Jerker Denrell 2008-09-19

From OBTnotes

Predicting the Next Big Thing

Success as a Signal of Poor Judgment

• from Stanford OB
• Speaker's site

Abstract

Successfully predicting that something will become a big hit seems impressive and may suggest that the individual has unusual vision and forecasting ability. In this paper, we show instead that such accurate predictions are an indication of poor rather than good forecasting ability. Using a formal model we demonstrate that a decision maker who accurately predicted an extreme event is more likely to be someone who ignores the base rate than someone who follows Bayes rule. The model is consistent with data from an experiment and the Wall Street Journal survey of professional forecasters. Our results illustrate why individuals who learn from successful others may learn to adopt sub-optimal forecasting practices