Projections, Predictions, Assumptions

Yesterday’s post talked about the need to do a new projection every year as a way of constantly adjusting your planning to reality. Makes sense. But . . . what’s a projection? Here’s the transcript of an actual recorded conversation between Kwai Chang Caine and Master Po.

Caine: “What’s a projection, Master Po?”
Po: “It’s an educated guess about the future, Grasshopper”

“And do I get this guess from a Magic Eightball? Or from the wind?”
“No, Grasshopper, it’s an educated guess. No fingers in the wind. You start with the facts—the things that are real. To that you add assumptions about the future—how long you will live, what your investments will earn, how much your salary will be—such things as that.”

“So these assumptions, they are my predictions for the future?”
“No! No predictions! We are Shaolin priests, not charlatan fortune tellers!”

“Thank you for correcting me, Master. I am humbled by your wisdom. And where do these assumptions come from?”
“You must glean them from the world as you see it. You can take them from history. Or from indicators if you like. Or from reputable experts. Whatever source is rational and readily at hand.”

“Can I take them from different sources in different years?”
“Bad idea, Grasshopper. That is a prescription for fooling yourself. And a Shaolin priest, above all else, never fools himself. Try to avoid switching sources. Be consistent in the source for each of your assumptions”

“So this annual prediction . . . no, projection . . . it is my educated guess as to the most probable outcome for the future?”
“Close, Grasshopper. Not the most probable. But rather, the expected outcome. The probable center of all possible outcomes.”

“I think I understand, Master. But I must ask one more question if I may.”
“Knock yourself out, Grasshopper.”

“You said I could find reasonable assumptions from history if I choose, such as average returns on stocks or bonds. But Master Kan has taught me that history is no predictor of the future. So how is that a reasonable basis for making a projection? Or projecting an expected outcome?”
“That’s a tough one. We Shaolin masters think long term. And we believe that certain historical long-term tendencies are likely to reassert themselves in the long-term future.”

“That still sounds like double-talk to me. No disrespect intended, Master.”
“Shaolin masters do not engage in double-talk, Grasshopper. Now go out and preach the ways of peace. And beat up some bad guys with your stick.”