Projections vs. Forecasts

February 5, 2015

Projections vs. Forecasts

 

On this blog, I regularly use the terms “projection” and “forecast.”  Unfortunately, I use them rather interchangeably.  There is an important difference between them and I’ll explain it in this blog post, with the hope that I better sear the information into my own grey matter.

 

A forecast is the best estimation of the actual future events that will occur.  I forecast winegrape prices.  I develop indices that combine the most important influences on winegrape prices and I use these to try to forecast the actual behavior of prices into the future.  I produce an average of the expected results that becomes the forecast. 

 

Because this is a forecast, I can then determine the range of outcomes that are possible and the probability that those will or will not happen for scenario and sensitivity analysis.  I can further calculate the likelihood that I got everything wrong or that one of my indices is invalid.

A projection, on the other hand, is just an illustration of how things either (a) would be in the future, given certain assumptions or (b) might be, according to a guess.  The important difference is that the projection is not actually aiming for a most likely or average outcome.  It’s either an uninformed guess or based on assumptions that are not, according to the data, most likely to reflect reality. 

 

 

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