How does forecast horizon typically affect accuracy?

How does forecast horizon typically affect accuracy?

• A. Accuracy generally declines the further out the forecast horizon
• B. Accuracy improves with longer horizons
• C. Horizon has no impact on accuracy
• D. Shorter horizons are always less accurate than longer

Answer: (A)

Forecast horizon is the length of time into the future you’re predicting. The farther out you forecast, the more uncertainty there is about the factors that will drive outcomes. Small errors in data or the model’s assumptions accumulate as you project forward, and unforeseen events or shifts in relationships can alter the patterns you rely on. Because of this, forecast accuracy typically declines as the horizon length increases. For example, predicting next week’s demand is usually more accurate than predicting demand six months ahead. While some patterns like seasonality can help a bit with longer horizons, the general trend is that accuracy worsens the further you look.

Forecast horizon is the length of time into the future you’re predicting. The farther out you forecast, the more uncertainty there is about the factors that will drive outcomes. Small errors in data or the model’s assumptions accumulate as you project forward, and unforeseen events or shifts in relationships can alter the patterns you rely on. Because of this, forecast accuracy typically declines as the horizon length increases. For example, predicting next week’s demand is usually more accurate than predicting demand six months ahead. While some patterns like seasonality can help a bit with longer horizons, the general trend is that accuracy worsens the further you look.