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Judgmental Forecasting

This document discusses judgmental forecasting and the biases that can affect it. It notes that while statistical forecasting extrapolates past patterns, human judgment is needed to incorporate changes, inside information, and managers' experience. However, judgment is also prone to biases like inconsistency, conservatism, recency, availability, and anchoring. The document provides examples of each bias and recommendations for mitigating them, such as formalizing decision processes, considering all available information, and obtaining forecasts from disinterested third parties. It concludes that acknowledging and addressing biases can improve the accuracy of judgment-based forecasts.

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AltafHussain
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285 views32 pages

Judgmental Forecasting

This document discusses judgmental forecasting and the biases that can affect it. It notes that while statistical forecasting extrapolates past patterns, human judgment is needed to incorporate changes, inside information, and managers' experience. However, judgment is also prone to biases like inconsistency, conservatism, recency, availability, and anchoring. The document provides examples of each bias and recommendations for mitigating them, such as formalizing decision processes, considering all available information, and obtaining forecasts from disinterested third parties. It concludes that acknowledging and addressing biases can improve the accuracy of judgment-based forecasts.

Uploaded by

AltafHussain
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PPTX, PDF, TXT or read online on Scribd
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JUDGMENTAL

FORECASTING
Biases, etc.

Judgmental Forecasting

The statistical forecasting methods


presented in the text allow us to
extrapolate established patterns and/or
existing relationships in order to predict
their continuation, assuming that such
patterns/relationships will not change
during the forecasting phase.

Judgmental Forecasting

As the same time, because changes can


and do occur, these must be detected as
early as possible to avoid large, usually
costly, forecasting errors.

Judgmental Forecasting

However, when changes are detected, or


if we can know when they are about to
occur, human judgment is the only
viable alternative for predicting both
their extent and their implications on
forecasting.

Judgmental Forecasting

Human judgment is also needed to


incorporate inside information and
knowledge, as well as managers
experience, about the future.

Judgmental Forecasting

Before using our judgment for improving


forecasting accuracy, however, we must
understand its biases and limitations
along with its major advantages.
Doing so allows us to combine the
information from our statistical
predictions with those of our judgment
by exploiting the advantages of both
while avoiding their drawbacks.

Judgmental Forecasting

We make innumerable forecasts every day,


but expend little effort in evaluating them
to find ways of improving their accuracy.
The reason is simple: we do not want to be
held responsible if our forecasts go wrong.
However, unless we get feedback about the
accuracy of our predictions, it is not likely
that we can improve our performance when
making similar forecasts in the future.

Judgmental Forecasting

Because judgmental forecasts are much


more common than statistical ones, not
only can we not ignore them, but we
must also be willing to accept that
judgmental forecasting errors cannot be
entirely avoided; we will be better off if
we can accept such errors while learning
as much as possible from them so we
can improve our ability to forecast more
accurately in the future.

Judgmental Forecasting

The accuracy of judgmental forecasts is,


on average, inferior to statistical ones.
This is because our judgment is often
characterized by considerable biases
and limitations.

The nature of judgmental biases and


limitations

We rarely do anything to remedy the


deficiencies of our judgment, mainly
because we are unwilling to accept that
our judgment can be faulty or biased.
Because judgmental biases are almost
never presumed to exist, it is extremely
important to expose them: empirical
evidence clearly demonstrates their
existence and their negative, damaging
consequences.

Bias

The entire subject of judgmental biases


could take many volumes to treat
thoroughly. (See Kahneman and
Tversky, 1979). We focus here on those
aspects of judgmental biases that most
critically and directly affect forecasting.

Bias

Inconsistency: being unable to apply the


same decision criteria in similar
situations

Formalize the decision-making process


Create decision making rules to be followed

Bias

Conservatism: failing to change (or


changing slowly) ones own mind in light
of new information/evidence

Monitor for changes in the environment and


build procedures to take actings when such
changes are identified

Bias

Recency: having the most recent events


dominate those in the less recent past,
which are downgraded or ignored

Realize that cycles exist and that not all ups


or downs are permanent
Consider the fundamental factors that
affect the event of interest

Bias

Availability: relying upon specific events


easily recalled from memory to the
exclusion of other pertinent information

Present complete information


Present information in a way that points out
all sides of the situation being considered

Bias

Anchoring: being unduly influenced by


initial information which is given more
weight in the forecasting process

Start with objective information (e.g.,


forecasts)
Ask people to discuss the types of changes
possible; ask the reasons when changes are
proposed

Bias

Illusory correlations: believing that


patterns are evident and/or two
variables are causally related when they
are not

Verify statistical significance of patterns


Model relationships, if possible, in terms of
changes

Bias

Search for supportive evidence:


gathering facts that lead toward certain
conclusions and disregarding others that
threaten them

Induce disconfirming evidence


Introduce role of devils advocate

Bias

Regression effects: persistent increases


(or decreases) might be due to chance
rather than a genuine trend

One needs to explain that if the errors are


random, the apparent trend is unlikely to
continue

Bias

Attribution of success and failure: believing


success is attributable to ones skills while
failure to bad luck, or someone elses error.
This inhibits learning as it does not allow
recognition of ones mistakes

Do not punish mistakes, instead encourage


people to accept their mistakes and make
them public so they and others can learn to
avoid similar mistakes in the future. (This is
how Japanese companies deal with mistakes,
in general.)

Bias

Optimism, wishful thinking: peoples


preferences for future outcomes affect
their forecasts of such outcomes

Have forecasts made by a disinterested


third party
Have more than one person independently
make the forecasts

Bias

Underestimating uncertainty: excessive


optimism, illusory correlation, and the
need to reduce anxiety result in
underestimating future uncertainty

Estimate uncertainty objectively. Consider


many possible future events by asking
different people to come up with
unpredictable situations/events

Bias

Selective perception: seeing problems in


terms of ones own background and
experience

Ask people with different backgrounds and


experience to independently suggest
solutions.

Conventional wisdom versus


empirical findings

Another type of judgmental bias that can


threated decision-making effectiveness
is unfounded beliefs or conventional
wisdom.

Conventional Wisdom

The more information we have, the more


accurate the decision.

The amount of information does not


improve the accuracy of decisions, instead
it increases our confidence that our
decisions will be correct.

Conventional Wisdom

We can distinguish between useful and


irrelevant information.

Irrelevant information can be the cause of


reducing the accuracy of our decisions.

Conventional Wisdom

The more confident we are about the


correctness of our decision, the more
accurate our decision will be.

There is no relationship between how


confident one is and how accurate his or
her decision is.

Conventional Wisdom

We can decide rationally when it is time


to quit.

We feel we have invested too much to quit,


although the investment is a sunk cost.

Conventional Wisdom

Monetary rewards and punishments


contribute to better performance.

Human behavior is too complex to be


motivated by monetary factors alone.

Conventional Wisdom

We can assess our chances of


succeeding or failing reasonably well.

We are overly optimistic and tend to


downgrade or ignore problems and
difficulties.

Conventional Wisdom

Experience and/or expertise improves


accuracy of decisions.

In many repetitive, routine decisions,


experience and/or expertise do not
contribute more value to future-oriented
decisions.

Conventional Wisdom

We really know what we want, and our


preferences are stable.

Slight differences in a situation can change


our preferences (e.g., most people prefer a
half-full to a half-empty glass of water).

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