Scenario analysis is a process of analyzing possible future events by considering alternative possible outcomes (sometimes called "alternative worlds"). Thus, the scenario analysis, which is a main method of projections, does not try to show one exact picture of the future. Instead, it presents consciously several alternative future developments. Consequently, a scope of possible future outcomes is observable. Not only are the outcomes observable, also the development paths leading to the outcomes. In contrast to prognoses, the scenario analysis is not using extrapolation of the past. It does not rely on historical data and does not expect past observations to be still valid in the future. Instead, it tries to consider possible developments and turning points, which may only be connected to the past. In short, several scenarios are demonstrated in a scenario analysis to show possible future outcomes. It is useful to generate a combination of an optimistic, a pessimistic, and a most likely scenario. Although highly discussed, experience has shown that around three scenarios are most appropriate for further discussion and selection. More scenarios could make the analysis unclear.
Read more about Scenario Analysis: Principle, Financial Applications, Geopolitical Applications, Traditional Critique
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