Ulrike Leopold-Wildburger

Experiments on forecasting behavior with several sources of information - A review of the literature

Decision makers frequently have to forecast the future values of a time series (e.g. the price of a commodity, sales figures) given several sources of information (e.g. leading indicators, forecasts of advisors). As a subdomain of decision theory the explanation and the improvement of human forecasting behavior are interdisciplinary issues and have been subject to extensive empirical field and laboratory research. We here review the relevant experimental literature, demonstrate the significance of these results for decision science in general, and summarize the implications for practical forecasting applications.

OR for better management of sustainable development

At the occasion of EURO XXI 2006 in Iceland (http:// www.euro2006.org/), the European Journal of Operational Research together with the Programme Committee of EURO XXI 2006, consisting of Tuula Kinnunen (Chair), Raymond Bisdorff, Jean-Pierre Brans, Ulrike LeopoldWildburger, Snjolfur Olafsson, Maurice Shutler, Gerhard-Wilhelm Weber, Marino Widmer and Martin Zachariasen, decided to prepare and publish this feature cluster on OR for Better Management of Sustainable Developement, which was also the special conference theme of EURO XXI 2006. One of the central concerns on Earth and among people is how to ensure development both quantitatively and qualitatively. Sustainable development looks for a continuous improvement of the living and working conditions, providing valuable food and a healthy environment, good education and chances for everyone to master life and to enable them to contribute to the happiness of others. Via its conference theme, EURO XXI 2006 aimed to showcase how OR can improve the management of this important topic that touches everyone in the world. For decades, Icelanders have had a special experience in the energy sector. A number of semi-plenary speakers developed our theme in depth, and many streams were directly related to it. Development needed and the special contribution made by OR, our Science of Better, became acknowledged by the approval of a new EURO Working Group ‘‘OR for Development” founded during EURO XXI 2006. This feature cluster demonstrates the state-of-the-art, challenges and ways for improving the management of sustainable development, to invite to future research and collaboration among the countries of EURO and across the world. To ensure high-quality paper submission, practitioners and researchers of OR related to the development theme were welcome to contribute. Their papers are hosted in this issue. Contributions of a more theoretical nature were also welcome, provided their contribution to the special theme was demonstrated. The feature cluster includes twelve papers. Each of them is based on a presentation delivered at EURO XXI 2006. These twelve papers were selected from about 40 papers,

Heuristic modeling of expectation formation in a complex experimental information environment

Abstract Academic subjects made judgmental forecasts of a graphically presented time series in a laboratory experiment. Besides the past realizations of the time series itself, the only available information for the forecasting task was provided by leading series, i.e. indicators with a constant lead period of one. The number and the quality of the leading series were varied systematically between seven versions of the experiment resulting in different levels of information complexity. We present a heuristic that explains the subjects’ average forecasting behavior better than the rational expectations hypothesis in all versions of the experiment. Furthermore, we find that the forecasting accuracy of the subjects increases with the number of reliable indicators but their efficiency declines with increasing complexity.

Voting in EMU - An Experimental Study of Institutional Innovation and the Role of Communication in the Stability and Growth Pact

The Stability and Growth Pact (SGP) in the EUs economic and monetary union (EMU) aims to assure sound public finances in the EMU Member States by providing for sanctions against countries with excessive deficits. We experimentally examine the voting procedure of the SGP and find that the institutional rules are not at all satisfactory. As an institutional innovation, we test a procedure where fiscal sinners are excluded from voting, as suggested by Otmar Issing. It turns out that this modification is surprisingly successful. In addition, our study shows that the opportunity to communicate has a significant impact and tends to mitigate the Pacts shortcomings.

Expected utility versus the changes in knowledge ahead

We present a decision theory appropriate for use in serious choices such as insurance. It extends standard decision theories like expected utility or cumulative prospect theory which are atemporal single stage theories. Instead it employs stages of knowledge ahead to track satisfactions and dissatisfactions. In the first stage of the risk, the uninsured face dissatisfactions of worries and planning difficulties (avoided by the insured), also perhaps positive satisfactions of thrills (missed out by the insured). In the second stage when the risk is past, the uninsured may face the dissatisfactions of ridicule and blame if they learn that they were unlucky. From experimental and questionnaire data, 80% of our subjects are influenced by such secondary satisfactions. Only five percent of our participants employ the usage of integrated quantitative aggregation rules for evaluating acts as assumed under expected utility theory.

Educational effects in an experiment with the management game SINTO-Market

This paper examines how the educational background influences the performance of managers’ strategies. The research is based on data collected by an experiment with the management game SINTO-Market. This management game puts the players in a competitive situation in the branded food product sector, within which the subjects take over the role of the managers who have to find out the most successful strategy. From experimental research with this management game we will draw some interesting conclusions about human behavior in complex economic decision-making situations. To investigate educational effects the management game SINTO-Market was performed with students of different educational levels 17 times. The results show some significant differences between graduates and undergraduates.

Understanding Negotiations: A Video Approach in Experimental Gaming

Reinhard Selten since the beginning of his scientific career has been concerned with developing descriptive theories that take account of the boundedly rational behavior of human subjects. The concept of bounded rationality was introduced by Herbert Simon in the 1950s (Simon 1955, 1957), and Selten was immediately convinced by his arguments (Selten 1995). Together with a group of other researchers in Frankfurt around the economist Heinz Sauermann who shared the view that behavior of economic agents is not adequately modeled by “homo oeconomicus” theories Reinhard Selten started to run economic experiments and to develop a corresponding methodology already in the 1950s (see Sauermann and Selten 1967). In Selten’s own words: “We invented experimental economics”.

How do commission rates influence a firm’s success? statistical analysis of a corporate strategy simulation experiment

The purpose of this paper is to analyse the relationship between commission rates and a firm’s success within a corporate strategic planning simulation experiment. Teams of students are assigned to the role of managers of a firm within a competitive market situation. They have the task to experience the complex situation in which they act as managers to increase the performance of a firm by setting specific parameters. Our most interesting parameter is the commission rate. The Marketing Game considers a reasonably complex and realistic situation for the participants. We examine to what extent subjects succeed in increasing a firm’s turnover and profit by varying the commission rates.

Modeling Expectation Formation Involving Several Sources of Information

Abstract Experimental studies of expectation formation of subjects are predominantly limited to the prediction of one single time series despite the practical relevance of expectations in situations with multiple sources of information. In this paper, we report on an experiment in which subjects are given time series (indicators) as additional information for the judgemental forecast of a stationary time series. The quality and the number of these indicators are varied in three versions of a forecasting experiment. We explore the effects on forecasting accuracy and we test the average forecasts of the subjects for consistency with the rational expectations hypothesis. A simple heuristic is presented that explains the average forecasting behavior better than the rational expectations if indicators are presented to the subjects. It is demonstrated by a simulation study that this result is representative for the considered stationary stochastic processes.

Some New Lotka-Volterra-Experiments

The experiment described here has problems of economic stabilisation in mind, but, mainly for reasons of simplicity, it attacks the problem in the field of biology. A biotope consisting of two populations should be brought to a stationary fixpoint level by means of four different instruments. In each treatment of the experiment, however, only one instrument can be used to reach the two-dimensional goal.