Wednesday, 21 March 2012

In the right mood for a forecast


We are lousy at making predictions, partly because we lack the knowledge about statistics that is necessary to accurately judge the probability of events. However, accurate predictions are important for making strategic decisions in the business and private context. In a previous post, we learned that we can become better predictors by teaching ourselves the knowledge we are lacking. But what else can we do? Our mental health seems to play a role when it comes to judging the likelihood of events that lie beyond our control.

Kriti Jain, Neil Bearden, and Allan Filipowicz from INSEAD international business school used the 2010 Soccer World Cup in South Africa for conducting a study with 1,110 soccer fans. Before the World Cup, they assessed participants’ depression level and then had them rate the success probabilities of the soccer teams participating in the competition. They found depressed participants to make worse predictions than non-depressed individuals. The main reason for this inaccuracy was that depressed individuals overestimated the probability of the less likely events.

The original article is currently under review at the International Journal of Forecasting. It is available on Kriti Jain’s homepage. There is an outline of the article on smartmoney.com.

Non-depressed individuals are better at making predictions than depressed ones. At first glance, this might seem to be a contradiction with the findings on what is known as depressive realism: depressive individuals judge the level control they have over outcomes and the likelihoods about their own success or failure more accurately than non-depressive persons. However, the authors of the described study mention that their setting was different: participants had to judge the likelihood of events they could not influence at all. Thus, being mentally healthy and not depressed seems to be the better mental state for accurate judgments of events one cannot influence. This is just one of the many benefits of being mentally healthy.

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