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    Judgmental Methods

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    Vikash Movva
    Judgmental forecasting methods rely on human judgment, typically from experts. While commonly used, experts often produce poor forecasts due to overconfidence in their abilities. Data-driven methods have been shown to produce more accurate forecasts than experts. It is important for experts not to be overconfident and to consider outside perspectives when making judgments.

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    Judgmental Methods

    Uploaded by

    Vikash Movva
    14 views14 pages
    Judgmental forecasting methods rely on human judgment, typically from experts. While commonly used, experts often produce poor forecasts due to overconfidence in their abilities. Data-driven methods have been shown to produce more accurate forecasts than experts. It is important for experts not to be overconfident and to consider outside perspectives when making judgments.

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    Judgmental forecasting methods rely on human judgment, typically from experts. While commonly used, experts often produce poor forecasts due to overconfidence in their abilities. Data-driven methods have been shown to produce more accurate forecasts than experts. It is important for experts not to be overconfident and to consider outside perspectives when making judgments.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    14 views14 pages

    Judgmental Methods

    Uploaded by

    Vikash Movva
    Judgmental forecasting methods rely on human judgment, typically from experts. While commonly used, experts often produce poor forecasts due to overconfidence in their abilities. Data-driven methods have been shown to produce more accurate forecasts than experts. It is important for experts not to be overconfident and to consider outside perspectives when making judgments.

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    © All Rights Reserved
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    of 14

    Forecasting Demand – Judgmental Methods

    Anton J. Kleywegt, Ph.D.


    School of Industrial and Systems Engineering
    Review of Previous Lessons

    • Careful thought is required when modeling


    demand
    • Customer behavior often is not rational
    • Customer behavior exhibits predictable
    patterns even when it is not rational
    Learning Outcomes
    • Become familiar with some characteristics of the most
    widely used method of forecasting: judgmental
    methods
    Forecasting Methods
    • Classification of forecasting methods according to Armstrong, J.S. Long-range
    Forecasting, Second Edition, 1985
    Judgmental Forecasting Methods

    • As the name indicates, judgmental forecasting methods are driven mostly by human
    judgment, typically the judgment of experts
    • By far the most widely used forecasting approach in practice
    • Examples
    • Sales managers forecasting future sales or demand
    • Medical doctors diagnosing causes of medical problems
    • Medical doctors predicting prognoses for patients
    • Pundits forecasting outcomes of elections
    • Brokers recommending investments
    • College admissions staff forecasting academic success
    Judgmental Forecasting Methods

    • “Expert” opinion often produces poor forecasts


    • Quality of forecasts tends to increase and then
    decrease as the level of expertise increases
    • See the following articles:
    • Armstrong, J.S., “How Expert Are the Experts?”,
    Inc, pp.15-16, 1981
    • Armstrong, J.S., “The Seer-Sucker Theory: The
    Value of Experts in Forecasting”, Technology
    Review, pp.16-24, 1980
    Judgmental Forecasting Methods

    • Proposed explanations for poor forecasting


    performance of experts
    • Experts think they know better, and do not learn
    as well from data as more humble forecasters
    • Experts are overconfident, overestimate their
    knowledge and forecasting skills, and
    underestimate their forecasting errors
    Judgmental Forecasting Methods
    • Overconfidence are positively correlated with various
    factors:
    • The higher the publically perceived level of
    expertise, the greater the tendency to be
    overconfident
    • Most managers and companies perform
    poorly after their praises have been sung
    in the popular media
    • Past success greatly increases overconfidence
    • If a person is successful, it is usually
    ascribed to some inherent talent, and if
    a person is unsuccessful, it is usually
    ascribed to external influences or bad
    luck
    Judgmental Forecasting Methods
    • Overconfidence are positively correlated with various
    factors (continued):
    • Expectations of skill is positively correlated with
    overconfidence
    • The higher a manager’s level in the
    organization, the more the tendency to
    be overconfident (note that either may
    be the cause of the other)
    • Gender: men have a greater tendency to be
    overconfident than women
    • Do you think that you are a better than
    average driver?
    Judgmental Forecasting Methods

    • Organizations continue to use experts for their


    forecasting even if they know that experts do not
    produce better quality forecasts
    • Why?
    • The manager knows that the forecast is always
    wrong
    Judgmental Forecasting Methods

    • Judgmental forecasting methods perform poorly


    compared with data-driven forecasting methods
    • Even very simple, crude regression models produce
    better forecasts than experts
    • See the following articles:
    • Dana, J. and Dawes, R.M., "The Superiority of
    Simple Alternatives to Regression for Social
    Science Predictions", Journal of Educational and
    Behavioral Statistics, pp.317-331, 2004
    • Dawes, R.M., "The Robust Beauty of Improper
    Linear Models in Decision Making", American
    Psychologist, pp.571-582, 1979
    Judgmental Forecasting Methods
    • Judgmental forecasting methods perform poorly compared with data-driven
    forecasting methods
    • See the following articles (continued):
    • Kahneman, D. and Tversky, A., "On the Psychology of Prediction“, Psychological
    Review, pp.237-251, 1973
    • Lovallo, D. and Kahneman, D., "Delusions of Success", Harvard Business Review,
    pp.56-63, 2003
    • Overconfidence inhibits use of the “outside view”
    • Example of “outside view”:
    • Most entrepreneurs who start a new business forecast that it will be
    successful with high probability, but fewer than 20% of startups
    survive more than a few years (forbes.com)
    Judgmental Forecasting Methods

    • Judgmental forecasting methods perform poorly


    compared with data-driven forecasting methods
    • See the following articles (continued):
    • Meehl, P.E., "Causes and Effects of My Disturbing
    Little Book", Journal of Personality Assessment,
    pp.370-375, 1986
    • Sarbin, T.R., "A Contribution to the Study of
    Actuarial and Individual Methods of Prediction",
    American Journal of Sociology, pp.593-602, 1943
    • Sarbin, T.R., "Prediction and Clinical Inference:
    Forty Years Later", Journal of Personality
    Assessment, pp.362-369, 1986
    Summary
    • Judgmental forecasting methods are driven mostly by
    the opinions of experts
    • By far the most widely used forecasting approach in
    practice
    • Judgmental forecasting methods almost always
    perform poorly compared with data-driven forecasting
    methods
    • It is important not to be overconfident, and to take
    into account the outside view

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