Predicting the Next Big Thing: Success as a Signal of Poor Judgment

Authors:
Jerker Denrell;Christina Fang
Affiliations:
Saïd Business School, University of Oxford, Oxford OX1 1HP, United Kingdom;Department of Management, Stern School of Business, New York University, New York, New York 10012
Venue:
Management Science
Year:
2010

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Abstract

Successfully predicting that something will become a big hit seems impressive. Managers and entrepreneurs who have made successful predictions and have invested money on this basis are promoted, become rich, and may end up on the cover of business magazines. In this paper, we show that an accurate prediction about such an extreme event, e.g., a big hit, may in fact be an indication of poor rather than good forecasting ability. We first demonstrate how this conclusion can be derived from a formal model of forecasting. We then illustrate that the basic result is consistent with data from two lab experiments as well as field data on professional forecasts from the Wall Street Journal Survey of Economic Forecasts.