Examples of Forecasting Examples of Forecasting ApplicationsApplications

•Service organizations (e.g. fast food Service organizations (e.g. fast food restaurant) forecast customer restaurant) forecast customer demand to plan staffingdemand to plan staffing•Companies planning ordering or Companies planning ordering or production schedules forecast production schedules forecast customer demand for productscustomer demand for products•Investors forecast movements in Investors forecast movements in stock prices and interest ratesstock prices and interest rates•Government policy planners Government policy planners forecast movements in forecast movements in macroeconomic variables such as macroeconomic variables such as inflation, interest rates, and inflation, interest rates, and unemployment unemployment

Overview of Forecasting Overview of Forecasting methodsmethods

•Judgment methods (e.g., Jury of Judgment methods (e.g., Jury of executive opinion, Delphi technique, executive opinion, Delphi technique, Sales force composite, user Sales force composite, user expectations) expectations) •Extrapolation methods that use past Extrapolation methods that use past data of a time series variable to data of a time series variable to forecast future values of a variable: forecast future values of a variable: In general simple methods turn out In general simple methods turn out to be effectiveto be effective•Econometric models (causal models) Econometric models (causal models) use other explanatory time series use other explanatory time series variables: (e.g., predict sales based variables: (e.g., predict sales based on advertising) on advertising)

Components of Time Components of Time Series DataSeries Data

•Trend component Trend component •Seasonal componentSeasonal component•Cyclic componentCyclic component•Random (noise) componentRandom (noise) component

Measures of errorMeasures of error

•Mean forecast error (bias)Mean forecast error (bias)•Mean Absolute Error (MAE)Mean Absolute Error (MAE)•Mean Square Error (MSE)Mean Square Error (MSE)•Root Mean Square Error (RMSE)Root Mean Square Error (RMSE)•Mean Absolute Percentage Mean Absolute Percentage Error (MAPE)Error (MAPE)

Some notationSome notation

•Y : variable we want to forecastY : variable we want to forecast•F : ForecastF : Forecast•E : Error = Y - FE : Error = Y - F•Therefore Y = F + ETherefore Y = F + E•Error (residual) is assumed to Error (residual) is assumed to be randombe random

Some notationSome notation

•Y : variable we want to forecastY : variable we want to forecast•F : ForecastF : Forecast•E : Error = Y - FE : Error = Y - F•Therefore Y = F + ETherefore Y = F + E•Error (residual) is assumed to Error (residual) is assumed to be randombe random•Runs test: A formal test of the Runs test: A formal test of the null hypothesis of randomnessnull hypothesis of randomness