4.4 Forecasting by analogy
A useful judgmental approach which is often implemented in practice is forecasting by analogy. A common example is the pricing of a house through an appraisal process. An appraiser estimates the market value of a house by comparing it to similar properties that have sold in the area. The degree of similarity depends on the attributes considered. With house appraisals, attributes such as land size, dwelling size, numbers of bedrooms and bathrooms, and garage space are usually considered.
Even thinking and discussing analogous products or situations can generate useful (and sometimes crucial) information. We illustrate this point with the following example.8
Example: Designing a high school curriculum
A small group of academics and teachers were assigned the task of developing a curriculum for teaching judgement and decision making under uncertainty for high schools in Israel. Each group member was asked to forecast how long it would take for the curriculum to be completed. Responses ranged between 18 and 30 months. One of the group members who was an expert in curriculum design was asked to consider analogous curricula developments around the world. He concluded that 40% of analogous groups he considered never completed the task. The rest took between 7 to 10 years. The Israel project was completed in 8 years.
Obviously, forecasting by analogy comes with challenges. We should aspire to base forecasts on multiple analogies rather than a single analogy, which may create biases. However, these may be challenging to identify. Similarly, we should aspire to consider multiple attributes. Identifying or even comparing these may not always be straightforward. As always, we suggest performing these comparisons and the forecasting process using a systematic approach. Developing a detailed scoring mechanism to rank attributes and record the process of ranking will always be useful.
A structured analogy
Alternatively, a structured approach comprising a panel of experts can be implemented, as was proposed by Green & Armstrong (2007). The concept is similar to that of a Delphi; however, the forecasting task is completed by considering analogies. First, a facilitator is appointed. Then the structured approach involves the following steps.
- A panel of experts who are likely to have experience with analogous situations is assembled.
- Tasks/challenges are set and distributed to the experts.
- Experts identify and describe as many analogies as they can, and generate forecasts based on each analogy.
- Experts list similarities and differences of each analogy to the target situation, then rate the similarity of each analogy to the target situation on a scale.
- Forecasts are derived by the facilitator using a set rule. This can be a weighted average, where the weights can be guided by the ranking scores of each analogy by the experts.
As with the Delphi approach, anonymity of the experts may be an advantage in not suppressing creativity, but could hinder collaboration. Green and Armstrong found no gain in collaboration between the experts in their results. A key finding was that experts with multiple analogies (more than two), and who had direct experience with the analogies, generated the most accurate forecasts.
Green, K. C., & Armstrong, J. S. (2007). Structured analogies for forecasting. International Journal of Forecasting, 23(3), 365–376.