November 2008
Beginner
448 pages
11h 33m
English
Content preview from Budgeting Basics and Beyond
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15.2. Smoothing Techniques
Smoothing techniques are a higher form of naive models. The two typical forms are moving averages and exponential smoothing. Moving averages are the simpler of the two.
Moving Averages
Moving averages are averages that are updated as new information is received. With the moving average, a manager simply employs the most recent observations to calculate an average, which is used as the forecast for the next period.
Example 2
Assume that the marketing manager has these sales data:
| Date | Actual Sales (Yt) |
|---|---|
| Jan.1 | 46 |
| 2 | 54 |
| 3 | 53 |
| 4 | 46 |
| 5 | 58 |
| 6 | 49 |
| 7 | 54 |
In order to predict the sales for the seventh and eighth days of January, the manager has to pick the number of observations for averaging purposes. Let us consider two cases. One is a six-day moving average and the other is a three-day average.
Case 1
where Y' = predicted
Case 2
Predicted Sales (Y't)
In terms of weights given to observations, in Case 1, the old data received a weight of ⅚ and the current observation got a weight of ⅙. In Case 2, the old data received a weight of only ⅔ while the current observation received a weight of ⅓.
Thus, the marketing manager's choice of the number of periods to use in a moving average ...
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