The Lucretius problem
The fool believes the tallest mountain he's seen is the tallest possible.
The Roman poet Lucretius wrote about a fool who couldn't conceive of mountains taller than the ones he'd seen. We do the same with most extreme events. We anchor worst-case scenarios on the worst past event, guaranteeing under-preparation.
The 100-year flood was based on 100 years of data. The 500-year storm has been seen a few times in recorded history. The worst-ever market crash gets used as the worst-imaginable. None of these are upper bounds. They're just the largest in the sample.
For operators, the discipline is to plan for worse than the worst you've seen. Whatever your historical max drawdown, max delay, max customer loss, the future can produce larger. Margin of safety should be calibrated to that, not to the past.
Examples in the wild
Cyber insurance markets repeatedly underprice catastrophic breaches because the largest historical breach gets used as a soft cap. The next breach can always be larger.
Stress tests in banking use historical worst cases. The 2008 stress test would have underestimated the actual 2008 crisis. The Lucretius problem is built into the methodology.
Most disaster preparation is calibrated to past disasters. The next earthquake, hurricane, or epidemic can always be larger than any in living memory.
The Lucretius problem is one of the mental models we apply through real cases inside the Pareto MBA — a part-time program for professionals who want to think clearly about business.