Using Scenarios

René Doff

Chapter 2 described the principle of the VUCA world. If the world is indeed volatile, uncertain, complex and ambiguous, traditional prediction models are not likely to work very well, which we demonstrated in Chapter 3 in our assessment of the VaR methodology. Stock prices and interest rates are inherently difficult to predict, and it is not only the financial markets that suffer from this unpredictability – weather, housing prices, the strategic moves of the competition, all these aspects are difficult to predict.

In prediction, there is a balance between correctness/accuracy and precision. We can say with almost 100% accuracy that tomorrow’s temperature will be between –10°C and +40°C. However, that is not very precise and is therefore useless information. Similarly, a statement that the S&P 500 will lie between 500 and 5,000 points one year from now is very likely, but hardly guides our potential actions or investment decisions. Likewise, a prediction that the S&P 500 will be exactly 2,358 next year is very precise but most probably incorrect.

Nevertheless, we consistently try to beat the odds by making very detailed predictions. Even worse, evidence shows that we are