Adjusting judgemental extrapolations using Theil's method and discounted weighted regression

Abstract

Theil's method can be applied to judgemental forecasts to remove systematic errors. However, under conditions of change the method can reduce the accuracy of forecasts by correcting for biases that no longer apply. In these circumstances, it may be worth applying an adaptive correction model which attaches a greater weight to more recent observations. This paper reports on the application of Theil's original method and a discounted weighted regression form of Theil's method (DWR) to the judgemental extrapolations made by 100 subjects in an experiment. Extrapolations were made for both stationary and non-stationary and low- and high-noise series. The results suggest DWR can lead to significant improvements in accuracy where the underlying time-series signal becomes more discernible over time or where the signal is subject to change. Theil's method appears to be most effective when a series has a high level of noise. However, while Theil's corrections seriously reduced the accuracy of judgemental extrapolations for some series the DWR method performed well under a wide range of conditions and never significantly degraded the original forecasts. © 1997 by John Wiley & Sons, Ltd.