Do forecasts expressed as prediction intervals improve production planning decisions?

Paul Goodwin, Dilek Önkal, Mary E. Thomson

Research output: Contribution to journalArticle

Abstract

A number of studies have shown that providing point forecasts to decision makers can lead to improved production planning decisions. However, point forecasts do not convey information about the level of uncertainty that is associated with forecasts. In theory, the provision of prediction intervals, in addition to point forecasts, should therefore lead to further enhancements in decision quality. To test whether this is the case in practice, participants in an experiment were asked to decide on the production levels that were needed to meet the following week’s demand for a series of products. Either underproduction cost twice as much per unit as overproduction or vice versa. The participants were supplied with either a point forecast, a 50% prediction interval, or a 95% prediction interval for the following week’s demand. The prediction intervals did not improve the quality of the decisions and also reduced the propensity of the decision makers to respond appropriately to the asymmetry in the loss function. A simple heuristic is suggested to allow people to make more effective use of prediction intervals. It is found that applying this heuristic to 85% prediction intervals would lead to nearly optimal decisions.

Original languageEnglish
Pages (from-to)195-201
Number of pages7
JournalEuropean Journal of Operational Research
Volume205
Issue number1
DOIs
Publication statusPublished - 1 Aug 2010

Keywords

  • prediction intervals
  • asymmetric loss
  • forecasting
  • decision making

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