If you are given a MAD of 35 for one forcasting method and t

If you are given a MAD of 35 for one forcasting method, and then you are given a MSE of 53 for a different forecasting method, which forecasting method can you conclude is better? Please Exlain.

Solution

MAD means the mean absolute deviation. It takes the absolute value of forecast errors and averages them over the entirety of the forecast time periods. Formula is ( |FE| ÷ N)

MSE is mean squared error. It is the sum of the forecast errors squared divided by N-1. Formula is [((FE)^2) ÷ (N-1)]

Assuming that \"N\" is same in both cases. let it be 10.

MAD = sum of absolute value of forecast errors/10 = 35

or, sum of absolute value of forecast errors = 35*10 = 350

MSE = sum of the square of forecasting error/n-1

53 = sum of the square of forecasting error/9

sum of the square of forecasting error = 53*9 = 477

Thus we can observe that the forecasting error is lower in case of MSE. Its sum of squares is just 477, whereas the sum of absolute values is 350. Hence the method using MSE is better.