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Earl Joseph's Forecasting Toolbox

Page history last edited by Rog Rydberg 14 years, 10 months ago

 

 

 

INTRODUCTION TO FORECASTING

 

 

“The future of the past is in the future. The future of present is in the past. The future of the future is in present.”

(John McHale, 1969)

 

Forecasting plays a major role in most of our activities concerning the future. It is a branch of the anticipatory sciences used for identifying and projecting alternative possible futures.

 

Forecasting opens menu windows onto futures. It is a conduit leading to plans the development of “better” futures.

 

Forecasted visions of possible futures open our freedom of choice over which future to encourage or discourage.

 

In our fast-paced, rapidly changing world, the futures that we will experience will tend to be vastly different from our present reality in a growing number of ways.

 

Furthermore, because of constant development of new knowledge and advances in the scientific (and ensuing

technological advances), sociological, political, economic, and business arenas, our global society has

ever increasing ability to shape (for better or worse) futures we will eventually achieve.

 

As a result, society and each institution in it finds that more knowledge about possible futures and the

consequences of today’s decisions and actions is required. Thus, it is increasingly imperative that we

have better forecasting tools and that we apply them in responsible ways. It is more and more important to

forecast, ahead of time, with longer lead times, the possible futures implied by the changes wrought by this

new knowledge generation.

 

To these ends, forecasting has become an essential tool for all participants in

society to use in their attempts to decide, plan, design, steer, manage, implement, and control change by

identifying preferable futures with forecasts.

 

In general terms, a forecast is simply a statement, based upon some criteria and evidence, concerning the

future condition of something. A major purpose of forecasting is to give us choice over which future, either

the trend path we are on, or an alternative, to plan,

design, create, and to back with our resources.

 

Forecasting aids in identifying which futures to bring into fruition (preferable ones) and which to

forestall, or attempt to eliminate (the undesirables).

 

Furthermore, forecasts are useful in assisting our intuitions about our plans, outlooks, investments, and so

on, whenever we would like to have a better idea of the possible or most probable outcome. We want

information from forecasts relative to:

 

1. Identifying:

a) Possible futures

b) Probable futures

c) Preferable futures

 

2. Providing a basis for understanding the process and dynamics of change:

a) Providing notions of where change may take us into the future;

b)providing a systematic methodology, based upon a set of supportive assumptions, for the discovery of possible futures.

 

Since we know that individuals and society in general have the means and knowledge to shape major

elements of our future, to grow new opportunities as well to set in motion means for avoiding or lessening

the impact of negative future threats, forecasting again becomes an increasingly important tool for all of us to

understand and use.

 

Forecasting has many uses, some of which are to: identify the trend path we are traveling into the

future; identify alternative possible futures (alternatives to

the trends); provide views of possible futures; raise awareness of possible futures so that we have

choice over which future we support; generate “future histories” that we can study to

determine our role in shaping them before they become a reality; provide information about possible futures so that

realistic planning can occur; provide information on possible futures to aid decision-making and planning;

justify the decisions and plans we make; discover possible breakthroughs; discover possible life, societal, scientific, political, social, technological, and institutional future turning

points or paradigm shifts; track evolving change and advances; provide managers with information for choosing

their organization’s vision, mission, purpose, goals, objectives, strategies, plans, and tactics;

provide information on possible futures for assessment relative to their possible future impacts

and consequences.

 

FUTURIST SKILLS: TREND FORECASTING

 

Trend forecasting is one of the most used methods of forecasting. It is often the starting point for

forecasters who after doing a trend analysis, modify the future trends discovered using various other

methods and information to arrive at a “better” forecast. Trend analysis forecasting philosophies, assumptions, and

methods:

 

Trend analysis identifies and maps past and present experience along the path of change traveled over

time and, when extended (called extrapolated), forecasts a likely heading for the future.

 

Trend forecasts are based upon the assumption that the future will unfold at about the same rate of

change, direction, and magnitude of growth or decline as it did in past.

 

Trend forecasts provide the most likely path for the short-range future they prophesy (because of the

flywheel impact of recent decisions and actions).

 

Trend forecasts most often give a least likely prediction for the long-range future they depict (because other factors and other forces also steer future change).

Trend forecasting can be quantitative and

qualitative.

 

Trend forecasts provide a “yardstick of change” for measuring future change (better than taking a

“snapshot of today “as the extrapolated yardstick) for steering our intuition and decision-making efforts relative to the future.

 

Trends are not just straight lines extended into the future from the past. Trend forecasts can take on

many different curve paths into the future.

 

Some common trend curves are:

 

J-curve - the trend curve grows along a path like the

letter J depicting exponential change;

 

S-curve - the trend curve grows along a path simulating the letter S depicting the trend reaching a

limit;

 

Step function curve - the trend follows a curve path like steps going in or out of a building;

 

Life cycle curve - the trend follows a curve path similar to the normal curve in statistics;

 

Cyclic curve - the trend curve follows approximately a repeated set of transitions, each

with a similar shape but differing magnitudes;

 

Breakthrough trend curve - a current or new generation of change breaks though its past trend;

 

Bumpy trend curve - much like a stock’s price changes over time.

 

The farther one attempts to extend past trends into the future, the fuzzier the result is, relative to the actual

future to result. Trend forecasting attempts to measure the expected path that a particular area under study will

follow into its future. The “curvilinear” shape of the trend is important and more easily forecast than the

actual timing of curving transitions. Thus, a trend is more qualitative rather than quantitative.

 

Other ways to approach or do qualitative trend forecasting involve:

Forecasting generational transitions - involves product or technology improvements per generation; requires also forecasting (or stating as an assumption), for example, how technology will advance, market acceptance of changes, how a new human generation will react to past/present life style trends, etc.

 

Envelope trend forecasting - involves plotting and extending a tangent curve over multi-generational

change in a particular area. By extending envelope past trends with the upper and lower bound of

expectation, the wider the differences grow the farther into the future the trends are extrapolated.

 

Thus, a fan-shaped band of trend possibilities are depicted for the future.

 

WHAT MAKES A GOOD FORECAST?

To put it in simple terms, good forecasts lead to good decisions, strategies, plans, and actions that cause

positive future social change. Further, according to Cooper and Layard (2002), it is widely accepted that

obtaining good forecasts is fraught with considerable difficulty. The main purpose of forecasting is to provide

information to decision makers by making them aware of some aspects to anticipate for the future. The main

attributes of the future, that can be forecasted, fall into four general categories; direction of change, rate of

development, magnitude of change, and the timing of the future under consideration.

 

The development of a forecast is largely a science.

 

For a forecast to be creditable and believed it should be constructed following a number of ground rules.

 

First, it should be based upon evidence that supports leads to the forecast.

 

Secondly, its development is based upon one or more systematic forecasting methodologies.

 

Third, it should not rely just on speculation or one’s opinion; rather it should rely upon data and evidence.

 

Fourth, the assumptions for the forecast should be stated.

 

Fifth, it should provide some useful purpose, such as, to provide knowledge about a future possibility

useful for developing strategies and plans, or to be communicated to raise awareness about a possible

future.

 

The real test for a good forecast is not so much its ability to predict a future, but instead, its power to cause

change for the future. That is, a doomsday forecast should cause a sector of society to change its strategies,

plans, and actions to avoid or put off farther into the future the forecast negative future. And, a forecast for

a desirable future should cause a sector of society to take action or make strategies and plans to bring that

future into being. Good forecasts should compare and contrast trends versus possible alternatives.

 

From these viewpoints, forecasting is not so much an art but instead, a systematic process (science) for

identifying a possible future. However, forecasts can be developed as possible, probable, or preferable types.

Further, there are positive, negative, most/highly likely, and most unlikely/low probability kinds. The

distinction between a forecast and prediction is clearcut.

 

A prediction is a statement about what will happen for the future specified. Whereas, a forecast is a

statement about what future could develop.

 

Many, if not most, forecasts are based on using two or more forecasting methodologies. Typically, they are

made using some form of a qualitative and judgmental technique. Why? These techniques put the forecast into

the “right ballpark.” Why again, because while quantitative techniques tend to be quite rigorous and

defensible, qualitative/judgmental techniques tend to do a better job of allowing for changes in the forecast

environment. Moreover, these techniques provide information for understanding the explicit causal factors

that go into a forecast. Further, these techniques can provide an audit trail leading to the forecast, and thus

making the forecast more valid. Further, to make it an even better forecast, the forecaster should provide an

explicit and systematic representation of the rationales behind the adjustment or combination mechanism used

for the forecast. For example, a judgmental adjustment to a quantitative forecast might begin by first decomposing the rationale into various components (e.g. what are the separate effects of the society, economy, political, and technological driving forces).

 

One might then bring in the impact of the likelihood of the different possible outcomes and assess their

subsequent effect on the judgmental adjustment (such as, issue threats and opportunities, possible wild cards or

breakthroughs, trends, etc.). In any case, these considerations together with "what-if" analysis of

possible impacts and consequences effects of differing assumptions would go far in making forecasts more

defensible.

 

Another purpose of forecasting is to reduce uncertainty relative to a future under study. Within a

framework of the importance for reducing uncertainty, other considerations must be taken into account,

namely; timeliness of the forecast, cost and effort to produce the forecast, and its unintended consequences

if efforts are performed to avoid or bring the forecast future into fruition. Thus, the argument about what

makes a good forecast isn’t so much about minimizing statistical errors but more about the usefulness of the

forecast. In the process of formulating a good forecast, forecasters attempt to break down uncertainty into the

considerations outlined in this article. In practice, from a practical viewpoint, not all good forecasts can employ

all of the deliberations outlined.

 

Good forecasts should be more accurate than unskilled reference forecasts (opinions, speculation,

guessing, and politicized forecasts). Further, good strategic planning is measured by successfully

managing the future. To manage any future, we first need to forecast what is likely to occur in the future. A

variety of forecasting methods can be applied to achieve this goal. The next step is to use the forecast

knowledge to create plans that allocate resources to be applied to achieve a selected future.

 

Good forecasts indicate a likely direction given current knowledge, trends, and alternative possibilities.

If the trends change dramatically, or unanticipated events or policies occur, then the future forecast will

be dubious. Forecasts are based on assumptions about the nature and direction of trends, policies, and possible

important future events.

 

Therefore, and obviously, forecasts should be updated as new information is developed, as new trends become apparent, or assignificant but unanticipated events occur. That is, the need and approach is to do incremental forecasting and planning. That is, one needs the long-term view of where the future is headed given by, for example, a five-year plan. However, along the way, when new knowledge is obtained, most likely the long-range plan will need to be updated.

 

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