Question

(Forecast accuracy across horizons) You are a consultant to MedTrax, a large pharmaceutical company, which released a new ulcer drug .3 months ago and is concerned about recovering research and development costs. Accordingly, MedTrax has approached yon for drug sales projections at 1- through 12-monthahead horizons, which it will use to guide potential sales force realignments. In briefing vou, MedTrax indicated that it expects your long-hori/on forecasts (e.g., 12-month-ahead) to be just as accurate as vour short-horizon forecasts (e.g., 1-month-ahead). Explain to MedTrax why that is not likely to be the case, even if you do the best forecasting job possible.

Answer 1

It is impossible for long-term forecasts to be as accurate as short-term forecasts, because long-term forecasts are based on intuitive facts that may not happen.

Short-term forecasts are more accurate because they are based on how the financial market and trade are doing today, so it becomes easier to predict (through real data) the sales and revenues that a product will be able to produce in a few weeks. However, a country's market and economy situation can change in a matter of months, as these changes can be unpredictable, long-term forecasts are impaired and end up being less accurate.

We can see an example of this right now, through the economic crisis that is spreading all over the world, caused by the expansion of the coronavirus. This expansion was something completely premeditated and probably not considered in the companies' long-term forecasts.