8 Keys to Anticipating Change

One of the most valuable skills in nature is being able to anticipate threats in our environment. This may have been a significant differentiating factor for modern humans – we can anticipate threats rather than only react to them when they happen. Being able to react quickly to unforeseen events is also very valuable, but I would argue not as valuable, day-to-day, as preparing beforehand.

In the financial industry, how you manage risk and how well you anticipate threats and changes often decides how profitable you are. The same is true of most business, but measured on a longer time scale in most circumstances. Outlined below are a few keys to anticipating change. All of them are common sense, but some are not commonly practiced.

Scan the environment
The first key is making sure that all of the information is getting to you. Start with general publications such as national newspapers (Wall Street Journal, New York Times, or Washington Post), magazines (Fast Company or Fortune), news media (CNN, NPR, etc.), and websites (CNN.com, Google News). These will give you something to talk about with friends and coworkers and feed you the information you need.

Trade and industry publications will give more detailed information on your business. Reading Industry publications will also help you get to know the thought leaders and those at the cutting edge who are most likely to spot coming changes.

Another great source is the people around you. Talk to friends, family, clients, customers, and coworkers. This is where the newest and freshest information comes from and most of it doesn’t make the national news.

Identify trends
Once you have set yourself up at the center of all of this information, its time to figure out what to do with it so that it becomes useful. Some of the work we may leave up to experts to write about emerging trends and converging ideas. But no expert knows our business like we do. What trends or patterns do you see emerging in all of the information? What are the causes for those patterns or trends?

An excellent example of this came from an experience I had talking to a floor trader with some twenty years experience. He explained to me that when the Federal Reserve changes the reserve rate, then bond prices react and move to the new price. This is obvious economics that we all learn at some time. But, the interesting thing is what the price does on the way there. The bond market is huge, the volume of shares traded is something unimaginable and difficult to manipulate because it is so large. The closest thing to a perfect economic pricing model found in real life. It should just switch to the new price. But it doesn’t. It almost always overshoots, recoils back beyond where it was and then slowly moves to the new price. This floor trader always makes money on that movement. He identified the pattern, and I could appreciate that, but I could not understand why the bond price would move like that. He explained, as though it were obvious, that it was all psychology. Bond traders react initially to the news, they flood the market with orders causing the price to move and overshoot the target because of the volume of new orders. Then, because all of the orders stop, the price recoils back beyond the original price. Then there is no longer enough volume to move it quickly and it will move more slowly to the new equilibrium price.

Evaluate different possible scenarios
Once we have identified different trends and thought about what the causes might be, take some time to brainstorm through a few different scenarios for how it might play out. Think through and identify all of the major players that would be involved. How is each player likely to react given the trend? How will each player react to how the other players react? This can continue until long after it is useful and probably beyond the time that it is accurate, but consider a few reactions into the future for each likely scenario. There is actually a whole discipline in economics devoted to this called “game theory,” but in business planning its called “scenario planning.” Considering alternative scenarios will give you a good chance to really try to understand your competitors, regulators, customers, etc.

Understand the implications
Now that we have a list of likely scenarios, we want to seek to understand and predict the implications the most likely scenarios might have on your business. Sometimes this is relatively easy, other times it is misleadingly complex. The whole discipline of economics is devoted to understanding implications and more recently methods such as systems thinking have come into common use to analyze how a change will ripple through a system. Take time for some careful thought into what internal changes an external change might force. In the end do a “gut” check – often our gut (especially a “calibrated gut”) or intuition will sense the implications better than our logical mind. Learn to value the input of both your mind and your gut, only experience will be able to tell when to use each.

Connect distant ideas
With the steps listed above you probably understand better than 90% of the possible risk your business faces. But there are a few more steps you can take to anticipate change. A more proactive approach is to actively seek connections in distant and seemingly unconnected information, connections that would have an impact on your business. Connecting distant ideas is often considered visionary, with all of the positive and negative connotations that come along with that. Sometimes you will see how things will turn out and be years ahead of your competitors and other times you will just be wrong. Learning to balance that and understanding how to identify a few key points along the way that will let you know early if you are wrong will help prevent spending too many resources on non-events.

Create your own luck
You now understand your risks, have a good idea of how others are going to react, and have found some creative solutions that will position you nicely. Now, with a little luck things will turn out how you planned, or will they?

Creating your own luck is another way of saying that you are going to do all that you can to make sure that things turn out the way you expect. You know who the major players are, who the thought leaders are, what intermediate steps need to occur in order for your future to unfold, now make it happen. Take a moment to figure out how you can influence thought, regulation, or events to favor you. This often involves building relationships with anyone and everyone that touches on that future, including employees, coworkers, bosses, friends, family, and lots of people you can meet if you make an effort. Make a persuasive case for your point of view, but also listen and be open to being wrong. Remember as well, that you are not just meeting to make your case; you want to build a long-term relationship so that your information now comes from those on the cutting edge.

You can do the same thing with events. You know what intermediate steps need to happen on the way toward your goal, if you have to break those down further. Now, make sure that the right things happen so that those intermediate steps occur. Now you are creating your own luck.

Hedge your bet
After all of this, you still cannot be sure of success; that is how life operates. Hedging your bet shows no lack of commitment or loyalty to your goal. It is a practical step to managing the risk of an uncertain future. Flip back to the scenarios you thought through earlier and look at the top two or three most likely. Hedging in this case means doing what you can to be prepared if one of the others occurs instead of the one you are planning on.

Take a stand
In the end, all this information can case paralysis and indecision. Information doesn’t always resolve ambiguity. But, as is true in so much else in life, it is harder to get hit while moving. Make a decision and go with it, keep an eye on your early warning signals, and adjust as you learn.