Individual and group judgmental forecasts can be biased due to psychological and organizational factors. Individual biases include inconsistencies in decision-making and being influenced by irrelevant information. Group biases are amplified and include herding behavior and groupthink. Research on financial market forecasts shows that judgmental forecasts are generally no more accurate than naive forecasts based on current prices, and few experts can consistently outperform the market or time market movements.
Individual and group judgmental forecasts can be biased due to psychological and organizational factors. Individual biases include inconsistencies in decision-making and being influenced by irrelevant information. Group biases are amplified and include herding behavior and groupthink. Research on financial market forecasts shows that judgmental forecasts are generally no more accurate than naive forecasts based on current prices, and few experts can consistently outperform the market or time market movements.
Original Title
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Individual and group judgmental forecasts can be biased due to psychological and organizational factors. Individual biases include inconsistencies in decision-making and being influenced by irrelevant information. Group biases are amplified and include herding behavior and groupthink. Research on financial market forecasts shows that judgmental forecasts are generally no more accurate than naive forecasts based on current prices, and few experts can consistently outperform the market or time market movements.
Individual and group judgmental forecasts can be biased due to psychological and organizational factors. Individual biases include inconsistencies in decision-making and being influenced by irrelevant information. Group biases are amplified and include herding behavior and groupthink. Research on financial market forecasts shows that judgmental forecasts are generally no more accurate than naive forecasts based on current prices, and few experts can consistently outperform the market or time market movements.
Problems in Judgmental Forecasting Although judgmental methods have relative merit in certain circumstances there are also problems
These problems can lead to biases and hence systematic
inaccuracies in forecasting
Some biases are due to individual judgment and psychology
(eg. Sales Force forecasts)
Others are related to group biases with forecasts derived from
group input/interaction (Jury of Executive Opinion)
In addition political and organisational issues may lead to
systematic biases Judgmental Biases- Individual Research indicates that individual’s decision making processes and judgments (including forecasts) can be influenced by psychology, personality, physiology, and circumstance
These factors can influence the accuracy of judgments made by
influencing the selection of relevant information from available information, the weighting applied to that information and subsequent forecasts
Two individuals presented with the same available
information may produce widely differing judgmental forecasts How good is your Judgment?
Which is the larger inner Circle?
Which line is Longest? Centred? Further Judgment Exercise Please count the number of times the letter F appears in the following sentence:
FINISHED FILES ARE THE RESULT OF YEARS OF
SCIENTIFIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS.
FINISHED FILES ARE THE RESULT OF YEARS OF
SCIENTIFIC STUDY COMBINED WITH THE EXPERIENCE OF YEARS. Judgmental Biases- Individual Further issues arise because of inconsistency in decision making for a given individual over many almost identical decision situations
People are often unable or unwilling to apply the same
criteria or procedures when making similar decisions
Inconsistency may be due to forgetfulness, mood, boredom,
novelty-seeking, or belief conditions have changed when they haven’t
Research indicates a given individual can make widely varying
decisions using almost identical information depending on circumstances Other Problems and Biases Recency – remembering recent events more vividly, which consequently influences our judgement more greatly than less recent events
Beliefs about Information:
1. Belief that the more information we have, the more
accurate our decision will be. Empirical evidence does not support such a belief. More information increases our confidence that we are right without necessarily improving accuracy
2. Belief that we can discriminate between useful and
irrelevant information. Empirical evidence indicates that is rarely the case. Interpretation of Information Given the inability to discriminate between useful and irrelevant information, often irrelevant information is used in making decisions. This decreases decision-making accuracy
Most people seem to weight ‘verbal’ information more
heavily than numbers or statistical information and tend to include qualitative information (that is often irrelevant) in preference to quantitative information (that is often relevant)
Our system of learning is biased towards analysis of verbal,
oral and aural cues and against mathematical and other objective information Consider this Exercise Linda is 31 years old, single, outspoken and very bright. She majored in philosophy. As a student, she was deeply concerned with issues of discrimination and social justice, and also participated in antinuclear demonstrations.
Which of these two alternatives is more probable?
(a)Linda is a bank teller
(b) Linda is a bank teller and active in the feminist
movement Which alternative would you choose? Conjunction Fallacy
Assume you chose (b), just as most subjects - 80% to 90% - in
previous experiments did
Tversky and Kahneman (1983) argue: (b) is the conjunction of
two facts, namely that Linda is a bank teller and is active in the feminist movement, whereas (a) is one of the conjuncts
Since the probability of a conjunction cannot be greater
than that of one of its conjuncts, the correct answer is (a), not (b).
Therefore, your judgment is recorded as an instance of a
celebrated reasoning error, known as the conjunction fallacy Judgmental Biases - Group Evidence suggests that group decision making amplifies biases because of organisational issues, politics, personality, psychology and circumstances
Typically, responsibility for the decisions taken cannot be
attributed to any single individual possibly influencing accountability and decision making input and process
Herding behaviour and group-think are particular problems
that may bias decisions
Issues of power and conflict are possibly relevant
Group-think Group-think is a concept which suggests that individuals will behave and react differently to stimulii if in a group situation
Decision processes within groups may bias judgments leading
to inaccuracy of decisions and forecasts
Group-think may be a political phenomenon or a reflection of
personality of team members
Group-think is exacerbated when there is high group
cohesiveness and insulation
Also exacerbated if there is dominant leadership and
power/conflict issues within the group. Accuracy Of Judgmental Forecasts – Financial Markets Financial Markets - Graham and Harvey (1995) Only 22.8% of investment newsletters have average returns higher than a passive portfolio of equity and cash with the same volatility
Poor performance more persistent than good performance
Found no evidence investment letters have any knowledge
over and above common levels of predictability. Very few investment letters can ‘beat’ S&P 500.
Few can beat the market forecast derived from a statistical
representation of publicly available information
There is no evidence that the letters can time the market
(forecast direction of the market) Investment letter ‘winners’ rarely win again and ‘losers’ often again Forecast “Gurus” Some investment gurus have outperformed the market but they represent a tiny exception to the rule;
Past above-average performance does not indicate such
performance will continue in the future
All evidence points to the one conclusion;
All markets where information is widely disseminated and that
cannot be influenced by a few players makes it impossible to predict them accurately other than by using today’s price as the best possible forecast (naïve)