The effect of planning horizon on the effectiveness of what-if analysis

Abstract

Although what-if analysis is among the most popular decision support methods, empirical evidence indicates that it does not predictably improve decision making. This suggests that the effectiveness of what-if analysis is, in part, contingent on characteristics of what-if models. However, extremely little research has been conducted to identify and assess these characteristics. A between-subjects experiment was conducted to determine the effect of one potentially critical characteristic of what-if tools used for planning: the planning horizon reflected in the model. The authors hypothesized that the "temporal framing" embodied by what-if models with different planning horizons would result in differential effects on short-run and long-run performance. The hypothesis was supported: subjects provided a multi-period what-if model performed significantly better in the long-run than those provided a one-period model. In addition, both what-if groups out-performed the control group, but only in the short-run. Surprisingly, the control group out-performed both what-if groups in the long-run. These results suggest that the effectiveness of what-if analysis is contingent on subtle, yet fundamental, characteristics of what-if models. Future research that identifies other key characteristics will help provide modelers with specific, practical guidelines for effective model construction.