Tornado Diagrams 101
As we have said before, every forecast you’ll ever build is wrong. The truth may be out there, but due to a lack of perfect information about the future, you won’t be able to reveal it before your project review meeting.
There is a paradox here: The more you insist on the truth, the more likely you are to deny the uncertainties obscuring it. Alas, denying the existence of those uncertainties distances you still further from the truth. So, take a deep breath, and let go of your desire to know the truth. Now you are ready to manage (dare I say embrace?) the uncertainty standing between you and the truth. Managing this uncertainty is the key to good forecasting. By effectively managing uncertainty, you’ll be able to honestly assess the value of your forecast and, in turn, make an honest statement about the value of your project.
As a forecaster, the key question you need to answer is: “Is my forecast precise enough to make a confident decision?” If it is, hooray! You are ready to make an investment decision. If the answer is no, then you need to gather more information. One of the most useful and easiest-to-understand methods we have to assess our confidence in a forecast is the tornado diagram. Using a tornado diagram, we can assess how much our forecast might change if things go better or worse than anticipated. We can also assess which uncertainties have the greatest impact on our forecast—those are the very inputs we should research further if we want to tighten up forecast precision.