Forecasting 1

Forecasting
Forecasting is the process of making statements about events whose actual outcomes (typically) have not yet been
observed. A commonplace example might be estimation of the expected value for some variable of interest at some
specified future date. Prediction is a similar, but more general term. Both might refer to formal statistical methods
employing time series, cross-sectional or longitudinal data, or alternatively to less formal judgemental methods.
Usage can differ between areas of application: for example in hydrology, the terms "forecast" and "forecasting" are
sometimes reserved for estimates of values at certain specific future times, while the term "prediction" is used for
more general estimates, such as the number of times floods will occur over a long period. Risk and uncertainty are
central to forecasting and prediction; it is generally considered good practice to indicate the degree of uncertainty
attaching to forecasts. The process of climate change and increasing energy prices has led to the usage of Egain
Forecasting of buildings. The method uses Forecasting to reduce the energy needed to heat the building, thus
reducing the emission of greenhouse gases. Forecasting is used in the practice of Customer Demand Planning in
every day business forecasting for manufacturing companies. The discipline of demand planning, also sometimes
referred to as supply chain forecasting, embraces both statistical forecasting and a consensus process. An important,
albeit often ignored aspect of forecasting, is the relationship it holds with planning. Forecasting can be described as
predicting what the future will look like, whereas planning predicts what the future should look like.[1] There is no
single right forecasting method to use. Selection of a method should be based on your objectives and your conditions
(data etc.).[2] A good place to find a method, is by visiting a selection tree. An example of a selection tree can be
found here.[3] .

Categories of forecasting methods

Time series methods

Time series methods use historical data as the basis of estimating future outcomes.
• Rolling forecast is a projection into the future based on past performances, routinely updated on a regular
schedule to incorporate data.[4]
• Moving average
• weighted moving average
• Exponential smoothing
• Autoregressive moving average (ARMA)
• Autoregressive integrated moving average (ARIMA)
e.g. Box-Jenkins
• Extrapolation
• Linear prediction
• Trend estimation
• Growth curve
Forecasting 2

Causal / econometric methods

Some forecasting methods use the assumption that it is possible to identify the underlying factors that might
influence the variable that is being forecast. For example, sales of umbrellas might be associated with weather
conditions. If the causes are understood, projections of the influencing variables can be made and used in the
forecast.
• Regression analysis using linear regression or non-linear regression
• Econometrics
• Autoregressive moving average with exogenous inputs (ARMAX)

Judgmental methods
Judgmental forecasting methods incorporate intuitive judgements, opinions and subjective probability estimates.
• Composite forecasts
• Surveys
• Delphi method
• Scenario building
• Technology forecasting
• Forecast by analogy

Artificial intelligence methods

• Artificial neural networks
• Support vector machines

Other methods
• Simulation
• Prediction market
• Probabilistic forecasting and Ensemble forecasting
• Reference class forecasting

Forecasting accuracy
The forecast error is the difference between the actual value and the forecast value for the corresponding period.

where E is the forecast error at period t, Y is the actual value at period t, and F is the forecast for period t.
Measures of aggregate error:
Forecasting 3

Mean Absolute Error (MAE)

Mean Absolute Percentage Error (MAPE)

Percent Mean Absolute Deviation (PMAD)

Mean squared error (MSE)

Root Mean squared error (RMSE)

Forecast skill (SS)

Please note that business forecasters and practitioners sometimes use different terminology in the industry. They
refer to the PMAD as the MAPE, although they compute this volume weighted MAPE. For more information see
Calculating Demand Forecast Accuracy
Reference class forecasting was developed to increase forecasting accuracy.[5]
See also
• Forecast error
• Calculating Demand Forecast Accuracy
• Predictability
• Prediction interval, similar to confidence interval

Applications of forecasting
Forecasting has application in many situations:
• Supply chain management - Forecasting can be used in Supply Chain Management to make sure that the right
product is at the right place at the right time. Accurate forecasting will help retailers reduce excess inventory and
therefore increase profit margin. Accurate forecasting will also help them meet consumer demand.
• Weather forecasting, Flood forecasting and Meteorology
• Transport planning and Transportation forecasting
• Economic forecasting
• Egain Forecasting
• Technology forecasting
• Earthquake prediction
• Land use forecasting
• Product forecasting
• Player and team performance in sports
• Telecommunications forecasting
• Political Forecasting
• Sales Forecasting
Forecasting 4

See also
• Calculating Demand Forecast Accuracy
• CPFR
• Forecasting bias
• Foresight (future studies)
• Futures studies
• Futurology
• Global Prescience
• Optimism bias
• Planning
• Prediction
• Reference class forecasting
• Strategic foresight
• Strategic misrepresentation
• Technology forecasting

References
[1] http:/ / www. forecastingprinciples. com/ index. php?option=com_content& task=view& id=3& Itemid=3
[2] http:/ / www. forecastingprinciples. com/ index. php?option=com_content& task=view& id=3& Itemid=3#D. _Choosing_the_best_method
[3] http:/ / www. forecastingprinciples. com/ index. php?option=com_content& task=view& id=17& Itemid=17
[4] Rasmussen, Nils H.; Christopher J. Eichorn, Corey S. Barak, Toby Prince (2003). Process Improvement for Effective Budgeting and
Financial Reporting (http:/ / books. google. com/ books?id=ZxAIxj0ZflgC& pg=PA79& dq="Rolling+ forecast"& client=firefox-a). John
Wiley and Sons. p. 79. ISBN 0471455075. .
[5] Flyvbjerg, B., 2008, "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class Forecasting in Practice."
European Planning Studies, vol. 16, no. 1, January, pp. 3-21. (http:/ / www. sbs. ox. ac. uk/ centres/ bt/ Documents/ Curbing Optimism Bias
and Strategic Misrepresentation. pdf)

• Armstrong, J. Scott (ed.) (2001) (in English). Principles of forecasting: a handbook for researchers and
practitioners. Norwell, Massachusetts: Kluwer Academic Publishers. ISBN 0-7923-7930-6.
• Flyvbjerg, Bent, 2008, "Curbing Optimism Bias and Strategic Misrepresentation in Planning: Reference Class
Forecasting in Practice," European Planning Studies, vol. 16, no. 1, January, pp. 3-21. (http://www.sbs.ox.ac.
uk/centres/bt/Documents/Curbing Optimism Bias and Strategic Misrepresentation.pdf)
• Geisser, Seymour (1 June 1993) (in English). Predictive Inference: An Introduction. Chapman & Hall, CRC
Press. ISBN 0-412-03471-9.
• Gilchrist, Warren (1976) (in English). Statistical Forecasting. London: John Wiley & Sons. ISBN 0-471-99403-0.
• Hyndman, R.J., Koehler, A.B (2005) "Another look at measures of forecast accuracy" (http://www.
robjhyndman.com/papers/mase.pdf), Monash University note.
• Makridakis, Spyros; Wheelwright, Steven; Hyndman, Rob J. (1998) (in English). Forecasting: methods and
applications (http://www.robjhyndman.com/forecasting/). New York: John Wiley & Sons.
ISBN 0-471-53233-9.
• Kress, George J.; Snyder, John (30 May 1994) (in English). Forecasting and market analysis techniques: a
practical approach. Westport, Connecticut, London: Quorum Books. ISBN 0-89930-835-X.
• Rescher, Nicholas (1998) (in English). Predicting the future: An introduction to the theory of forecasting. State
University of New York Press. ISBN 0791435539.
• Taesler, R. (1990/91) Climate and Building Energy Management. Energy and Buildings, Vol. 15-16, pp 599 -
608.
Forecasting 5

• Turchin, P. (2007) "Scientific Prediction in Historical Sociology: Ibn Khaldun meets Al Saud". In: History &
Mathematics: Historical Dynamics and Development of Complex Societies. (http://edurss.ru/cgi-bin/db.
pl?cp=&page=Book&id=53185&lang=en&blang=en&list=Found) Moscow: KomKniga. ISBN
978-5-484-01002-8
• Sasic Kaligasidis, A et al. (2006) Upgraded weather forecast control of building heating systems. p. 951 ff in
Research in Building Physics and Building Engineering Paul Fazio (Editorial Staff), ISBN 0-415-41675-6
• United States Patent 6098893 Comfort control system incorporating weather forecast data and a method for
operating such a system (Inventor Stefan Berglund)

External links
• Forecasting Principles: "Evidence-based forecasting" (http://www.forecastingprinciples.com)
• Introduction to Time series Analysis (Engineering Statistics Handbook) (http://www.itl.nist.gov/div898/
handbook/pmc/section4/pmc4.htm) - A practical guide to Time series analysis and forecasting
• Time Series Analysis (http://www.statsoft.com/textbook/sttimser.html)
• Global Forecasting with IFs (http://www.ifs.du.edu)
• Earthquake Electromagnetic Precursor Research (http://www.quakefinder.com)
Article Sources and Contributors 6

Article Sources and Contributors

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