Forecasting – Prediction is very difficult, especially if it’s about the future!
10/07/2017

Niels Bohr, the Nobel laureate in Physics and father of the atomic model, is quoted as saying, “Prediction is very difficult, especially if it’s about the future!” This quote serves as a warning of the importance of testing a forecasting model out-of-sample. It’s often easy to find a model that fits the past data well — perhaps too well! — but quite another matter to find a model that correctly identifies those features of the past data which will be replicated in the future.
So here’s the thing: in the private and public sector, we keep hearing senior executives talking about being more predictive — getting on the front-foot and being less reactive. Almost all of them fail to recognise that unless your business processes, their incoming demand and outgoing outcomes are not “In Control” (meaning in statistical control) then forecasting is worthless — a black art at best! Here’s an example of a process that is not In Control:
The above processes (there are 2 of them, with a change near the middle of the chart causing a “process break” between the first part of the process and the second part of the process) are not In Control. The chart has a large number of different types of signals, red x indicating unusually long delivery times, green x indicating unusually short delivery times, green • indicating sustained unusually short delivery times and red • indicating sustained unusually long delivery times. Using this data to forecast forwards will produce at best a range of between 80 and 200 (lower and upper red performance corridor guidelines on right part of chart), but because it’s not In Control, there will be occasions when these guidelines will be exceeded. This is because, as Niels Bohr says, the signals indicate that the process contains features that may or may not be replicated in the future.
Looking at a process that is In control:
We can see that there are no signals and that the data is following a very strong seasonal pattern. This means the results are likely to be dominated by features of the past that will be replicated in the future. So we can confidently (but not with absolute certainty — there’s always risk, but in this case it is minimised by being In Control) predict what will happen in the future (unless we or the system we are examining make changes):
Thus, we can be pretty sure that the forecast for February 2015 will be around an average (green line bounded by upper and lower red guidelines) of 9,750+500 approx., and for July 2015 will be around an average of 12,500+500 approx.
BUT, if a senior executive says, “I need you to be more precise, I need one number”, you’re up against another well-respected Physicist — Heisenberg and his Uncertainty Principle. The more precise one thing you measure, the fuzzier another becomes. So asking for a forecast which is a single number only (without a range of possible values), means that the probability of it actually occurring approaches zero! Or as Dilbert says, worthless!
Categories & Tags:
Leave a comment on this post:
You might also like…
Sourcing company Betas in LSEG Workspace and Datastream
Following our introductory post on sourcing Betas, this post will go into a little more depth for those who may be seeking more complex data. Betas are accessible in LSEG's Workspace service, through Workspace itself, ...
You could save a life: The real impact of learning CPR
When writing this, my sister told me to tell you my age. I won't do that, but I will tell you that I was in my forties, with no previous heart problems when I ...
Need to create a reference list or citation quickly? Try MyBib or ZoteroBib!
Are you looking for a fast and free way to generate accurate citations and bibliographies for your assignments or research projects? Perhaps you've tried some reference management software and found that it wasn't really what ...
Downloading the FileOpen plugin for British Standards Online
You need to install and use a FileOpen plugin on your device to access any document you find on British Standards Online (BSOL). This protects BSOL’s digital assets from copying, piracy, and unauthorized sharing. You ...
Navigating Change from Private Sector to Humanitarian Supply Chain Management
Seven questions with alumna Miori Naito, Supply Chain Officer in Kenya on her inspiring career shift from commercial to humanitarian supply chain operations, the challenges and rewards of her bold move from Tokyo to ...
Sadaf’s ‘gap-bridging’ MBA. A transformative Cranfield experience
After six years of digital transformation projects for a global, financial institution, Sadaf sought to scale her influence, contribute meaningfully to the business world, and lead change in a structured and strategic way. Recognising ...