To what extent can and should extreme but unusual events be taken into account?
An earthquake in California, a terrorist attack on a tourist resort, or the unexpected death of a political leader might lead to enormous forecast errors. Base rates (historical frequencies) are likely to provide adequate forecasts of such events. For example, one could consult actuarial life tables to asses the likelihood that a 57-year-old male political leader who does not smoke will die in the next three years. If the impact of the possible event on the forecast is high but the base rate is indeed low, you may want to consider sticking with your forecast but paying up to the expected cost of the event (probability * financial damage) in insurance premiums. Alternatively, it might be cheaper to accommodate unlikely eventualities in your organizations plans. Back to top M.
