Transcript
- Slide 1
- Business Strategy, Luck, and Poor Judgment Jerker Denrell, Stanford Christina Fang, NYU
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- Strategizing and forecasting Accurate forecasting of the value of resources is the only systematic way to earn above normal returns Barney, 1986, 1990
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- Forecast accuracy versus skill Skill Accuracy
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- I think there is a world market for about five computers. Thomas J. Watson, Chairman of IBM, 1943 Accurate vs Good Forecasts
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- I think there is a world market for about five computers. Thomas J. Watson, Chairman of IBM, 1943 I think there is a world market for about five billion computers. Thomas Crank, Chairman of Wild Ideas, 1943 Accurate vs Good Forecasts
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- I think there is a world market for about five computers. Thomas J. Watson, Chairman of IBM, 1943 Accuracy: bad Judgment: good I think there is a world market for about five billion computers. Thomas Crank, Chairman of Wild Ideas, 1943 Accurate vs Good Forecasts
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- I think there is a world market for about five computers. Thomas J. Watson, Chairman of IBM, 1943 Accuracy: bad Judgment: good I think there is a world market for about five billion computers. Thomas Crank, Chairman of Wild Ideas, 1943 Accuracy: good Judgment: bad Accurate vs Good Forecasts
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- If someone predicts that an activity will be very successful Accurate vs Good Forecasts
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- If someone predicts that an activity will be very successful and the prediction turns out to be correct Accurate vs Good Forecasts
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- If someone predicts that an activity will be very successful and the prediction turns out to be correct the individual is probably a poor forecaster Accurate vs Good Forecasts
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- If someone predicts that an activity will be very successful and the prediction turns out to be correct the individual is probably a poor forecaster Accurate foresight about the next big thing signals bad judgment Accurate vs Good Forecasts
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- Skill Accuracy Forecast accuracy versus skill
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- Skill Accuracy Forecast accuracy versus skill
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- Model You observe a noisy signal:
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- Model You observe a noisy signal: S = m + error
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- Model You observe a noisy signal: S = m + error
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- Model You observe a noisy signal: S = m + error
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- Model Task: Make a Forecast
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- Model Task: Make a Forecast Forecast = b*S
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- Model Task: Make a Forecast Forecast = b*S Bayesian b = 0.5
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- Model Task: Make a Forecast Forecast = b*S Bayesian b = 0.5 Overreactor b = 1
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- If m = 0, distribution of forecasts Forecast
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- If m = 0, distribution of forecasts Bayesian Forecast
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- If m = 0, distribution of forecasts Bayesian Overreactor Forecast
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- If m = 3, distribution of forecasts
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- Bayesian Forecast
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- If m = 3, distribution of forecasts Bayesian Overreactor Forecast
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- Accuracy vs Expected Accuracy Mean Square Error (MSE) E[ ( forecast actual) 2 ]
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- If m = 3, what is the expected MSE given the forecast?
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- Forecast
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- If m = 3, what is the expected MSE given the forecast? Forecast
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- Experiment You observe a noisy signal: S = m + error Task: Make a Forecast
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- Experiment You observe Test Sales Task: Make a Forecast of the Actual Sales
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- Experiment You observe Test Sales Task: Make a Forecast of the Actual Sales Can observe 50 previous test sales and actual sales
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- Experiment Artist Test Actual 100158.6275.33 100227.6816.17 100363.8170.79 100447.8646.46 100543.9464.67 100648.0544.31 100771.0452.03 100854.651.37 .
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- Experiment Artist Test Actual 100158.6275.33 100227.6816.17 100363.8170.79 100447.8646.46 100543.9464.67 100648.0544.31 100771.0452.03 100854.651.37 . Test i = m i + error (mean of m i =50) Actual i = m i + error
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- Suppose the actual outcome is between 40 and 60
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- Suppose the actual outcome is above 60
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- Conclusion Accurate Foresight about the Next Big Thing Signals Bad Judgment Are entrepreneurs who made money by betting on a vision that turned out to be correct worse forecasters?