For my finance lecture we are currently on the topic of operation risk.

Scenarios play a vital role in the estimation of low frequency (or probability), high impact (or severity) events. How could you estimate the probability of a scenario?

This question is 2 marks, but would a step in the right direction be finding an appropriate distribution for frequency and severity of events.


This is a particularly fascinating area of inference, at least in my opinion. While you are asking for an estimation of the probability of an unlikely event, I'll instead offer a paper that presents a heuristic for detection of model error. It is explicitly probability free.

Mathematical Definition, Mapping, and Detection of (Anti)Fragility

Taleb has spent the majority of his professional life dealing with so-called "Black Swan Events" (a term he popularized with his book "The Black Swan").

To the point, finding an appropriate distribution of low frequency events is a particularly troublesome task that does not fit nicely into classical statistical inference. Those events go to the heart of Hume's problem of induction, a topic that Taleb seems to have devoted his professional life to.


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