The Thoughtful Forecaster

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The Thoughtful Forecaster Case 5 A Summary Submitted to Dr. Roy Patin, Professor of Finance Submitted by Faye d’Hamecourt In Partial Fulfillment of the Requirements for Financial Administration FINC 5713-170 Midwestern State University Dillard College of Business Administration Fall 2011 Date Submitted August 31, 2011 Forecasting is an important aspect in today's business world. Every day businesses strive or lose, depending on the successfulness and accurateness of their forecasting. For successful forecasting, the forecaster needs to have a clear understanding of the current business activities, past trends, and the company’s business strategy. Case 5 exhibits key principles on the way financial forecasting is…show more content…
Economy conditions includes trends in macroeconomic situations and circumstances in the country. Modeling a Base-Case Forecast That Incorporates Expectations for Business Strategy Once the forecaster contains a complete analysis of financial statement trends and environment conditions, the forecaster can the combine these into the business' operating strategy to from a complete and proper forecast. The forecaster should also identify actions, coincidental with the business' operating strategy for achieving these future business outcomes. Recognizing the Potential for Cognitive Bias in the Forecasting Process Research has indicated that financial forecasts made by humans are often systematically biased. There are two types of cognitive bias that are found in human forecasting: optimism bias and overconfidence bias. Optimism bias is defined as a positive error in the expected number of the predicted value. As a result of optimism bias, the predicted value is higher than the actual value. Overconfidence bias is defined as a negative error in the expected variance of the predicted value. This means that the forecaster believes that the bell curve of the expected value will have a tight dispersion; in reality this dispersion is much more wide spread. The most significant issue presented in Case 5 is the section on cognitive bias. It is interesting to learn that humans are systematically biased when predicting the future of a business enterprise.

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