Nave Forecast

Nave, & Moving Average

Simple Slope
Ted Mitchell

Year

Simplest possible forecast

Tomorrow will be like today
Nave is the basis for comparison of all
methods.
Ignores any historical data previous to today

Actual

Nave Forecast

error

E=A-F

10

2
3
4
5
6
7
8

Use todays result to forecast tomorrow

Year

Actual

Nave Forecast

error

E=A-F

10

Year

Actual

Nave Forecast

error

E=A-F

10

12

Actual

Nave Forecast

error

E=A-F

10

12

10

14

12

15

14

16

15

17

16

19

17

21

19

23

21

N=8

N=8

23

SE =13

10

Use todays result to forecast tomorrow

10

Year

Use todays result to forecast tomorrow

Use todays result to forecast tomorrow

ME = 1.63

period actual

Momentum

Total Historical Average

Fi+1 = (1/n)(Ai)
where
Fi+1 = forecast for next period
n = number of historical periods
Ai = sum of the actual results for each of
the n historical periods

If things have momentum they are easier to

predict.
Averages are a measure of momentum
Various averages are used for prediction
Total historical average
Moving averages
Weighted averages

period actual

1
2
3
4
5
6
7
8
9

10
12
?

forecast

Error

Get the forecast for the next period

10/1 = 10
(10+12)/2 = 11

2
?

period actual

1
2
3
4
5
6
7
8
9

10
12
14
15
16
17
19
21
23

forecast

1
2
3
4
5
6
7
8
9

10
?

Forecast using average of the total history

Error

Get the forecast for the next period

10/1 = 10

Error

Get the forecast for the next period

10/1 = 10
(10+12)/2 = 11
(10+12+14)/3 =12
(10+12+14+15)/4 =12.8
(10+12+14+15+16)/5 =13.4
(10+12+14+15+16+17)/6 =14
(10+12+14+15+16+17+19)/7 =14.7
(10+12+14+15+16+17+19+21)/8 =15.5

2
3
2.2
3.2
3.6
5
6.3
7.5

Using Total Historical Average

Disadvantage
Really lags behind a trend! because
Uses all historical data
Puts equal weight on every piece of historical
information

period actual

Moving Average
Pick the last n periods that are most relevant
Fi+1 = (1/n) (Ai)
where
Fi+1 = the forecast for next period
n = the number of periods in the moving
average
(Ai) = the sum of the last n periods

period actual

1
2
3
4
5
6
7
8
9

10
12
14
15
16
?

Forecast using a moving average on last 3 periods

(10+12+14)/3 =12
(12+14+15)/3 =13.7
(14+15+16)/3 =15

Error

3
2.3

1
2
3
4
5
6
7
8
9

10
12
14
?

period actual

1
2
3
4
5
6
7
8
9

10
12
14
15
16
17
19
21
23

Forecast using a moving average on last 3 periods

Error

(10+12+14)/3 =12

Forecast using a moving average on last 3 periods

Error

period actual

1
2
3
4
5
6
7
8
9

10
12
14
15
?

Forecast using a moving average on last 3 periods

Error

(10+12+14)/3 =12
(12+14+15)/3 =13.7

3
?

Moving Average
(10+12+14)/3 =12
(12+14+15)/3 =13.7
(14+15+16)/3 =15
(15+16+17)/3 =16
(16+17+19)/3 =17.3
(17+19+21)/3 =19

3
2.3
2
3
3.7
4

Still lags behind a trend

Puts equal weight on each of the historical
results being used
Gives bias when seasonal data is involved
If you want more weight on the most recent
data you need a weighted average

period actual

Weighted Moving Average

Three period average with equal weight
Fjun = (Amar +Aapr + Amay ) / 3
or
Fjun = (3A mar +3A apr + 3Amay ) / 9
Weighted average with more on May
Fjun = (2A mar +3A apr + 4Amay ) / 9
Nave Again
Fjun = (0A mar +0A apr + 9Amay ) / 9

Simple Growth and Slope For

Trends
Ted Mitchell

1
2
3
4
5
6
7
8
9

10
12
14
15
16
17
19
21
23

Forecast using a WEIGHTED moving average on

last 3 periods

(2(10)+3(12)+4(14))/9 = 12.4
(2(12)+3(14)+4(15))/9 = 14
(2(14)+3(15)+4(16))/9 = 15.2
(2(15)+3(16)+4(17))/9 = 16.2
(2(16)+3(17)+4(19))/9 = 17.7
(2(17)+3(19)+4(21))/9 = 19.4

Error

Weighted Moving Average

2.6
2
1.8
2.8
3.3
3.6

Weighted Moving Average is better at

responding to a trend because it puts more
weight on recent data and less weight on old
data
They get the appropriate weights by doing a
statistical fit to the data

Trends

Simple Trend Projection

Trends in the data are not handled well by

moving averages or exponential smoothing
methods.

Before the era of simple statistical tools on

every PC managers used simple calculations
of trends based on the nave forecast.
The nave forecast is
sales in next period t = sales in the last
period (t-1) or
Rt = Rt-1

Do a Forecast for Period 2

The sales in the last period plus the

percentage growth over the last two periods

Sales
Revenue
Two
Periods
Ago

Last period plus X Percent

Do a Forecast for Period 2

Simple Percentage
Projection uses the
same growth as
between the last
two periods

Sales
Revenue
Two
Periods
Ago

Last period

Last period

Nave Forecast

Nave Forecast
g

time

Getting the slope

The percentage growth over the last two
periods = g
Prediction for the last period would be
R1 = g R 0
We know R 1 and R0 so we can calculate g

Example Calculate historical g

R1 = g R0
where
R0 = $150
R1 = $175
then calculate g
175 = g(150)
g = 175 / 150
g = 1.17 or growth is 117%

time

g = Growth rate between 0 and 1

Sales
Revenue
Two
Periods
Ago

Simple last period

plus percent
growth Projection
uses the same
slope as the last
two periods
Nave Forecast

Last period

g = R1/R0
0

time

Prediction of Revenue in period 2

(Revenue in period 2) = g (Revenue in period 1)
R2 = gR1

Prediction for R2

Prediction for R2 in period 2

Sales
Revenue

Where

R0 = 150

R1 = revenue in 1 = 175
g = 1.17
Then
R2 = 1.17(175) = 204.17

Sales
Revenue
R2 = 1.17(175) = 204

R1 = 175

R0 = 150

R2 = 204.17

R1 = 175

Nave Forecast
= 175

Nave Forecast
= 175

g = 1.17
0

g = 1.17
2

time

time

The Problem with

The last period result + percent
improvement method
Very dependent on the base used in the
percentage. If you use the same percentage
as time passes then the method inflates the
forecasted values
But it is simple and very popular!

Examples: Nave Method

& Last Period Plus Rate of
Change Method

Home Market in this example is

experiencing a long run decline in sales as it
nears the end of the Product Life Cycle

Ted Mitchell
New Shoes Home Market Spring 478

Period

3
4

Actual Units
Sold

Nave Forecast

error

E=A-F

1,193,000
1,193,000

Actual Units
Sold

Nave Forecast

error

E=A-F

1,193,000

1,023,000

Nave Forecast

error

E=A-F
170,000

1,193,000

1,023,000

1,193,000

1,023,000

You have two pieces of information

Industry Sales in period 3 = 1,193,000
Industry Sales in period 4 = 1,023,000
And the idea that the market is in decline
phase of the Product Life Cycle (PLC)
Do you nave or last period + decline %

170,000

Actual Units
Sold

What to do Next?

1,193,000

Period

Use todays result to forecast tomorrow

Period

Use todays result to forecast tomorrow

Last period + change %

Consider the last period plus the decline rate
from the two previous periods
What is the decline rate
Sales in 4 = decline rate (Sales in 3)
1,023 = decline rate (1,193 )
Decline rate = 1,023 / 1,193 = 85.75%

Use todays result to forecast tomorrow

Forecasting period 5
Sales in 5 = decline rate (sales in 4)
Sales in 5 = 85.75% (1,023,000)
Sales in 5 = 877,225 units

Period

Actual Units
Sold

Nave Forecast

error

E=A-F

1,193,000

1,023,000

1,193,000

877.225

170,000

Period

Nave Forecast

error

E=A-F

1,193,000

1,023,000

1,193,000

1,000,000

877.225 or the
nave method
1,023,000

6
7

Actual Units
Sold

Period

Actual Units
Sold

Nave Forecast

error

E=A-F

1,193,000

170,000

1,023,000

1,193,000

170,000

Smallest error
is naive

1,000,000

877.225 or the
nave method
1,023,000

Smallest error
is naive

885,000

977,517 or the
nave method
1,000,000

Smallest error
is last period +
decline rate

7
7

Use last period and decline rate to

forecast period 5

Use last period and decline rate to

forecast period 5 or nave method

Use last period and decline rate to

forecast period 5