Training on Train Tracks: “Pivotal assumptions” for building scenarios

Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

Having expounded on the glories of the multi-scenario approach to global macro forecasting and tackled the task of teaching readers all about tail risks, today we turn to comparing a scenario to a train track and explain why, based on this metaphor, we call our assumptions that distinguish across scenarios “pivotal assumptions”.

Scenarios as Train Tracks

Scenarios are stories, remember. In each, we narrate how the world economy could move along one path that diverges from the other two.

To build these divergent paths, or “train tracks”, we write down our “pivotal assumptions”, which we also call “assumptions that distinguish across scenarios”.

Train Switches

During this exercise, we like to visualize our pivotal assumptions as railroad switches. This metaphor helps us choose them carefully, center only on the most crucial of global macro risks. That way, our scenarios will truly “pivot” or “hinge” on the assumptions we choose.

For example, in our last Quarterly Outlook, we identified Russia’s energy offensive against Europe as a pivotal risk. In our central scenario, we assumed that Europe would muddle through the winter of 2022–2023. In our downside-risk scenario, that the Russia cutoff of gas supplies to Europe would provoke stagflation. In our optimistic scenario, we assumed that Europe would easily cope with the cutoff.

By switching across these three pivotal assumptions—plugging them into our model and writing them into our narratives—we were able to imagine and model three distinct forward tracks that Europe might run along over the subsequent eight quarters.

Learn more

Learn more about our multi-scenario approach to forecasting here and how to apply it to your organization’s strategic planning here.

Our assumptions as to pivotal risks distinguish across scenarios. Those that assume away tail risks, however, underly all our scenarios. For more on tail risks and how we handle them, follow this link.

Or watch our method in action by signing up for our September 8 webinar, “Our Outlook and Your Wealth”!