Framework

Choosing a forecasting method

The question it answers

When a manager must forecast sales or demand, should they rely on expert judgement, quantitative models, or a combination of both?

Origin
Makridakis, Wheelwright and Hyndman (1998); Hyndman and Athanasopoulos (2021); combination evidence in Petropoulos et al. (2022); Makridakis, Spiliotis and Assimakopoulos (2018)
Diagram type
Comparison table
Level of analysis
Firm
Topics
Data & analyticsCorporate finance
Magnifying lens over a line chart tile, icon for data and analytics

Diagram

Choosing a forecasting method

CriterionNeedsBest whenWatch out
DelphiExpert panelNo data, long horizonSlow; expert selection
Scenario analysisNarrativesStructural breaksLimited by imagination
Market researchCustomersNew product, no historyStated differs from actual behaviour
Time series (ARIMA)Own historyStable patternsBreaks
Exponential smoothingRecent historyLevel, trend, seasonSlow to adapt to breaks
RegressionDriver dataExplaining driversOmitted variables
Financial modelAll of the aboveIntegrated planFalse precision

Sources

References

Listed A–Z by author surname, Harvard style. A source with a DOI links to https://doi.org/…; one without links to its page or says plainly that it has no DOI.

  1. Box, G.E.P. and Jenkins, G.M. (1976) Time Series Analysis: Forecasting and Control, rev. edn. San Francisco: Holden-Day.No DOISource page
  2. Dalkey, N. and Helmer, O. (1963) ‘An experimental application of the Delphi method to the use of experts’, Management Science, 9(3), pp. 458–467.doi:10.1287/mnsc.9.3.458Source page
  3. Hyndman, R.J. and Athanasopoulos, G. (2021) Forecasting: Principles and Practice, 3rd edn.No DOIotexts.comSource page
  4. Makridakis, S., Wheelwright, S.C. and Hyndman, R.J. (1998) Forecasting: Methods and Applications, 3rd edn. New York: Wiley.No DOISource page
  5. Makridakis, S., Spiliotis, E. and Assimakopoulos, V. (2018) ‘Statistical and machine learning forecasting methods: concerns and ways forward’, PLOS ONE, 13(3), article e0194889.doi:10.1371/journal.pone.0194889Source page
  6. Petropoulos, F. et al. (2022) ‘Forecasting: theory and practice’, International Journal of Forecasting, 38(3), pp. 705–871.doi:10.1016/j.ijforecast.2021.11.001Source page
  7. Wack, P. (1985) ‘Scenarios: uncharted waters ahead’, Harvard Business Review, 63(5), pp. 73–89.No DOIhbr.orgSource page
  8. Winters, P.R. (1960) ‘Forecasting sales by exponentially weighted moving averages’, Management Science, 6(3), pp. 324–342.doi:10.1287/mnsc.6.3.324Source page