Imagine that you are project engineer that has been asked to project (forecast) a cash flow...

Imagine that you are project engineer that has been asked to project (forecast) a cash flow for a new project. What would you do for the following:

a. Can the forecasts be biased in any way?

b. If so, in what direction and why do you think that’s the case?

c. How can a manager and/or their firm neutralize the bias?

Expert Solution

a). The forecast can be biased in both the ways Positive or Negative

b).over-forecast (the forecast is more than the actual), or under-forecast (the forecast is less than the actual).

c). Tracking Signal quantifies “Bias” in a forecast. The tracking signal in each period is calculated as follows:

Once this is calculated, for each period, the numbers are added to calculate the overall tracking signal.
A forecast history totally no bias will return a value of zero,
with 12 observations, the worst possible result would return either +12 (under-forecast) or -12 (over-forecast).
forecast history returning a value greater than 4.5 or less than negative 4.5 would be considered out of control.

Normalized Forecast Metric to measure the bias.

metric will stay between -1 and 1, with 0 indicating the absence of bias.
negative values indicate a tendency to under-forecast whereas
positive values indicate a tendency to over-forecast.
Over a 12 period window, if the added values are more than 2, we consider the forecast to be biased towards over-forecast.
Likewise, if the added values are less than -2, we consider the forecast to be biased towards under-forecast.

jeff jeffy answered 1 year ago

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