Two Essays in Business Forecasting and Decision-Making
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TWO ESSAYS IN BUSINESS FORECASTING AND DECISION-MAKING Carmina Caringal Clarke Doctor of Philosophy, 2007 Australian Graduate School of Management University of New South Wales THE UNIVERSITY OF NEW SOUTH WALES Thesis/Dissertation Sheet Surname or Family name: CLARKE First name: CARMINA CARINGAL Other name/s: Abbreviation for degree as given in the University calendar: PH.D. School: AUSTRALIAN GRADUATE SCHOOL OF MANAGEMENT Faculty: AUSTRALIAN SCHOOL OF BUSINESS Title: TWO ESSAYS IN BUSINESS FORECASTING AND DECISION-MAKING Abstract 350 words maximum: (PLEASE TYPE) This dissertation is two essays in business decision-making. The first essay is motivated by recent field evidence suggesting significant reliance on conventional techniques (e.g. NPV and DCF) without assessment of the decision profile - its degree of uncertainty, ambiguity and knowledge distribution. However, without knowing the decision profile, the chosen decision might not be appropriate given the decision situation. Therefore, essay 1 develops a multi-faceted conceptualization of the decision profile and provides a prescriptive model for choosing appraisal methods based on this profile. Specifically, it prescribes the limited use of conventional methods to low ambiguity and uncertainty situations and using decision trees, real options, scenario planning and case-based methods as the level of uncertainty increases. In high ambiguity situations, however, the only viable approaches are case-based methods which do not have perfect information assumption that conventional alternative methods do. Case-based methods have been supported theoretically in case-based decisions and case-based reasoning literature but lags in its use in business decision-making. Possible reasons for this include a lack of concrete applications and developments of major concepts such as its case memory, similarity and prediction functions. Therefore, essay 2 proposes a model of case-based decisions called similarity-based forecasting (SBF) and applies it to a high uncertainty and ambiguity situation – namely forecasting movie success. In doing so, it outlines operational definitions of the memory, similarity and prediction functions and, based on data from the entertainment industry, provides empirical support for the hypothesis that case-based methods can be more accurate than regression forecasting; both SBF and combined SBF-regression models were able to predict movie gross revenues with 40% and 50% greater accuracy than regression respectively. This essay concludes with a discussion of some possible directions for future research including applications using data from other domains and settings, testing the boundary conditions for which the SBF approach should be applied, experiments using SBF under uncertainty and complexity manipulations, and ‘time-stamped’ comparisons with predictions made using information markets (e.g. Hollywood Stock Exchange). Declaration relating to disposition of project thesis/dissertation I hereby grant to the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or in part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. I retain all property rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstracts International (this is applicable to doctoral theses only). …………………………………………………………… …………………………………………………………… ………………………………… Signature Witness Date The University recognises that there may be exceptional circumstances requiring restrictions on copying or conditions on use. Requests for restriction for a period of up to 2 years must be made in writing to the Registrar. Requests for a longer period of restriction may be considered in exceptional circumstances if accompanied by a lette r of support from the Supervisor or Head of School. Such requests must be submitted with the thesis/dissertation. FOR OFFICE USE ONLY Date of completion of requirements for Award: Registrar and Deputy Principal THIS SHEET IS TO BE GLUED TO THE INSIDE FRONT COVER OF THE THESIS " ORIGINALITY STATEMENT .1 hereby declare that this submission is my own work and to the best of my knowledge it contains no materials previously published or written by another person, or substantial proportions of material which have been accepted for the award of any other degree or diploma at UNSW or any other educational institution, except where due acknowledgement is made in the thesis. Any contribution made to the research by others, with whom I have worked at UNSW or elsewhere, is explicitly acknowledged in the thesis. I also declare that the intellectual content of this thesis is the product of my own work, except to the extent that assistance from others in the project's design and conception or in style, presentation and ~7~~~S~i7~~;~'~~":"""""""""""" Date....... .1lf)(/Y.~:~~~:~: :-~ ~.......... ............... COPYRIGHT STATEMENT 'i hereby grant the University of New South Wales or its agents the right to archive and to make available my thesis or dissertation in whole or part in the University libraries in all forms of media, now or here after known, subject to the provisions of the Copyright Act 1968. i retain all proprietary rights, such as patent rights. I also retain the right to use in future works (such as articles or books) all or part of this thesis or dissertation. I also authorise University Microfilms to use the 350 word abstract of my thesis in Dissertation Abstract International (this is applicable to doctoral theses only). i have either used no substantial portions of copyright material in my thesis or i have obtained permission to use copyright material; where permission has not been granted I have applied/wil apply for a partial restriction of the ~i~i~~d~~.t~~~::................................... Date.......... .p/. ó¡0.r............................. ........................... AUTHENTICITY STATEMENT .1 certify that the Library deposit digital copy is a direct equivalent of the final officially approved version of my thesis. No emendation of content has occurred and if there are any minor variations in formatting, they are the result of the nversio to digital format.' Signed ... : Date.......... (fCf").... .O.:j......................... .. ........................................... ............................. ACKNOWLEDGEMENTS I have many people to thank for without them, this thesis would never have been. I would like to start by thanking my thesis adviser and mentor, Professor Dan Lovallo. Dan’s support was and continues to be, above and beyond what was expected of an adviser and I am grateful for his kindness, patience and guidance throughout my candidature. I thank my “academic uncle” Professor Colin Camerer at the California Institute of Technology, for taking me under his wing during my time at Cal Tech. I am honoured to have been given the opportunity to study and learn from the best. I also extend my thanks to my thesis committee of Professor Tom Powell, Dr Anna Gunnthorsdottir and Professor Simon Sheather for their insights in the early stages of my thesis. I thank my family and extended family for continuing to support my every endeavour throughout the last 28 years. Twenty-eight times over I thank my Mum, Dad, my sister Christine, my aunts and uncles for believing in me. Mum and Dad, I will forever be grateful for the sacrifices you made to see my dreams through, I have not forgotten the countless late nights you stayed up with me, the many times you went out of your way to take me to school, to uni, to classes and exams, your generosity in putting me through tutoring and making sure that I had everything I needed (and more) to succeed. Finally, to my wonderful husband Shane, for loving me and being a constant reminder of what is most important in my life. This thesis is in memory of my beloved grandparents Lola Imang, Lolo Piroy and Lola Goria and to my grandfather Lolo Carling, whom I adore. This thesis was to be his birthday present last year, which sadly he did not get to see. I miss you dearly. ABSTRACT This dissertation is two essays in business decision-making. The first essay is motivated by recent field evidence suggesting significant reliance on conventional techniques (e.g. NPV and DCF) without assessment of the decision profile - its degree of uncertainty , ambiguity and knowledge distribution . However, without knowing the decision profile, the chosen decision might not be appropriate given the decision situation. Therefore, essay 1 develops a multi-faceted conceptualization of the decision profile and provides a prescriptive model for choosing appraisal methods based on this profile. Specifically, it prescribes the limited use of conventional methods to low ambiguity and uncertainty situations and using decision trees, real options, scenario planning and case-based methods as the level of uncertainty increases. In high ambiguity situations, however, the only viable approaches are case-based methods which do not have perfect information assumption that conventional alternative methods do. Case-based methods have been supported theoretically in case-based decisions and case-based reasoning literature but lags in its use in business decision-making. Possible reasons for this include a lack of concrete applications