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The Effectiveness of Simple Decision Heuristics: Forecasting Commercial Success for Early-Stage Ventures

  • Thomas Åstebro

    ()

    (Joseph L. Rotman School of Management, University of Toronto, 105 St. George Street, Toronto, Ontario M5S 3E6, Canada)

  • Samir Elhedhli

    ()

    (Department of Management Sciences, University of Waterloo, Waterloo, Ontario N2L 3G1, Canada)

Registered author(s):

    We investigate the decision heuristics used by experts to forecast that early-stage ventures are subsequently commercialized. Experts evaluate 37 project characteristics and subjectively combine data on all cues by examining both critical flaws and positive factors to arrive at a forecast. A conjunctive model is used to describe their process, which sums "good" and "bad" cue counts separately. This model achieves a 91.8% forecasting accuracy of the experts' correct forecasts. The model correctly predicts 86.0% of outcomes in out-of-sample, out-of-time tests. Results indicate that reasonably simple decision heuristics can perform well in a natural and very difficult decision-making context.

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    File URL: http://dx.doi.org/10.1287/mnsc.1050.0468
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    Article provided by INFORMS in its journal Management Science.

    Volume (Year): 52 (2006)
    Issue (Month): 3 (March)
    Pages: 395-409

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    Handle: RePEc:inm:ormnsc:v:52:y:2006:i:3:p:395-409
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    1. Kahneman, Daniel & Tversky, Amos, 1979. "Prospect Theory: An Analysis of Decision under Risk," Econometrica, Econometric Society, vol. 47(2), pages 263-91, March.
    2. Thomas Astebro & Irwin Bernhardt, 1999. "The Social Rate of Return to Canada's Inventor's Assistance Program," Post-Print hal-00480038, HAL.
    3. Zacharakis, Andrew L. & Meyer, G. Dale, 2000. "The potential of actuarial decision models: Can they improve the venture capital investment decision?," Journal of Business Venturing, Elsevier, vol. 15(4), pages 323-346, July.
    4. Makridakis, Spyros & Hibon, Michele, 2000. "The M3-Competition: results, conclusions and implications," International Journal of Forecasting, Elsevier, vol. 16(4), pages 451-476.
    5. Thomas B. Astebro & Yigal Gerchak, 2000. "Calculating the Expectation and Variance of the Present Value for a Random Profit Stream of Uncertain Duration," Post-Print hal-00648005, HAL.
    6. Alba, Joseph W & Marmorstein, Howard, 1987. " The Effects of Frequency Knowledge on Consumer Decision Making," Journal of Consumer Research, Oxford University Press, vol. 14(1), pages 14-25, June.
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