Question

What implications do forecast errors have for the search for ultra-sophisticated statistical forecasting models?

Short answer

Answer

Forecast errors refer to the difference between what occurred and what was forecast. In statistics, these errors are called residuals.

Step-by-step solution

Definition of forecast errors

Forecast errors are not an error since it is what we expected. But common usage refers to the difference as an error. A common way to calculate the forecast error is to calculate the Mean Absolute Deviation (MAD). This shows the deviation of forecasted demand from the actual demand, in units.

Step 2: Implications do forecast errors have for the statistical forecasting models

All forecast contains some errors whether the model is simple or sophisticated because the forecast is a prediction of the future based on past data. Forecast error can be caused by changes in conditions that generated the past data.For example, an economic recession could change the demand for certain unnecessary products.

The facts that all forecast models have some error, no matter what a forecaster does, they cannot predict all events in the future that can cause demand to fluctuate.