Thursday, March 30, 2017
Golden Rule of Forecasting - Be conservative
One of the leading experts on forecasting is J Scott Armstrong, from the Wharton School. He has produced numerous papers and books on forecasting but has encapsulated all of his decades of thinking with his paper, The Golden Rule of Forecasting. There is a right and a wrong way to do forecasting and Armstrong walks through the key issues, whether it is through an econometric model or a judgmental forecast. His golden insight is that when in doubt be conservative. More deeply, his comment is that the forecaster must seek out and use all knowledge relevant to the problem, including knowledge of methods validated for the situation.
He has a list of twenty-eight guidelines that stem from his golden rule. These guidelines include rules for problem formulation, judgmental methods, extrapolation methods, causal methods, combining forecasts from different methods, and avoidance of unstructured judgmental adjustments. Ignoring these guidelines will lead to greater forecast error especially if there a high degree of uncertainty and complexity. Fortunately, the simple guidelines should be easy to follow, but in reality, too many forecasters ignore these simple steps and create their own forecasting doom.
The golden rule is consistent with the comments of another leading forecasting expert, Arnold Zellner, who argued for the KISS forecasting method, "Keep It Sophisticatedly Simple". A sophisticatedly simple model is one that "takes account of the techniques and knowledge in an field and is logically sound". Don't make forecasts in vacuum. Use all of the help you can get from previous work. Do your preparatory work for forming the problem and watch out for biases. Yes, it is simple, but Armstrong provides a good reminder.