Testing the Tea Leaves: Evaluating the Validity of Forecasts

OVERVIEW: All business decisions are based on forecasts about future markets, financial realities, operating environments, technologies, and a host of other relevant factors. Because the effectiveness of these decisions will depend, in large measure, on the validity of the forecast, it is highly desirable that managers and executives have practical ways for testing this validity. The two most common reasons for poor forecasts are the use of unreliable or outdated data and the use of inappropriate forecasting models. Techniques exist for testing forecasts for each of these shortcomings.