Time series and forecasting · insight-0203

Widen or label scenario forecasts because they exclude uncertainty in the assumed drivers

Situation
Finance asks for next quarter's demand under three fuel-price scenarios, each with an 80% interval.
Action
Label scenario intervals as conditional on the assumed driver path. Show the spread across scenarios next to the within-scenario interval, and add a driver-uncertainty band when you can forecast the driver.
Reason
Scenario-based prediction intervals do not include the uncertainty in the future values of the predictors, so they understate total uncertainty.
Boundary
Planning, budgeting, stress tests, capacity what-ifs with assumed macro or price paths.

Symptom or risk

Each scenario interval looks narrow and decision makers read it as the total uncertainty, although the driver itself is uncertain.

When the driver is a decision you control, conditional intervals are the right object.

Adding driver uncertainty makes ranges wider and harder to sell, but it prevents false precision.

Averaging the three scenarios into one 'expected' forecast without probabilities assigned to them.

Hypothetical: scenario intervals of plus or minus 4% each, while the scenarios themselves differ by 12%.

Prediction intervals for scenario-based forecasts do not include the uncertainty associated with the future values of the predictors.
Forecasting: Principles and Practice (3rd edition)