Role of Judgment

The most sophisticated forecast methodology provides sufficiently accurate results at minimum cost. No one flies a jet to the grocery store. Similarly, no manager would find costly and difficult methods appropriate for solving trivial forecasting problems.

To determine a suitable level of forecast accuracy, one must compare the costs and benefits of increased accuracy. When forecast accuracy is low, the probability of significant forecasting error is high, as is the chance of making suboptimal managerial decisions. Conversely, when forecast accuracy is high, the probability of substantial forecasting error is reduced and the chance of making erroneous managerial decisions is low. It is reasonable to require a relatively high level of forecast accuracy when the costs of forecast error are high. When only minor costs result from forecast error, inexpensive and less precise methods can be justified.

It is worth emphasizing that the objective of economic forecasting is to improve on the subjective judgments made by managers. All managers forecast; the goal is to make better forecasts. Nowhere in the forecasting process is the subjective judgment of managers relied on so heavily as it is in the selection of an appropriate forecast method. When it comes to the selection of the best forecast technique, there is no substitute for seasoned business judgment.

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