Sometimes I get asked for numbers at work in situations where I have next to no information. Here’s a good example from today:
A company is looking to buy protection against an event which we believe happens once in ten years. I do not know how we arrived at the 1 in 10 year number, or even when we came to believe in that number, or, as I think about it, even it was actually us who believed in that number. In any case:
Year 1: Event happens
Year 2: Event happens
Year 3: Event happens
The question to me was – what do you think the probability of the event happening in year 4 is? There’s little to no math or calculation you can do here – there are only two pieces of information:
(a) At some point someone believed that the event happened once in 10 years.
(b) That event has happened in each of the last 3 years.
That’s all you know . . . so what’s your answer to the question?