Predicting in shock: on the impact of negative, extreme, rare, and short lived events on judgmental forecasts

Ian Durbach () and Gilberto Montibeller ()
Additional contact information
Ian Durbach: University of Cape Town
Gilberto Montibeller: Loughborough University

EURO Journal on Decision Processes, 2018, vol. 6, issue 1, No 12, 213-233

Abstract: Abstract The occurrence of unexpected events that are extreme in magnitude, rare in frequency, and short-lived in duration poses distinctive challenges to decision makers and planners. In this paper we examine the impact of negative versions of these events, which we term “shocks”, on the judgmental forecasts of subjects experiencing them. A behavioral experiment asking participants to forecast monthly time series in the presence of temporary but extreme decreases in those series is used. Average changes to annual prediction intervals and 1-month ahead forecasts were much smaller than the magnitude of the shock and occurred in proportion to the size of the shock. Changes to prediction intervals were more persistent for moderate than large shocks, and larger for shocks occurring a second time. Our results provide supporting evidence for the view that decision makers underweight rare and extreme events rather than overweight them, consistent with a discounting or forgetting effect. The behavioral findings are relevant to operations researchers involved in expert judgment elicitation and in supporting decision making.

Keywords: Behavioral decision making; Judgmental forecasting; Prediction intervals; Price forecasting; Uncertainty; Extreme events; Rare events; 90B50 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://link.springer.com/10.1007/s40070-017-0063-2 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:eurjdp:v:6:y:2018:i:1:d:10.1007_s40070-017-0063-2

Ordering information: This journal article can be ordered from
http://www.springer. ... search/journal/40070

DOI: 10.1007/s40070-017-0063-2

Access Statistics for this article

EURO Journal on Decision Processes is currently edited by Vincent Mousseau

More articles in EURO Journal on Decision Processes from Springer, EURO - The Association of European Operational Research Societies
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().