Extreme value theory
What is extreme value theory?
This is a way to measure the likelihood of an extremely unlikely event. It's useful for insurers to help them measure the risk of disasters such as wildfires or earthquakes.
Where have you heard about extreme value theory?
As well as insurance, it's used in a number of different sectors including structural engineering, finance and traffic prediction. So for example, you might have heard how it can be used to estimate the probability of major flooding or fires.
What you need to know about extreme value theory.
Usually, statistical methods are concerned with measuring values that are somewhere close to average. Extreme value theory is a different class of methods, designed to estimate the probability of distant outliers. As well as insurance, the theory can also be used to calculate the probability of rare events such as stocks going up in price by 100x or more, or market crashes.
Find out more about extreme value theory.
See our guide to extreme risk to learn more about events with low probability but big consequences.