Demand Forecasting Behavior: System Neglect and Change Detection

Analyzing how individuals make forecasts based on time-series data finds that forecasting behavior systematically deviates from normative predictions: Forecasters overreact to forecast errors in relatively stable environments, but underreact toerrors in relatively unstable environments.

Abstract

We analyze how individuals make forecasts based on time-series data. Using a controlled laboratory experiment, we find that forecasting behavior systematically deviates from normative predictions: Forecasters overreact to forecast errors in relatively stable environments, but underreact to errors in relatively unstable environments. The performance loss that is due to such systematic judgment biases is larger in stable than in unstable environments. This paper was accepted by Martin Lariviere, operations management.