TWO MAJOR THEORIES OF BUSINESS FORECASTING.
Ø CROSS CUT ANALYSIS THEORY
Ø SPECIFIC HISTORICAL ANALOGY
Business forecasting is the process of predicting the future development
in business, based on analysis of trends in past and present data.
Business forecasting also involves making informed guesses about certain
business metrics, regardless of whether they reflect the specifics of a
business, such as sales growth, or predictions for the economy as a whole.
According to T.S. lovs and R.A fox
They viewed business forecasting as the using of a firm past
history which have being recorded, in
other to estimate what will happen at
the same future movement of time.
In business, there are six (6)
business theories that are being used for forecasting.
1.
Cross cut analysis theory.
2.
Specific historical analogy.
3.
Theory of economic rhythm.
4.
Action and reaction approach.
5.
Sequence method or time lag method.
6.
Model building approach.
Today i will be explaining the two major theories in business forecasting, which is the; Cross cut analysis theory and Specific
historical analogy.
... CROSS CUT ANALYSIS THEORY
This theory is based on the knowledge and interpretation of
the current forces rather than projection of past trends.
The theory assumes that the combined
effect of various factors is not studied, but the effect of each factor , that has a bearing on the
forecast is studied independently. This theory is an opposite to the analysis
of time series under the statistical methods.
Time series analysis : it is a
statistical techniques that deals with time series data or trend analysis .
Time series data means that data is in a series of a particular time periods or
intervals.
The theory was first developed by
Danish geological pioneer Nicholas Steno in Dissertationis Prodromas in (1669)
KEY TAKEAWAYS
- Cross-sectional
analysis focuses on many companies over a focused time period.
- Cross-sectional
analysis usually looks to find metrics outside the typical ratios to
produce unique insights for that industry.
- Although cross-sectional analysis is seen as the opposite of time series analysis, the two are used together in practice.
Examples of Cross-Sectional Analysis
Cross-sectional analysis
is not used solely for analyzing a company; it can be used to analyze many
different aspects of business. For example, a study released on July 18, 2016,
by the Tinbergen Institute Amsterdam (TIA) measured the factor timing ability
of hedge fund managers. Factor timing is the ability for hedge fund managers to
time the market correctly when investing, and to take advantage of market
movements such as recessions or expansions.
The
study used cross-sectional analysis and found that factor timing skills are
better among fund managers who use leverage to their advantage, and who manage
funds that are newer, smaller and more agile, with higher incentive fees and a
smaller restriction period. The analysis can help investors select the best
hedge funds and hedge fund managers.
The Fama and French
Three Factor Model credited
with identifying the value and small cap premiums is the result of
cross-sectional analysis. In this case, the financial economists Eugene
Fama and Kenneth French conducted a cross-sectional regression analysis of the universe of
common stocks in the CRSP database.
Advantages of a cross cut analysis theory
1.
Not costly to perform and does not
require a lot of time.
2.
The data can be used for various
types of research.
Disadvantages of cross cut analysis theory
1.
Cannot be used to analyze the system
of a business over a period of time.
2. Does not help to determine the cause and effect of business fall.
...... SPECIFIC HISTORICAL ANALOGY
This theory is based on the assumption that history repeats itself. It
simply implies that whatever happened in the past under a set of circumstances
is likely to happen in future under the same set of conditions.
The theory is hazed on a more realistic assumption that deals with the
selecting of some specific previous conditions which has many of the earmarks
of the presents and concluding that what happened in the earlier situation of a
business will happen in the present one also.
Specific
Historical Analogy: This theory is based on a more realistic assumption, i.e.,
that all business cycles are not uniform in amplitude or duration and as such
the use of history is made not by projecting any fancied economic rhythm into
the future, What is done is that a time series relating to the data in question
is thoroughly scrutinized and from it such period is selected in which
conditions were similar to those prevailing at the time of making the
forecasts. The course which events took in the past under similar circumstances
is then studied which gives an idea of the likely course which the phenomenon
in question would follow. For example, after World War II many persons forecast
a depression because World War I had been followed by a depression.
Advantages of specific historical analogy
1. It helps to understand the past
results of a business and would be helpful for future prediction.
2. It also helps to compare the present performance of the series with that of the past.
Disadvantages of specific historical analogy
1. Requires a lot of time to bring up past results.
2. It’s never 100% accurate.
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