Naïve Forecast

Naïve, & Moving Average
Simple Slope
Ted Mitchell

Year

• Simplest possible forecast
• Tomorrow will be like today
• Naïve is the basis for comparison of all
methods.
• Ignores any historical data previous to today

Actual

Naïve Forecast

error

A

F

E=A-F

0

10

1

?

?

2
3
4
5
6
7
8

Use today’s result to forecast tomorrow

Year

Actual

Naïve Forecast

error

A

F

E=A-F

0

10

1

?

Year

Actual

Naïve Forecast

error

A

F

E=A-F

0

10

1

12

Actual

Naïve Forecast

error

A

F

E=A-F

0

10

1

12

10

2

2

2

2

14

12

2

3

3

3

15

14

1

4

4

4

16

15

1

5

5

5

17

16

1

6

6

6

19

17

2

7

7

7

21

19

2

8

8

8

23

21

2

N=8

N=8

?

23

SE =13

10

Use today’s result to forecast tomorrow

10

Year

Use today’s result to forecast tomorrow

2

Use today’s result to forecast tomorrow

ME = 1.63

1

5 Using Total Historical Average • Disadvantage • Really lags behind a trend! because – Uses all historical data – Puts equal weight on every piece of historical information 2 .2 3.6 5 6.7 (10+12+14+15+16+17+19+21)/8 =15.4 (10+12+14+15+16+17)/6 =14 (10+12+14+15+16+17+19)/7 =14.5 2 3 2.period actual Momentum Total Historical Average • Fi+1 = (1/n)(ΣAi) where • Fi+1 = forecast for next period • n = number of historical periods • ΣAi = sum of the actual results for each of the n historical periods • If things have momentum they are easier to predict. • Averages are a measure of momentum • Various averages are used for prediction – Total historical average – Moving averages – Weighted averages period actual 1 2 3 4 5 6 7 8 9 10 12 ? forecast Error Get the forecast for the next period 10/1 = 10 (10+12)/2 = 11 2 ? period actual 1 2 3 4 5 6 7 8 9 10 12 14 15 16 17 19 21 23 forecast 1 2 3 4 5 6 7 8 9 10 ? Forecast using average of the total history Error Get the forecast for the next period 10/1 = 10 ? Error Get the forecast for the next period 10/1 = 10 (10+12)/2 = 11 (10+12+14)/3 =12 (10+12+14+15)/4 =12.8 (10+12+14+15+16)/5 =13.3 7.2 3.

7 (14+15+16)/3 =15 Error 3 2.7 3 ? Moving Average (10+12+14)/3 =12 (12+14+15)/3 =13.3 2 3 3.period actual Moving Average • Pick the last n periods that are most relevant • Fi+1 = (1/n) (ΣAi) where • Fi+1 = the forecast for next period • n = the number of periods in the moving average • (ΣAi) = the sum of the last n periods period actual 1 2 3 4 5 6 7 8 9 10 12 14 15 16 ? Forecast using a moving average on last 3 periods (10+12+14)/3 =12 (12+14+15)/3 =13.3 (17+19+21)/3 =19 3 2.3 1 2 3 4 5 6 7 8 9 10 12 14 ? period actual 1 2 3 4 5 6 7 8 9 10 12 14 15 16 17 19 21 23 Forecast using a moving average on last 3 periods Error (10+12+14)/3 =12 ? Forecast using a moving average on last 3 periods Error period actual 1 2 3 4 5 6 7 8 9 10 12 14 15 ? Forecast using a moving average on last 3 periods Error (10+12+14)/3 =12 (12+14+15)/3 =13.7 (14+15+16)/3 =15 (15+16+17)/3 =16 (16+17+19)/3 =17.7 4 • Still lags behind a trend • Puts equal weight on each of the historical results being used • Gives bias when seasonal data is involved • If you want more weight on the most recent data you need a weighted average 3 .

8 2.6 • Weighted Moving Average is better at responding to a trend because it puts more weight on recent data and less weight on old data • They get the appropriate weights by doing a statistical fit to the data Trends Simple Trend Projection • Trends in the data are not handled well by moving averages or exponential smoothing methods.7 (2(17)+3(19)+4(21))/9 = 19.period actual Weighted Moving Average • Three period average with equal weight • Fjun = (Amar +Aapr + Amay ) / 3 or • Fjun = (3A mar +3A apr + 3Amay ) / 9 • Weighted average with more on May • Fjun = (2A mar +3A apr + 4Amay ) / 9 • Naïve Again • Fjun = (0A mar +0A apr + 9Amay ) / 9 Simple Growth and Slope For Trends Ted Mitchell 1 2 3 4 5 6 7 8 9 10 12 14 15 16 17 19 21 23 Forecast using a WEIGHTED moving average on last 3 periods (2(10)+3(12)+4(14))/9 = 12.3 3.2 (2(16)+3(17)+4(19))/9 = 17. • The naïve forecast is sales in next period t = sales in the last period (t-1) or • Rt = Rt-1 4 .2 (2(15)+3(16)+4(17))/9 = 16. • Before the era of simple statistical tools on every PC managers used simple calculations of trends based on the naïve forecast.4 (2(12)+3(14)+4(15))/9 = 14 (2(14)+3(15)+4(16))/9 = 15.8 3.4 Error Weighted Moving Average 2.6 2 1.

17 or growth is 117% 1 2 time g = Growth rate between 0 and 1 Sales Revenue Two Periods Ago Simple last period plus percent growth Projection uses the same slope as the last two periods Naïve Forecast Last period g = R1/R0 0 1 2 time 5 .Do a Forecast for Period 2 • The sales in the last period plus the percentage growth over the last two periods Sales Revenue Two Periods Ago Last period plus X Percent Do a Forecast for Period 2 Simple Percentage Projection uses the same growth as between the last two periods Sales Revenue Two Periods Ago Last period Last period Naïve Forecast Naïve Forecast g 0 1 2 time Getting the slope • The percentage growth over the last two periods = g • Prediction for the last period would be R1 = g R 0 • We know R 1 and R0 so we can calculate g 0 Example Calculate historical g • R1 = g R0 where • R0 = $150 • R1 = $175 then calculate g • 175 = g(150) • g = 175 / 150 • g = 1.

17 R1 = 175 Naïve Forecast = 175 Naïve Forecast = 175 g = 1. If you use the same percentage as time passes then the method inflates the forecasted values • But it is simple and very popular! Examples: Naïve Method & Last Period Plus Rate of Change Method • Home Market in this example is experiencing a long run decline in sales as it nears the end of the Product Life Cycle Ted Mitchell New Shoes Home Market Spring 478 6 .17 2 time 0 1 2 time The Problem with • The “last period result + percent improvement” method • Very dependent on the base used in the percentage.17 Then R2 = 1.17(175) = 204.17 Sales Revenue R2 = 1.17 0 1 g = 1.Prediction of Revenue in period 2 • (Revenue in period 2) = g (Revenue in period 1) • R2 = gR1 Prediction for R2 Prediction for R2 in period 2 Sales Revenue Where R0 = 150 • R1 = revenue in 1 = 175 • g = 1.17(175) = 204 R1 = 175 R0 = 150 R2 = 204.

193.000 And the idea that the market is in decline phase of the Product Life Cycle (PLC) • Do you naïve or last period + decline % 170.193.193.023.023.023.000 Industry Sales in period 4 = 1.000 5 5 ? 1.000 1.193.193.000 4 1.023.000 6 6 7 7 7 You have two pieces of information Industry Sales in period 3 = 1.193 ) • Decline rate = 1.193.023 = decline rate (1.193.000 Actual Units Sold Naïve Forecast error A F E=A-F 3 1.023.023 / 1.000) • Sales in 5 = 877.000 1.75% (1.225 units 7 .75% Use today’s result to forecast tomorrow Forecasting period 5 • Sales in 5 = decline rate (sales in 4) • Sales in 5 = 85.000 3 1.000 Naïve Forecast error A F E=A-F 170.193 = 85.000 Actual Units Sold 6 What to do Next? 1.Period 3 4 Actual Units Sold Naïve Forecast error A F E=A-F 1.000 4 1.000 Period 5 Use today’s result to forecast tomorrow • • • • Period Use today’s result to forecast tomorrow Last period + change % • Consider the last period plus the decline rate from the two previous periods • What is the decline rate • Sales in 4 = decline rate (Sales in 3) 1.

193.000 1.517 or the naïve method 1.023.000 Smallest error is naive 5 1.000 1.023.023.193.000 Period Naïve Forecast error A F E=A-F 3 1.000 Smallest error is naive 6 885.000.000 877.193.000 4 1.000 5 1.000 6 7 Actual Units Sold 6 Period Actual Units Sold Naïve Forecast error A F E=A-F 3 1.000 1.000 170.000.000 4 1.000 170.000 877.023.000 5 ? 877.Period Actual Units Sold Naïve Forecast error A F E=A-F 3 1.000 Smallest error is last period + decline rate 7 7 Use last period and decline rate to forecast period 5 Use last period and decline rate to forecast period 5 or naïve method Use last period and decline rate to forecast period 5 8 .023.000 4 1.193.193.000 977.225 or the naïve method 1.000.225 or the naïve method 1.193.225 170.