Question

Why is it so dangerous to simply extrapolate historical data into the future to create a forecast? Use a specific real-world example of how this could create a problem. Does this mean we should not use historical data to forecast what will happen in the future?

Answer 1

Forecast are an important part of any business management model. It makes the use of current trends, trends of the past and essentially historical data to predict the demands in the future. The only disadvantage of using historical data in a forecast is that future demand is somewhat unpredictable. People usually tend to get optimistic with the trends of demand in the past which is what caused the problem in the future where there is a severe change in that trend due to certain factors not having any effect on the outcome of the products that acted before in the past.

Historical data should not be excluded from forecasts rather it should be supplemented with a secondary set of data which takes into account the deviations from the past value and the future requirements and essentially create a model in which the calculations support the data received which make use of the past values to correct them using the deviations as the factors.