Prediction: coveted, yet forsaken? Introducing a cross-validated predictive ability test in partial least squares path modeling

Abstract

Management researchers often develop theories and policies that are forward‐looking. The prospective outlook of predictive modeling, where a model predicts unseen or new data, can complement the retrospective nature of causal‐explanatory modeling that dominates the field. Partial least squares (PLS) path modeling is an excellent tool for building theories that offer both explanation and prediction. A limitation of PLS, however, is the lack of a statistical test to assess whether a proposed or alternative theoretical model offers significantly better out‐of‐sample predictive power than a benchmark or an established model. Such an assessment of predictive power is essential for theory development and validation, and for selecting a model on which to base managerial and policy decisions. We introduce the cross‐validated predictive ability test (CVPAT) to conduct a pairwise comparison of predictive power of competing models, and substantiate its performance via multiple Monte Carlo studies. We propose a stepwise predictive model comparison procedure to guide researchers, and demonstrate CVPAT's practical utility using the well‐known American Customer Satisfaction Index (ACSI) model.