A Use Case For What-If Tool — Long Horizon Forecasting Example
The Need For Long-Horizon Forecasting
Long-horizon forecasting involves predicting a situation 1.5–2 years in advance. Some businesses need such horizons for procurement of raw materials, ensuring the availability of staff and labour to meet demand and supply, expense management in terms of maintenance, smart purchasing to improve infrastructure and technology for continuous growth, and even better hiring. To sum up, long-horizon forecasting is crucial for any business in order to be prepared to smooth sail any challenges that the future might bring.
Having said this, it is difficult for most statistical and machine learning models to give accurate long-horizon forecasts accurately simply because it is easier to predict what happens tomorrow rather than predicting what happens one year from now, given what happened today. It is nearly impossible to take into account all the changes that will occur over longer periods of time which adds to the inherent uncertainty any entity possesses. It is also very difficult to make sense of these forecasts due to the long waiting period to their due date, and they often lose context as well. It is difficult to establish the causal relationships between the independent and the dependent variables for such forecasts if the experiment is ill-structured without a proper randomized controlled trial and thus such forecasts have lower levels of confidence.
A simple example of this is Bloomberg’s prediction of a recession in the United States which stood at about 35% in August 2019 for the next year (2020), is now at 100% — 8 months down the line. While we can justify this by the unprecedented COVID-19 outbreak, it is clear that long-horizon forecasts can severely falter inaccuracy due to the wide range of uncertainties that the future poses. Even if no outlier events take place, it is important to understand that long-horizon forecasts can not possibly capture such variabilities. The only long-term prediction that we can make for certain even hundreds of years down the line is that the Earth will still be revolving around the Sun — again without a 100% level of confidence! Read the complete use case here
