scenario analysis
A process of evaluating possible future events by considering alternative possible outcomes — typically base, bull, and bear cases — and their probabilities.
Example
“The three-scenario analysis showed the acquisition created value in the base and bull cases but destroyed it in the bear case.”
Memory Tip
SCENARIO ANALYSIS = base case, bull case, bear case. What happens under each story?
Why It Matters
Scenario analysis helps you prepare for different financial futures rather than assuming one outcome will occur. By considering multiple possibilities, you can make more robust decisions about savings, investments, and major purchases that account for uncertainty.
Common Misconception
Many people think scenario analysis is the same as forecasting or predicting the future accurately. In reality, it is not about being right but about understanding how different conditions might affect your finances so you can plan accordingly.
In Practice
A couple planning retirement might analyze three scenarios for their investment portfolio: a base case assuming 6 percent annual returns, a bull case with 8 percent returns, and a bear case with 3 percent returns. They might find that in the bear case their $500,000 portfolio would grow to $1.2 million in 20 years instead of $1.6 million, helping them decide whether to work longer or spend more conservatively.
Etymology
SCENARIO (a projected sequence of events) ANALYSIS. Analyzing different possible SCENARIOS.
Common Misspellings
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Related Terms
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See Also
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