Probabilistic Forecasting

Probabilistic forecasting is definitely a subject of interest at the moment, with bookmakers and fans alike trying desperately to predict the winners of the World Cup. Probabilistic forecasts can step in to help when you have imperfect information about the future, as instead of taking one possible future into account, probabilistic forecasts assign a probability to each of a number of different possible outcomes.

It is probably the most accurate type of forecasting because it embraces the very notion that you can’t know everything about the future and you don’t need to pretend to know, as there simply is no way of knowing! In this episode of LokadTV, we investigate more and see why this type of forecast can be beneficial and just how these forecasts can be used to improve the way supply chains operate as a whole, particularly as they comprehend the various asymmetries of supply chains. Meanwhilst, classic forecasts aim more for the average, which is not ideal for many business verticals, such as aerospace operations or fresh food.

These probabilistic forecasts are used for everything, from predicting the next day’s weather to generating betting odds for sporting events. But if you have a probability for every possible outcome, how can its accuracy be measured more concretely? We therefore discuss in more detail the notion of accuracy in relation to these forecasts and where their limitations lie. Probabilistic forecasts work best when uncertainty is involved, such as for e-commerces (longtail), fashion and aerospace for example.

To conclude, we discuss industries where probabilistic forecasts don’t work so well and debate why the industry is still so committed to more traditional forecasting techniques (spoiler: it’s because too many companies are far too reliant on Excel). We also expand on what the future of forecasting is likely to look like.