Instructions (SCMG Week 3) Week 3: Judgmental Forecasting Course Objectives: CO3: Evaluate Forecasting methods, predictability factors, and causes of error in Forecasting Prompt: This week you will

Fore ca stin g u sin g j u dgem en t i s c o m mon i n p ra ctic e . I n m an y c a se s, j u dgm en ta l

fo re ca stin g i s t h e o n ly o p tio n , s u ch a s w hen t h ere i s a c o m ple te l a ck o f h is to ric a l d ata ,

o r w hen a n ew p ro d u ct i s b ein g l a u n ch ed , o r w hen a n ew c o m petit o r e n te rs t h e m ark et,

o r d u rin g c o m ple te ly n ew a n d u n iq u e m ark et c o n dit io n s. F or e x am ple , i n D ece m ber

2 0 12 , t h e A ustr a lia n g o vern m en t w as t h e f ir s t i n t h e w orld t o p ass l e g is la tio n t h at

b an n ed t h e u se o f c o m pan y l o go s o n c ig are tte p ack ets , a n d r e q u ir e d a ll c ig are tte

p ack ets t o b e a d ark g re en c o lo u r. J u dgem en t m ust b e a p plie d i n o rd er t o f o re ca st t h e

effe ct o f s u ch a p olic y , a s t h ere a re n o h is to ric a l p re ce d en ts .

T here a re a ls o s it u atio n s w here t h e d ata a re i n co m ple te , o r o n ly b eco m e a v aila b le a ft e r

so m e d ela y . F or e x am ple , c e n tr a l b an ks i n clu de j u dgem en t w hen f o re ca stin g t h e

cu rr e n t l e v el o f e co n om ic a ctiv it y , a p ro ce d u re k n ow n a s n ow ca stin g, a s G D P i s o n ly

a v aila b le o n a q u arte rly b asis .

R ese a rc h i n t h is a re a h as s h ow n t h at t h e a ccu ra cy o f j u dgm en ta l f o re ca stin g i m pro ves

w hen t h e f o re ca ste r h as ( i) i m porta n t d om ain k n ow le d ge, a n d ( ii) m ore t im ely , u p-to -

d ate i n fo rm atio n . A j u dgm en ta l a p pro ach c a n b e q u ic k t o a d ju st t o s u ch c h an ges,

in fo rm atio n o r e v en ts .

O ver t h e y ea rs , t h e a cce p ta n ce o f j u dgm en ta l f o re ca stin g a s a s c ie n ce h as i n cre a se d , a s

h as t h e r e co gn it io n o f i t s n eed . M ore i m porta n tly , t h e q u alit y o f j u dgm en ta l f o re ca sts

h as a ls o i m pro ved , a s a d ir e ct r e su lt o f r e co gn is in g t h at i m pro vem en ts i n j u dgm en ta l

fo re ca stin g c a n b e a ch ie v ed b y i m ple m en tin g w ell- str u ctu re d a n d s y ste m atic

a p pro ach es. I t i s i m porta n t t o r e co gn is e t h at j u dgm en ta l f o re ca stin g i s s u bje ctiv e a n d

co m es w it h l im it a tio n s. H ow ev er, i m ple m en tin g s y ste m atic a n d w ell- str u ctu re d

a p pro ach es c a n c o n fin e t h ese l im it a tio n s a n d m ark ed ly i m pro ve f o re ca st a ccu ra cy .

T here a re t h re e g en era l s e ttin gs i n w hic h j u dgm en ta l f o re ca stin g i s u se d : ( i) t h ere a re

n o a v aila b le d ata , s o t h at s ta tis tic a l m eth od s a re n ot a p plic a b le a n d j u dgm en ta l

fo re ca stin g i s t h e o n ly f e a sib le a p pro ach ; ( ii) d ata a re a v aila b le , s ta tis tic a l f o re ca sts a re

g en era te d , a n d t h ese a re t h en a d ju ste d u sin g j u dgem en t; a n d ( ii i) d ata a re a v aila b le a n d

sta tis tic a l a n d j u dgm en ta l f o re ca sts a re g en era te d i n dep en den tly a n d t h en c o m bin ed .

4 We s h ou ld c la rif y t h at w hen d ata a re a v aila b le , a p ply in g s ta tis tic a l m eth od s ( s u ch a s

th ose d is c u sse d i n o th er c h ap te rs o f t h is b o ok), i s p re fe ra b le a n d s h ou ld a lw ay s b e u se d

a s a s ta rtin g p oin t. S ta tis tic a l f o re ca sts a re g en era lly s u perio r t o g en era tin g f o re ca sts

u sin g o n ly j u dgem en t. F or t h e m ajo rit y o f t h e c h ap te r, w e f o cu s o n t h e f ir s t s e ttin g

w here n o d ata a re a v aila b le , a n d i n t h e l a st s e ctio n w e d is c u ss t h e j u dgm en ta l

ad ju stm en t o f s ta tis tic a l f o re ca sts . W e d is c u ss c o m bin in g f o re ca sts i n S ectio n 12 .4 .

B ib lio gra p hy

Law re n ce , M ., G ood w in , P ., O ’C on nor, M ., & Ö nkal, D . ( 2 0 06 ). J u dgm en ta l f o re ca stin g: A

r e v ie w o f p ro gre ss o ver t h e l a st 2 5 y ea rs . I n te rn atio n al J o u rn al o f F ore ca stin g , 2 2 (3 ),

4 9 3– 518 . [ D OI]

4 . L aw re n ce , G ood w in , O ’C on nor, & Ö nkal ( 2 0 06 )