Business Forecasting Topic 11

Question 1

forecasts involve judgment in what ways

Answer 1

1. choice of method
2. how much past data
3. which variables to include

direct (widely used) - wholly based on judgment or judgmental adjustments to statistical

Question 2

benefits of management judgment to forecasts:

Answer 2

1. account special events (strike, gov initiative)
2. compensate for deficiencies/absence of historical data
3. allow managers to have control over variables
4. acceptable forecasts - managers = sense of ownership
   (complex stats method = lack transparency and credibility)

Question 3

problems of judgment related to humans

Answer 3

• limited info processing capacity
• simple mental strategies = cope with complexities

Question 4

Heuristics

Answer 4

are simple strategies that humans, animals, organizations, and even machines use to quickly form judgments,

Question 5

3 types of heuristics

Answer 5

1. availability
2. anchoring and adjustment
3. representatives

Question 6

availability

Answer 6

• likelihood of future events -> how easily similar past events are recalled
• over influenced by recent/vivid/events in press

fear e.g. violent crime more than obesity, terrorism more than smoking or food poisoning

Question 7

anchoring and adjustment

Answer 7

• making estimate, start with initial value and adjust from this
• estimates tend to be close to anchor even if implausible value
• underestimate upward trends (severe for exponential trends) - stay close to. most recent values

Question 8

Representativeness

Answer 8

extrapolating time series = expect future pattern to be representative of past pattern

• try reproduce perceived past pattern in forecasts - much of this past pattern is noise

Question 9

narrative fallacy

Answer 9

expert in investing explanations for these random movements

• many movements in sales = random = people brilliant at inventing explanations

Question 10

5 problems with judgment

Answer 10

1. hindsight bias -> wrongly think could have easily predicted - knew it all along
2. overconfidence -> better forecasts than really are despite messages from computer
3. political biases - dishonesty to please boss, Sandbagging - deliberately low
4. optimism bias - calculated
5. group biases - conformity

Question 11

6 ways of making the best use of judgment

Answer 11

1. Delphi method
2. decomposing
3. feedback
4. adjusting if appropriate
5. record reasons
6. combine judgment with statistical

Question 12

Delphi method

Answer 12

• avoid danger of face to face with groups

1. individual and anonymous forecasts & reasons
2. results tallied and summarised
3. re-polling
4. repeated until consensus emerges - median estimate = used as forecast

Question 13

adv and dis of Delphi

Answer 13

adv: large/geographic groups, no dominance, change minds

dis: little chance of persuasion, choosing panel members (experts = over analyse/not open minded)

Question 14

decomposition

Answer 14

make judgmental tasks easier through breaking down to smaller easier tasks

adjustments -> price reduction, promotion, new customer

only if this is practical

Question 15

feedback on performance

Answer 15

MAPE or MPE

on bias - more useful than feedback on accuracy

Question 16

adjusting statistical forecasts

Answer 16

only when appropriate -> important extra info on forthcoming events

• only effective when forecaster has important information (not available to statistical forecast)
• unnecessary (small) adjustments = reduce forecast accuracy and waste time

Question 17

record reasons for adjustments

Answer 17

• reduces gratuitous adjustments
• others understand forecast basis
• reduces possibility of political biases

Question 18

comparing judgmental and statistical

Answer 18

statistical = superior in finding patterns and relationships in data

human judgment = subject to number of biases -> best only when no past data or special events known to be forthcoming