangular distribution, the gravity
can be calculated using th
0.5
0.5 (Highest
(Highest sales
sales –– Breakeven
Breakeven sales)
sales) == 0.5(20000-9000)
22
0.5(20000-9000) == 5042
22
5042
simple formula: (CoG), which is analogous to the mean
(Highest
(Highest sales
sales –– Most
Most plausible
plausible sales)
sales) (20000-8000)
(20000-8000)
of a probability distribution. Because we
CoG = (Lowest sales + Most possible sales + Highest sales)/3
See
See the
the Appendix
Appendix for
for the
the logic
logic behind
behind this
this formula.
formula.

CoG = (6000 + 8000 + 20000)/3 = 11333 units.

See the appendix for the logicWe will show

behind how the
this CoG can
have be used to obtain
a triangular a ballpark figure
distribution, theforCoG
the value of an investment
formula. Part Two of this article.
can be calculated using this simple for-
22
mula:
So the success score, which is a measure of
EVALUATING THE BENEFITS OF THE POSSIBILITY DISTRIBUTION
the possibility of a profit, is 5,042/7,000 We will show how the CoG can be used
= 0.72. If we simply considered Thisthe most has several
approach to obtain a ballpark
significant figure
advantages: it isfor thetovalue
simple apply, communicate to lay
plausible sales level of 8,000audiences
units, andwe easyoftoan investment
understand in Part Two
and implement of this ar-It invokes a far less
in a spreadsheet.
might be deterred from launching the than
complex process ticle.
one needed to estimate a probability distribution.
product since it falls below the breakeven EVALUATING THE BENEFITS OF
point of 9,000. But because theA possibility
commonly used alternative approach, involving
THE POSSIBILITY Monte Carlo simulation to estimate
DISTRIBUTION
distribution is skewed, the most plausible
probability distributions, is computationally intensive and requires specialized software a
sales level does not take into account the This approach has several significant
large range of possible sales that lie above advantages: it is simple to apply, commu-
breakeven. So even though the most plau- nicate to lay audiences and easy to under-
sible volume of this new product is 1,000 stand and implement in a spreadsheet. It
units below breakeven, the distribution invokes a far less complex process than
still reveals a 72% possibility of a profit- one needed to estimate a probability
able sales result in the first year. distribution.
This success score could be compared with A commonly used alternative approach,
So theSosuccess score,score,
the success
those
which is a of
which
otherofnew
measure
is a measure theofproducts
possibility being
of
the possibility
consid-
a profit, involving
is 5,042/7,000
of a profit, = 0.72.
is 5,042/7,000
Monte Carlo simulation to
= 0.72.
If we Ifsimply considered ered
the forplausible
most launch salesas input
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might estimate
be deterred probability distributions, is
we simply considered the most plausible sales level of 8,000 units, we might be deterred
from from
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launching the product since itbelow the breakeven
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plausible volume this product
new productis 1,000 units units
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breakeven, the distribution
reveals a 72%a possibility also stimulate
of a profitable thinking
sales sales about
resultresult what
in theinfirst action to comparable results (Shaheen and col-
reveals 72% possibility of a profitable theyear.
first year.
might be taken to reduce the possibility leagues, 2007). In particular, the use of
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couldcould sales falling
be compared with below
those ofbreakeven,
other such as
new products possibility distributions avoids offering
beingbeing
considered
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for launch by reducing fixed costs.Various
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for launch as input to a decision on which to launch. Various decision rulespossible,
as input to a decision on which to launch. decision rules are possible,
including the launching a new
of reduction
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including the launching of new products in decreasing order of their success scores. In this
example, it could also even sales
stimulate from
thinking about9,000
what to 7,500,
action might the
be taken knowledge
suc- to reduce the is incomplete, or vague, or
example, it could also stimulate thinking about what action might be taken to reduce the
possibility of sales
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cess
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lowered that
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sales sales
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profitable outcome the
rises to estimated
92%; that is, possibility
weis,dramatically of failure.
reduce Note
the estimated inaccuracies
possibility of of associated with a simple but
profitable outcome rises to 92%; that we dramatically reduce the estimated possibility
failure. Note Note
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in thisincase, in this
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triangle to the left of
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ity distribution’s emphasis on specifying

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distribution’s centre of gravity (CoG), which is analogous to the mean of aand lowest possible sales in our example.
probability
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simple formula: A representative value of the fuzzy set of tion on the extent of the uncertainty they
CoG =CoG
(Lowest sales sales
= (Lowest + Most possible
+ Most sales sales
possible + Highest sales)/3
+ Highest sales)/3

CoG =CoG
(6000 + 8000
= (6000 + 20000)/3
+ 8000 = 11333
+ 20000)/3 units.units.
= 11333
18 FORESIGHT 2021: Q4
We will show how the CoG can be used to obtain a ballpark figure for the value of an investment in
We will show how the CoG can be used to obtain a ballpark figure for the value of an investment in
are facing, something that is often under-
estimated (Russo and Schoemaker, 1992).
Nevertheless, there is a danger that the
chosen range of possibilities will be too
narrow. Especially if we first establish the
most plausible level of sales, there may be
a tendency to anchor on this value when
specifying the upper and lower bounds of
sales, creating too narrow a base for the
triangle.
It is therefore important to ask deci-
sion makers to reflect on reasons why
outcomes may lie outside the suggested
ranges of possibilities, and encourage
them to widen the range before applying
the method. Starting with ranges, rather
It is therefore important to ask decision makers to reflect on reasons why outcomes
may lie outside the suggested ranges of possibilities.
than most-plausible outcomes, or using a
range of scenarios to envisage the chains
of events that might lead to alterna-
tive future events may be helpful here.
Scenarios allow the rationale underlying
estimates to be documented and allow as-
sumptions to be made explicit, and hence
open to challenge.
Remember that the possibility distri-
bution reflects what people think will
happen, and minds will change as new
knowledge is acquired – a Bayesian-style
updating process. Indeed, the possibil-
ity distribution can be used to guide the
acquisition of new knowledge that can
reduce the spread from worst to best
outcome and especially reduce the loss-
making part of this range.
Finally, possibility theory allows us to
assess how well our possibility estimates
performed. An outcome that occurs
despite given a low or zero possibility
score would merit attention. In this re-
spect, possibility distributions have an
advantage over continuous probability
distributions in that we can look back and
see what possibility values we gave to an
outcome that actually occurred. Doing
so is not possible when working with
continuous probability distributions, be-
cause each outcome has an infinitesimal
(virtually zero) probability of occurrence.
No method is perfect. While the simplic-
ity of possibility theory may lead to the
reduction in cognitive biases when com-
pared to probability theory, it is unlikely
to eliminate these biases. In most applica-
tions of judgmental forecasting, political
gaming can rear its head and distort the
estimation process. Moreover, while pos-
sibility theory may reduce the tendency
to underestimate uncertainty, it could in
some cases exaggerate uncertainty. When
two possibility distributions with a simi-
lar shape are being added or subtracted,
the resulting distribution has the same
shape, but it is wider than that of an anal-
ogous probability distribution (Shaheen
and colleagues, 2007). For example, if we
subtract a distribution of costs from a
revenue distribution, the possibility dis-
tribution for profit may overestimate the
uncertainty we face.
CONCLUSION
When we face decisions relating to an
uncertain future, it’s best not to pretend
that we can make precise forecasts about
what will transpire: there’s no value in be-
ing precise about our ignorance. In these
cases, simple, transparent methods that
formally recognise our lack of knowledge,
and the fuzziness that accompanies it,
come into their own. By making people’s
judgments explicit, acknowledging un-
certainty, and emphasising the need to
test and, if necessary, modify beliefs by
acquiring new evidence, the method we
have described should lead to more real-
istic forecasts. In Part Two of this article,
we will explore a range of potential ap-
plications of the approach, what we call
Fuzzy Forecasting.
APPENDIX:
FORMULA FOR THE SUCCESS SCORE
Since we don’t know the exact height
of the triangle at the breakeven sales of
8,000, we proceed as follows:
By definition, the height of the overall
triangle is 0 at the highest sales of 20,000
and 1 at the most plausible sales of 8,000.
https://foresight.forecasters.org FORESIGHT 19
 However, the shaded triangle has its
highest point at sales of 9,000. Moving
from right to left along the axis, sales of
9,000 are (20,000-9,000)/(20,000-8,000)
= 11/12 of the distance between 20,000
with a height of 0 and 8,000 with a height
of 1. Therefore, the shaded triangle has a
height of 11/12 x 1
Paul Goodwin is an Emeritus Pro-
fessor at the University of Bath, author of
numerous books and articles on the use
of judgment in forecasting, and Foresight’s
Editor for Hot New Research.
p.goodwin@bath.ac.uk
Steve Morlidge is founder of Catch
Bull ( https://catchbull.com/ ), co-author
of Future Ready: How to Master Business
Forecasting (2010) and author of The Little
(Illustrated) Book of Operational Forecast-
ing (2018). He has contributed nearly 20
articles for Foresight covering forecast ac-
curacy, forecastability, inventory control,
and a multi-part article on “Guiding Principles of the Forecasting
Process” (2012).
steve.morlidge@catchbull.com
20 FORESIGHT 2021: Q4
To get its area, we multiply the height of
the shaded triangle by half its base. Its
base is 20,000-9,000 = 11,000 and we
have (11/12) x 0.5 x 11,000 = 5,042 after
rounding.
Finally, the success score is the proportion
of the area of the triangle that is shaded,
or 5,042/7,000 = 0.72
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