The Definitive Guide to Business Finance: What smart managers do with the numbers, Second Edition

When it is worth weighting

Sometimes simple averages are not enough. Let me give you an example. One way of arriving at a forecast for next year’s sales is to ask a panel of experts. If you hold them all in equal regard, you can simply take the average of their predictions. However, if one of them is particularly erudite, you might want to give extra weight to her views.

Figure 5.7 shows this in action. Alex, Bob, and Chris predict that sales of a new product will be 1,000, 2,000 and 3,000 respectively. The simple average of these is 2,000. However, you think that your expert Alex is twice as likely to be right as either of the other two, and that Bob’s views carry slightly more weight than Chris’s. Accordingly, you allocate weights of 50%, ...