Tatsuro Senga: Management Capability and the Power of Foresight

Just before the stock market crash of 1929, economist Irving Fisher publicly declared that "stock prices have reached what looks like a permanently high plateau," only to lose his fortune in the subsequent collapse. However, in a book published the following year, he wrote: "The intelligent business man is always a forecaster. Large corporations and banks maintain statistical departments for the purpose of gauging the business future." Ironically, his insight that the ability to foresee the future is the key to economic success was correct.

So, what determines the accuracy of forecasting in modern companies? The answer we reached, along with my co-researchers, is the quality of "management practices." Using large-scale survey data from over 20,000 UK companies, we scored the quality of basic management operations—such as goal-setting methods, progress monitoring, and personnel evaluation and promotion—and analyzed how these scores linked to the accuracy of the companies' actual sales and GDP forecasts. The surveys were conducted in 2017, during the height of Brexit negotiations, and in 2020, when COVID-19 hit, providing data from periods of extremely high uncertainty.

The results were clear. Companies with higher management practice scores were more accurate in both their own sales forecasts and their macroeconomic forecasts. Furthermore, this relationship remained robust even when controlling for factors such as company size, years in business, and industry. It was not that large companies were better at forecasting; rather, regardless of size, the "quality of management" itself was linked to forecasting accuracy.

Even more interesting was that well-managed companies were "aware" that their forecasts were accurate. They set narrower estimates for their forecast margins of error, which aligned with their actual accuracy. They were not just lucky; they correctly understood how much confidence they should place in their own outlooks.

Shortly after the 2008 global financial crisis, Queen Elizabeth II visited the London School of Economics (LSE) and asked the economists, "Why did no one see it coming?" As the question of "why can't we foresee the future" is repeated across some 80 years, I believe the finding that the accumulation of basic management practices fosters forecasting power serves as one modest answer to this question.