Strategic Modelling and Business Dynamics: A Feedback Systems Approach

5.9. Appendix 2: The Dynamics of Information Smoothing

Information smoothing is so common in the day-to-day operation of business and society that it is worth examining more closely how it really works. Smoothing crops up in forecasts, expectations, perceptions, judgements and in any process of measurement or monitoring.^[] People do not instantly recognise the true conditions within an organisation. People do not change their minds immediately on the receipt of new information. Measurement, reflection and deliberation often take considerable time. Still more time is needed to adjust emotionally to a new situation before beliefs and behaviour change. Smoothing is a versatile way to capture this typical wait-and-see approach. A formulation for information smoothing is shown in Figure 5.35. The smoothing process transforms an input into an observed input over the 'time to form an impression'. The formulation is similar to the average ship rate earlier in the chapter, but the terminology is generalised. In addition, an alternative SMTH1 function is included to demonstrate its precise equivalence to the standard single-stock formulation.

^[] Forecasts and expectations can involve several interlinked smoothing processes in order not only to perceive the value of a given variable, but also to determine its trend. With knowing the trend, it is possible to project the value of the variable at a future point in time (according to the time horizon of the forecast). To find out more about forecasting ...