There are many situations where one is interested in predicting the expected number of events in period 2 given that x events occurred in period 1. For example, insurance companies must decide whether or not to cancel the insurance of drivers who had 3 or more accidents during the previous year....

A two state Markov chain model is used to describe and forecast the over time behavior of the best retail customers at Merrill Lynch. This model has 4 behaviorally meaningful parameters which capture the effect of recently being a prime customer, the differing average commissions generated...