When it comes to forecasting or decision-making, relying on the arithmetic mean, or average, can lead you to a seriously flawed plan of attack, according to the Management Insights feature in the current issue of Management Science, the flagship journal of the Institute for Operations Research and the Management Sciences (INFORMS®).
Management Insights, a regular feature of the journal, is a digest of important research in business, management, operations research, and management science. It appears in every issue of the monthly journal.
"Why Intuitive Averages Can Make Bad Forecasts and Counter-Intuitive Forecasts Can Do Better" is by Steven Shugan and Debanjan Mitra of the University of Florida.
Although some would argue, for example, that the best predictor of sales for a vocal-artist's next album is the average of the artist's previous album sales, the authors argue that this type of reliance on averages is wrong. Although it is natural to use the artist's average sales as a metric to predict future sales, it turns out that the artist's maximum sales may be the better predictor, even if some of the artist's previous albums were terrible.
Similarly, it may be more desirable to invest with an entrepreneur who has had one highly successful startup and several failures rather than to invest with an entrepreneur who on average had more success.
The authors explain that sometimes rare events – for example, a success in an environment where failure is common – sometimes convey more information and averaging tends to ignore that critical information. The authors show that this counter-intuitive result can apply in many situations, including, among others, the performance of professional sports players, the box office draw of actors, and the research productivity of scientists. In addition to explaining why nonaveraging metrics (such as the maximum) can perform better, they provide important guidelines for decision makers.
The current issue of Management Insights is available at http://mansci.journal.informs.org/cgi/reprint/55/1/viii. The full papers associated with the Insights are available to Management Science subscribers. Individual papers can be purchased at http://institutions.informs.org. Additional issues of Management Insights can be accessed at http://www.informs.org/site/ManSci/index.php?c=11&kat=Management+Insights.
The other Insights in the current issue are:
· Evidence of Boundedly Rational Trading Around a Stock's 52-Week Highs and Lows by Steven Huddart, Mark Lang, Michelle H. Yetman
· Revenue Management in Markets with Competition and Strategic Consumers by Yuri Levin, Jeff McGill, Mikhail Nediak
· Competition Between Amazon and Brick-and-Mortar Retailers: How the Benefit of Buying Online Depends on Where You Live by Chris Forman, Anindya Ghose, Avi Goldfarb
· Insurance Fraud: Outfoxing the Defrauder at Their Game by Georges Dionne, Florence Giuliano, Pierre Picard
· Risk Management with Satisficing Measures by David B. Brown, Melvyn Sim
· Team Familiarity, Role Experience, and Performance: Evidence from Indian Software Services by Robert S. Huckman, Bradley R. Staats, David M. Upton
· Do Smart Scientists Make Good Entrepreneurs? Exploring the Relationship Between Biomedical Scientists' Human Capital and Firm Performance by Andrew A. Toole, Dirk Czarnitzki
· The Value of Partial Resource Pooling: Should a Service Network Be Integrated or Product-Focused? by Bariｸs Ata, Jan A. Van Mieghem,
· Centralized vs. Decentralized Management of Digital Content on a Network of Caches by Mohit Tawarmalani, Karthik Kannan, Prabuddha De
· Revenue Management with Robust Optimization by S. Ilker Birbil, J. B. G. Frenk, Joaquim A. S. Gromicho, Shuzhong Zhang
INFORMS journals are strongly cited in Journal Citation Reports, an industry source. In the JCR subject category "operations research and management science," Management Science ranked in the top 10 along with two other INFORMS journals.
The special MBA issue published by BusinessWeek includes Management Science and three other INFORMS journals in its list of 20 top academic journals that are used to evaluate business school programs. Financial Times includes Management Science and four other INFORMS journals in its list of academic journals used to evaluate MBA programs.
About INFORMS
The Institute for Operations Research and the Management Sciences (INFORMS®) is an international scientific society with 10,000 members, including Nobel Prize laureates, dedicated to applying scientific methods to help improve decision-making, management, and operations. Members of INFORMS work in business, government, and academia. They are represented in fields as diverse as airlines, health care, law enforcement, the military, financial engineering, and telecommunications. The INFORMS website is www.informs.org. More information about operations research is at www.scienceofbetter.org.
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Management Science