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57-770: Risk and uncertainty are central to forecasting and prediction; it is generally considered a good practice to indicate the degree of uncertainty attaching to forecasts. In any case, the data must be up to date in order for the forecast to be as accurate as possible. In some cases the data used to predict the variable of interest is itself forecast. A forecast is not to be confused with a Budget; budgets are more specific, fixed-term financial plans used for resource allocation and control, while forecasts provide estimates of future financial performance, allowing for flexibility and adaptability to changing circumstances. Both tools are valuable in financial planning and decision-making, but they serve different functions. Forecasting has applications in

114-431: A company's prospects. In economics, as in finance, risk is often defined as quantifiable uncertainty about gains and losses. Environmental risk arises from environmental hazards or environmental issues . In the environmental context, risk is defined as "The chance of harmful effects to human health or to ecological systems". Environmental risk assessment aims to assess the effects of stressors, often chemicals, on

171-523: A good indicator of future demand. Some forecasting methods try to identify the underlying factors that might influence the variable that is being forecast. For example, including information about climate patterns might improve the ability of a model to predict umbrella sales. Forecasting models often take account of regular seasonal variations. In addition to climate, such variations can also be due to holidays and customs: for example, one might predict that sales of college football apparel will be higher during

228-405: A highly quantified way. The technique is usually referred to as probabilistic risk assessment (PRA). See WASH-1400 for an example of this approach. The incidence rate can also be reduced due to the provision of better occupational health and safety programmes. Security is freedom from, or resilience against, potential harm caused by others. A security risk is "any event that could result in

285-400: A large organization or simply crossing the road. Intuitive risk management is addressed under the psychology of risk below. Risk management refers to a systematic approach to managing risks, and sometimes to the profession that does this. A general definition is that risk management consists of "coordinated activities to direct and control an organization with regard to risk". ISO 31000 ,

342-501: A method, is by visiting a selection tree. An example of a selection tree can be found here. Forecasting has application in many situations: In several cases, the forecast is either more or less than a prediction of the future. In Philip E. Tetlock 's Superforecasting: The Art and Science of Prediction , he discusses forecasting as a method of improving the ability to make decisions. A person can become better calibrated — i.e. having things they give 10% credence to happening 10% of

399-431: A pool of risks including market risk, credit risk, operational risk, interest rate risk, mortality risk, longevity risks, etc. The term "risk" has a long history in insurance and has acquired several specialised definitions, including "the subject-matter of an insurance contract", "an insured peril" as well as the more common "possibility of an event occurring which causes injury or loss". Occupational health and safety

456-399: A relationship into the future, without necessarily understanding the reasons for the relationship. Causal methods include: Quantitative forecasting models are often judged against each other by comparing their in-sample or out-of-sample mean square error , although some researchers have advised against this. Different forecasting approaches have different levels of accuracy. For example, it

513-552: A sequence and the "moment" or "index". This type of extrapolation has 100% accuracy in predictions in a big percentage of known series database (OEIS). The forecast error (also known as a residual ) is the difference between the actual value and the forecast value for the corresponding period: where E is the forecast error at period t, Y is the actual value at period t, and F is the forecast for period t. A good forecasting method will yield residuals that are uncorrelated . If there are correlations between residual values, then there

570-622: A simple summary, defining risk as "the possibility of something bad happening". The International Organization for Standardization (ISO) 31073 provides basic vocabulary to develop common understanding on risk management concepts and terms across different applications. ISO 31073 defines risk as: effect of uncertainty on objectives Note 1: An effect is a deviation from the expected. It can be positive, negative or both, and can address, create or result in opportunities and threats . Note 2: Objectives can have different aspects and categories, and can be applied at different levels. Note 3: Risk

627-521: A variety of hazards that may result in accidents causing harm to people, property and the environment. In the safety field, risk is typically defined as the "likelihood and severity of hazardous events". Safety risks are controlled using techniques of risk management. A high reliability organisation (HRO) involves complex operations in environments where catastrophic accidents could occur. Examples include aircraft carriers, air traffic control, aerospace and nuclear power stations. Some HROs manage risk in

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684-408: A wide range of fields where estimates of future conditions are useful. Depending on the field, accuracy varies significantly. If the factors that relate to what is being forecast are known and well understood and there is a significant amount of data that can be used, it is likely the final value will be close to the forecast. If this is not the case or if the actual outcome is affected by the forecasts,

741-437: Is where m {\displaystyle m} =seasonal period and k {\displaystyle k} is the smallest integer greater than ( h − 1 ) / m {\displaystyle (h-1)/m} . The seasonal naïve method is particularly useful for data that has a very high level of seasonality. A deterministic approach is when there is no stochastic variable involved and

798-494: Is a questionnaire screening tool, used to provide individuals with an evaluation of their health risks and quality of life. Health, safety, and environment (HSE) are separate practice areas; however, they are often linked. The reason is typically to do with organizational management structures; however, there are strong links among these disciplines. One of the strongest links is that a single risk event may have impacts in all three areas, albeit over differing timescales. For example,

855-416: Is an individual or collaborative undertaking planned to achieve a specific aim. Project risk is defined as, "an uncertain event or condition that, if it occurs, has a positive or negative effect on a project's objectives". Project risk management aims to increase the likelihood and impact of positive events and decrease the likelihood and impact of negative events in the project. Safety is concerned with

912-476: Is concerned with occupational hazards experienced in the workplace. The Occupational Health and Safety Assessment Series (OHSAS) standard OHSAS 18001 in 1999 defined risk as the "combination of the likelihood and consequence(s) of a specified hazardous event occurring". In 2018 this was replaced by ISO 45001 "Occupational health and safety management systems", which use the ISO Guide 73 definition. A project

969-449: Is information left in the residuals which should be used in computing forecasts. This can be accomplished by computing the expected value of a residual as a function of the known past residuals, and adjusting the forecast by the amount by which this expected value differs from zero. A good forecasting method will also have zero mean . If the residuals have a mean other than zero, then the forecasts are biased and can be improved by adjusting

1026-432: Is narrowly focused on computer security, information risks extend to other forms of information (paper, microfilm). Insurance is a risk treatment option which involves risk sharing. It can be considered as a form of contingent capital and is akin to purchasing an option in which the buyer pays a small premium to be protected from a potential large loss. Insurance risk is often taken by insurance companies, who then bear

1083-419: Is only suitable for time series data . Using the naïve approach, forecasts are produced that are equal to the last observed value. This method works quite well for economic and financial time series, which often have patterns that are difficult to reliably and accurately predict. If the time series is believed to have seasonality, the seasonal naïve approach may be more appropriate where the forecasts are equal to

1140-457: Is that chartists study only the price action of a market, whereas fundamentalists attempt to look to the reasons behind the action. Financial institutions assimilate the evidence provided by their fundamental and chartist researchers into one note to provide a final projection on the currency in question. Forecasting has also been used to predict the development of conflict situations. Forecasters perform research that uses empirical results to gauge

1197-400: Is that the presence of a strong deterministic ingredient is hidden by noise. The deterministic approach is noteworthy as it can reveal the underlying dynamical systems structure, which can be exploited for steering the dynamics into a desired regime. Time series methods use historical data as the basis of estimating future outcomes. They are based on the assumption that past demand history is

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1254-478: Is the past data. Although the time series notation has been used here, the average approach can also be used for cross-sectional data (when we are predicting unobserved values; values that are not included in the data set). Then, the prediction for unobserved values is the average of the observed values. Naïve forecasts are the most cost-effective forecasting model, and provide a benchmark against which more sophisticated models can be compared. This forecasting method

1311-458: Is the possibility of something bad happening. Risk involves uncertainty about the effects/implications of an activity with respect to something that humans value (such as health, well-being, wealth, property or the environment), often focusing on negative, undesirable consequences. Many different definitions have been proposed. One international standard definition of risk is the "effect of uncertainty on objectives". The understanding of risk,

1368-472: Is the use of computers to store, retrieve, transmit, and manipulate data. IT risk (or cyber risk) arises from the potential that a threat may exploit a vulnerability to breach security and cause harm. IT risk management applies risk management methods to IT to manage IT risks. Computer security is the protection of IT systems by managing IT risks. Information security is the practice of protecting information by mitigating information risks. While IT risk

1425-436: Is usually expressed in terms of risk sources, potential events, their consequences and their likelihood. This definition was developed by an international committee representing over 30 countries and is based on the input of several thousand subject-matter experts. It was first adopted in 2002 for use in standards. Its complexity reflects the difficulty of satisfying fields that use the term risk, in different ways. Some restrict

1482-843: The Delphi method , market research , and historical life-cycle analogy. Quantitative forecasting models are used to forecast future data as a function of past data. They are appropriate to use when past numerical data is available and when it is reasonable to assume that some of the patterns in the data are expected to continue into the future. These methods are usually applied to short- or intermediate-range decisions. Examples of quantitative forecasting methods are last period demand, simple and weighted N-Period moving averages , simple exponential smoothing , Poisson process model based forecasting and multiplicative seasonal indexes. Previous research shows that different methods may lead to different level of forecasting accuracy. For example, GMDH neural network

1539-478: The variance (or standard deviation) of asset prices. More recent risk measures include value at risk . Because investors are generally risk averse , investments with greater inherent risk must promise higher expected returns. Financial risk management uses financial instruments to manage exposure to risk. It includes the use of a hedge to offset risks by adopting a position in an opposing market or investment. In financial audit , audit risk refers to

1596-707: The Wind Forecast Improvement Project sponsored by the US Department of Energy are examples. In relation to supply chain management, the Du Pont model has been used to show that an increase in forecast accuracy can generate increases in sales and reductions in inventory, operating expenses and commitment of working capital. The Groceries Code Adjudicator in the United Kingdom, which regulates supply chain management practices in

1653-711: The common methods of management, the measurements of risk and even the definition of risk differ in different practice areas. This section provides links to more detailed articles on these areas. Business risks arise from uncertainty about the profit of a commercial business due to unwanted events such as changes in tastes, changing preferences of consumers, strikes, increased competition, changes in government policy, obsolescence etc. Business risks are controlled using techniques of risk management . In many cases they may be managed by intuitive steps to prevent or mitigate risks, by following regulations or standards of good practice, or by insurance . Enterprise risk management includes

1710-452: The compromise of organizational assets i.e. the unauthorized use, loss, damage, disclosure or modification of organizational assets for the profit, personal interest or political interests of individuals, groups or other entities." Security risk management involves protection of assets from harm caused by deliberate acts. Risk is ubiquitous in all areas of life and we all manage these risks, consciously or intuitively, whether we are managing

1767-432: The context of public health , risk assessment is the process of characterizing the nature and likelihood of a harmful effect to individuals or populations from certain human activities. Health risk assessment can be mostly qualitative or can include statistical estimates of probabilities for specific populations. A health risk assessment (also referred to as a health risk appraisal and health & well-being assessment)

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1824-454: The disadvantage of being extremely large or undefined if Y is close to or equal to zero. Mean absolute percentage error (MAPE):   M A P E = 100 ∗ ∑ t = 1 N | E t Y t | N {\displaystyle \ MAPE=100*{\frac {\sum _{t=1}^{N}|{\frac {E_{t}}{Y_{t}}}|}{N}}} Risk In simple terms, risk

1881-540: The earliest use of the word in English (in the spelling of risque from its French original, 'risque') as of 1621, and the spelling as risk from 1655. While including several other definitions, the OED 3rd edition defines risk as: (Exposure to) the possibility of loss, injury, or other adverse or unwelcome circumstance; a chance or situation involving such a possibility. The Cambridge Advanced Learner's Dictionary gives

1938-405: The effectiveness of certain forecasting models. However research has shown that there is little difference between the accuracy of the forecasts of experts knowledgeable in the conflict situation and those by individuals who knew much less. Similarly, experts in some studies argue that role thinking — standing in other people's shoes to forecast their decisions — does not contribute to the accuracy of

1995-405: The first and last observation, and extrapolating it into the future. The seasonal naïve method accounts for seasonality by setting each prediction to be equal to the last observed value of the same season. For example, the prediction value for all subsequent months of April will be equal to the previous value observed for April. The forecast for time T + h {\displaystyle T+h}

2052-431: The football season than during the off season. Several informal methods used in causal forecasting do not rely solely on the output of mathematical algorithms , but instead use the judgment of the forecaster. Some forecasts take account of past relationships between variables: if one variable has, for example, been approximately linearly related to another for a long period of time, it may be appropriate to extrapolate such

2109-422: The forecast. An important, albeit often ignored aspect of forecasting, is the relationship it holds with planning . Forecasting can be described as predicting what the future will look like, whereas planning predicts what the future should look like. There is no single right forecasting method to use. Selection of a method should be based on your objectives and your conditions (data etc.). A good place to find

2166-1578: The forecasting technique by an additive constant that equals the mean of the unadjusted residuals. Measures of aggregate error: The forecast error, E, is on the same scale as the data, as such, these accuracy measures are scale-dependent and cannot be used to make comparisons between series on different scales. Mean absolute error (MAE) or mean absolute deviation (MAD):   M A E = M A D = ∑ t = 1 N | E t | N {\displaystyle \ MAE=MAD={\frac {\sum _{t=1}^{N}|E_{t}|}{N}}} Mean squared error (MSE) or mean squared prediction error (MSPE):   M S E = M S P E = ∑ t = 1 N E t 2 N {\displaystyle \ MSE=MSPE={\frac {\sum _{t=1}^{N}{E_{t}^{2}}}{N}}} Root mean squared error (RMSE):   R M S E = ∑ t = 1 N E t 2 N {\displaystyle \ RMSE={\sqrt {\frac {\sum _{t=1}^{N}{E_{t}^{2}}}{N}}}} Average of Errors (E):   E ¯ = ∑ i = 1 N E i N {\displaystyle \ {\bar {E}}={\frac {\sum _{i=1}^{N}{E_{i}}}{N}}} These are more frequently used to compare forecast performance between different data sets because they are scale-independent. However, they have

2223-620: The forecasts depend on the selected functions and parameters. For example, given the function The short term behaviour x t {\displaystyle x_{t}} and the is the medium-long term trend y t {\displaystyle y_{t}} are where α , γ , β , μ , η {\displaystyle \alpha ,\gamma ,\beta ,\mu ,\eta } are some parameters. This approach has been proposed to simulate bursts of seemingly stochastic activity, interrupted by quieter periods. The assumption

2280-531: The groceries retail industry, has observed that all the retailers who fall within the scope of his regulation "are striving for continuous improvement in forecasting practice and activity in relation to promotions". Qualitative forecasting techniques are subjective, based on the opinion and judgment of consumers and experts; they are appropriate when past data are not available. They are usually applied to intermediate- or long-range decisions. Examples of qualitative forecasting methods are informed opinion and judgment,

2337-414: The importance of different adverse effects in a particular situation. The Society for Risk Analysis concludes that "experience has shown that to agree on one unified set of definitions is not realistic". The solution is "to allow for different perspectives on fundamental concepts and make a distinction between overall qualitative definitions and their associated measurements." The understanding of risk,

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2394-475: The international standard for risk management, describes a risk management process that consists of the following elements: Futarchy List of forms of government Futarchy is a form of government proposed by economist Robin Hanson , in which elected officials define measures of national wellbeing, and prediction markets are used to determine which policies will have the most positive effect. It

2451-444: The local environment. Finance is concerned with money management and acquiring funds. Financial risk arises from uncertainty about financial returns. It includes market risk , credit risk , liquidity risk and operational risk . In finance, risk is the possibility that the actual return on an investment will be different from its expected return. This includes not only " downside risk " (returns below expectations, including

2508-538: The main motivation is generally financial. Finally, futarchy is a form of government where forecasts of the impact of government action are used to decide which actions are taken. Rather than advice, in futarchy's strongest form, the action with the best forecasted result is automatically taken. Forecast improvement projects have been operated in a number of sectors: the National Hurricane Center 's Hurricane Forecast Improvement Project (HFIP) and

2565-469: The methods and processes used by organizations to manage risks and seize opportunities related to the achievement of their objectives. Economics is concerned with the production, distribution and consumption of goods and services. Economic risk arises from uncertainty about economic outcomes. For example, economic risk may be the chance that macroeconomic conditions like exchange rates, government regulation, or political stability will affect an investment or

2622-527: The methods of assessment and management, the descriptions of risk and even the definitions of risk differ in different practice areas ( business , economics , environment , finance , information technology , health , insurance , safety , security etc). This article provides links to more detailed articles on these areas. The international standard for risk management, ISO 31000 , provides principles and general guidelines on managing risks faced by organizations . The Oxford English Dictionary (OED) cites

2679-425: The possibility of losing some or all of the original investment) but also "upside risk" (returns that exceed expectations). In Knight's definition, risk is often defined as quantifiable uncertainty about gains and losses. This contrasts with Knightian uncertainty , which cannot be quantified. Financial risk modeling determines the aggregate risk in a financial portfolio. Modern portfolio theory measures risk using

2736-440: The potential that an audit report may fail to detect material misstatement either due to error or fraud. Health risks arise from disease and other biological hazards . Epidemiology is the study and analysis of the distribution, patterns and determinants of health and disease. It is a cornerstone of public health , and shapes policy decisions by identifying risk factors for disease and targets for preventive healthcare . In

2793-464: The reliability of the forecasts can be significantly lower. Climate change and increasing energy prices have led to the use of Egain Forecasting for buildings. This attempts to reduce the energy needed to heat the building, thus reducing the emission of greenhouse gases . Forecasting is used in customer demand planning in everyday business for manufacturing and distribution companies. While

2850-422: The term to negative impacts ("downside risks"), while others also include positive impacts ("upside risks"). Some resolve these differences by arguing that the definition of risk is subjective. For example: No definition is advanced as the correct one, because there is no one definition that is suitable for all problems. Rather, the choice of definition is a political one, expressing someone's views regarding

2907-442: The time. Or they can forecast things more confidently — coming to the same conclusion but earlier. Some have claimed that forecasting is a transferable skill with benefits to other areas of discussion and decision making. Betting on sports or politics is another form of forecasting. Rather than being used as advice, bettors are paid based on if they predicted correctly. While decisions might be made based on these bets (forecasts),

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2964-423: The uncontrolled release of radiation or a toxic chemical may have immediate short-term safety consequences, more protracted health impacts, and much longer-term environmental impacts . Events such as Chernobyl , for example, caused immediate deaths, and in the longer term, deaths from cancers, and left a lasting environmental impact leading to birth defects , impacts on wildlife, etc. Information technology (IT)

3021-408: The value from last season. In time series notation: A variation on the naïve method is to allow the forecasts to increase or decrease over time, where the amount of change over time (called the drift ) is set to be the average change seen in the historical data. So the forecast for time T + h {\displaystyle T+h} is given by This is equivalent to drawing a line between

3078-520: The veracity of predictions for actual stock returns are disputed through reference to the efficient-market hypothesis , forecasting of broad economic trends is common. Such analysis is provided by both non-profit groups as well as by for-profit private institutions. Forecasting foreign exchange movements is typically achieved through a combination of historical and current data (summarized in charts) and fundamental analysis . An essential difference between chart analysis and fundamental economic analysis

3135-476: Was found in one context that GMDH has higher forecasting accuracy than traditional ARIMA. Judgmental forecasting methods incorporate intuitive judgement, opinions and subjective probability estimates. Judgmental forecasting is used in cases where there is a lack of historical data or during completely new and unique market conditions. Judgmental methods include: Often these are done today by specialized programs loosely labeled Can be created with 3 points of

3192-512: Was found to have better forecasting performance than the classical forecasting algorithms such as Single Exponential Smooth, Double Exponential Smooth, ARIMA and back-propagation neural network. In this approach, the predictions of all future values are equal to the mean of the past data. This approach can be used with any sort of data where past data is available. In time series notation: where y 1 , . . . , y T {\displaystyle y_{1},...,y_{T}}

3249-521: Was named by The New York Times as a buzzword of 2008. The idea of futarchy was later introduced in the context of blockchains and the DAO bringing it closer to an actual implementation. Economist Tyler Cowen said I would bet against the future of futarchy, or its likelihood of succeeding were it in place. Robin says "vote on values, bet on beliefs", but I don't think values and beliefs can be so easily separated. This government -related article

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