Forecasting, When Power Law Distributions Apply

Abstract

Whilst a lot of our strategic focus in the public sector is on linear policy approaches, many systems/ phenomena of importance are defined as non-linear or far from equilibrium. Traditional approaches to linear forecasting have not proved effective for non-linear systems, since non-linear systems follow a different set of rules. Historically, non-linear systems were too hard to forecast, but over recent decades some rules and approaches are starting to emerge. One important and clearly defined category of non-linear systems are those that follow a ‘power-law’ distribution rather than the ‘normal’ distribution, which is often associated with linear systems or systems in equilibrium. My research collects, analyses, and does a comparative analysis of the different power law populations, as well as the main strategic forecasting techniques that can be applied to those populations/ systems. Overall Conclusions and observations. Just as in science and mathematics, there is now a clearly defined separation and understanding of linear and non-linear systems and the rules that apply to each. My thesis has as its central theme, the idea that strategy as a subject also fits this same philosophical separation of approaches, which I have called the strategic planning versus the strategic thinking divide. Strategic planning is essentially the linear approach – being rational and assuming relatively stable conditions. Strategic thinking assumes the world is effectively non-linear and ‘far from equilibrium’. Non-linear approaches mean acknowledging concepts like; punctuated equilibrium, power law ‘log-log’ graphs, ‘scale-free’ characteristics, ‘self organising criticality’, accepting only pattern prediction (including 1/f formulas) and not precise prediction etc. Understanding non-linearity is essential to understand such things as ‘Black Swans’. Luck, serendipity and ‘bounded rationality’ are always involved in non-linear complex adaptive systems, whereas linear systems tend to comply with the so called ‘rational’ traditions in science and economics. Power law statistical distributions can be seen in a wide variety of non-linear natural and man-made phenomena, from earthquakes and solar flares to populations of cities and sales of books. This sheer diversity of effects that have power law distributions is actually an amazing fact that has only become evident over the last decade or so. Since the world contains aspects that are clearly linear and other aspects that are clearly non-linear, it is essential for someone interested in strategy to be able to understand both systems and be able to apply the correct techniques to each approach. The two parts of ‘punctuated equilibrium’ effectively link the two strategic approaches together as there is only one world and not two separate realities. It therefore follows that a strategist needs a good understanding of both strategic planning and strategic thinking, since both are needed for different phases or periods, and perhaps both are needed for any period when you can't tell what phase you are in, which can also happen. I suggest that under a linear phase, the strategic planning approach should be dominant, but supported by strategic thinking (since you never know when events will turn abruptly); whereas in a turbulent non-linear period the strategic thinking approach should be dominant, but supported by strategic planning (since you know that great turbulence will not last). This is a sort of a swapping dominant/ recessive situation, which has a loose parallel in the theory of the left/ right brain split, where it is not wise to use only one style of thinking, since there are two styles which suit different situations. The key is to pick the right thinking style for the right situation. Just as we have one brain, but two thinking styles, so in the strategy toolbox we also have two valid, useful and complimentary general strategic approaches. However for this thesis, I have focused on the non-linear power law aspects of life which have strong implications for strategic thinking, since that is the new area for me as well as one of the new knowledge frontiers for strategy as a subject (and for leadership, politics and many other areas).