Scenario Planning
Scenario planning is the process of identifying possible future outcomes and planning to handle them. This is the origin of base cases whereby the base case represents the most likely or default scenario.A realtor plans their strategy for the year with the base case that sales will increase slightly. They also develop a strategy for the downside scenario that sales drop significantly and the upside scenario that sales increase significantly.
Assumptions
Assumptions are what you hold to be true for the purposes of overcoming ambiguity. Unstated assumptions are dangerous as you are essentially pretending the assumption is a fact. As such, assumptions are commonly stated and evaluated with the base case representing the assumption that you have currently adopted.A school board states the assumption that the school year will continue as planned in its annual budget. This is a base case with alternative assumptions including things like political actions and government shutdowns that disrupt the school year.
Educated Guesses
An educated guess is the process of using an expert opinion to make reasonable assumptions or predictions about the future. These are often presented as a base case as this term recognizes that there is nothing certain about an educated guess.A stock analyst adopts the base case that a troubled merger proposal will fall through in their price target for a stock.
Model
A model is an attempt to predict the future with a formal system of calculation. These aren't necessarily better than an educated guess but people tend to have more confidence in complex systems that involve a lot of numbers. In the case of a model, a base case is usually based on an educated guess regarding the most realistic input variables. In other words, models are often founded upon educated guesses if you dig deep enough though the apparent certainly of their numbers. It is also common for models to be based on a machine learning generated probability model that is essentially an automated educated guess.A financial model predicts modest growth for an economy given a realistic set of input variables. Based on this, an economist goes with the base case that an economy will avoid a near term recession.
| Overview: Base Case | ||
Type | ||
Definition (1) | The outcome that you hold as most likely. | |
Uses | PredictionsAssumptionsDealing With AmbiguityEstimatesPlanningFinancial Models | |
Related Concepts | ||
