Some Observations on Adaptive Forecasting

The procedure of “adaptive” or “exponential” forecasting is based on weighted averages of two sources of evidence; one is the latest evidence (the most recent observation), the other the value computed one period before. As such, it is an easy, quick and cheap method; very little information is needed for a forecast; also, the most recent information is used. This article serves a dual purpose. One is to simplify the forecasting procedure and to clarify its characteristics in the simplest possible manner. This objective is pursued in Sections 2–4. The second purpose is to formulate a probabilistic model underlying the prediction procedure and to select weights which minimize the mean-square prediction error. Sections 5 and 6 are devoted to that purpose.