I love asking this question, because even people who consider themselves rules gurus usually get it wrong (including me). Final Edit: I think I have it right now.
ghoppe correctly identified the rules that handle multiple prevention effects trying to modify the same event.
Comprehensive Rules
616.1. If two or more replacement and/or prevention effects are attempting to modify the way an event affects an object or player, the affected object's controller (or its owner if it has no controller) or the affected player chooses one to apply, following the steps listed below. If two or more players have to make these choices at the same time, choices are made in APNAP order (see rule 101.4).
101.4. If multiple players would make choices and/or take actions at the same time, the active player (the player whose turn it is) makes any choices required, then the next player in turn order (usually the player seated to the active player's left) makes any choices required, followed by the remaining nonactive players in turn order. Then the actions happen simultaneously. This rule is often referred to as the "Active Player, Nonactive Player (APNAP) order" rule.
Rule 101.4 is just reminding us what APNAP order is, and the fact that even though the choices each player make have an order, the result of their choices are applied simultaneously.
Lets Look at the actual text of each card (ignoring parts that don't apply), so that we know what the event is, and what is trying to replace that event.
(Event) Volcanic Fallout: ~this~ deals 2 damage to each creature and each player.
Furnace of Rath: If a source would deal damage to a creature or player, it deals double that damage to that creature or player instead.
Hostility: If a spell you control would deal damage to an opponent, prevent that damage. Put a 3/1 red Elemental Shaman creature token with haste onto the battlefield for each 1 damage prevented this way.
Hallow: Prevent all damage target spell would deal this turn. You gain life equal to the damage prevented this way.
The event that Volcanic Fallout is creating, can be thought of as 4 individual events that happen simultaneously. You will see later why it is easier to think of the event in these terms.
- deal 2 damage to Player A
- deal 2 damage to Hostility
- deal 2 damage to Player B
- deal 2 damage to Player C
Player A (Active Player)
Rule 101.4 lets Player A make choices first, because they are the active player. According to Rule 616.1, they may only get to make choices for replacement effects for which they are the affected player/affected object's controller. This means that they completely ignore Hostility's replacement effect, because it is only replacing damage to opponents. This leaves Player A with two choices.
- 13: Apply Furnace of Rath, then Hallow. (Result Player B +12 Life)
- 31: Apply Hallow, then Furnace of Rath. (Result Player B +8 Life)
(1)(3) If Player A chooses to apply Furnace of Rath first, the event looks like this:
- deal (double) 2 damage to Player A
- deal (double) 2 damage to Hostility
- deal 2 damage to Player B
- deal 2 damage to Player C
Then because there are still replacement effects to be applied, Player A applies Hallow to the event:
- (Prevent all damage) 4 damage to Player A, Player B gains 4 life.
- (Prevent all damage) 4 damage to Hostility, Player B gains 4 life.
- (Prevent all damage) 2 damage to Player B, Player B gains 2 life.
- (Prevent all damage) 2 damage to Player C, Player B gains 2 life.
Since Hallow prevented all damage from the event, the other players do not have a choice of applying Hostility's prevention effect.
Result Player B gains 12 Life
(3)(1) If Player A chooses to apply Hallow first, (then Furnace of Rath has no effect), the event looks like this:
- (Prevent all damage) 2 damage to Player A, Player B gains 2 life.
- (Prevent all damage) 2 damage to Hostility, Player B gains 2 life.
- (Prevent all damage) 2 damage to Player B, Player B gains 2 life.
- (Prevent all damage) 2 damage to Player C, Player B gains 2 life.
Result Player B +8 Life
Player C (Active Player)
If instead, Player C is the active player, they can choose when to apply all prevention effects, including Hostility since it is preventing damage to them. Rule 101.4 lets Player C make choices first. This leaves Player C with 6 choices for replacement effect order. (Parenthesis indicate that the replacement effect has nothing to replace for that player).
- 123: Apply Furnace of Rath, Hostility, (Hallow). (Result Player A 4 tokens, plus Player A's choices)
- 132: Apply Furnace of Rath, Hallow, (Hostility). (Result Player B +10 Life)
- 213: Apply Hostility, (Furnace of Rath), (Hallow). (Result Player A 2 tokens, plus Player A's choices)
- 231: Apply Hostility, (Hallow), (Furnace of Rath). (Result Player A 2 tokens, plus Player A's choices)
- 312: Apply Hallow, (Furnace of Rath), (Hostility). (Result Player B +8 Life)
- 321: Apply Hallow, (Hostility), (Furnace of Rath). (Result Player B +8 Life)
(1) If Player C chooses to apply Furnace of Rath first, the event looks like this:
- deal 2 damage to Player A
- deal 2 damage to Hostility
- deal 2 damage to Player B
- deal (double) 2 damage to Player C
(2)(3) Then Player C has two choices. Apply Hostility first, Hallow has nothing left to prevent. Proceed to Active Player A for his choices:
(2) Hostility
- deal 2 damage to Player A
- deal 2 damage to Hostility
- deal 2 damage to Player B
- (put) 4 (3/1 tokens) into play under Player A's control.
Result Player A 4 tokens, plus Player A's choices
(3)(2) or Player C Applies Hallow preventing all the spells damage (no more decisions for any other player):
(3) Hallow
- (Prevent all damage) 2 damage to Player A, Player B gains 2 life.
- (Prevent all damage) 2 damage to Hostility, Player B gains 2 life.
- (Prevent all damage) 4 damage to Player B, Player B gains 4 life.
- (Prevent all damage) 2 damage to Player C, Player B gains 2 life.
Result Player B +10 Life
(2) If Player C chooses to apply Hostility first, the event looks like this:
- deal 2 damage to Player A
- deal 2 damage to Hostility
- deal 2 damage to Player B
- (put) 2 (3/1 tokens) into play under Player A's control.
Since Player A is no longer an affected player (Hostility has prevented all damage to them and any other permanents they are the owner of).
Result Player A 2 tokens, plus *Player A's choices*
(3) If Player C chooses to apply Hallow first, the event looks like this:
- (Prevent all damage) 2 damage to Player A, Player B gains 2 life.
- (Prevent all damage) 2 damage to Hostility, Player B gains 2 life.
- (Prevent all damage) 2 damage to Player B, Player B gains 2 life.
- (Prevent all damage) 2 damage to Player C, Player B gains 2 life.
Since Hallow has prevented all damage, the remaining events have no effect.
Result Player B +8 Life
Player B (Active Player)
If Player B is the active player, they will have the exact same 6 choices for the order of replacement effects as Player C, and the same possible outcomes when Player C was the active player. The only difference is, if they choose to apply the effects of Hostility before Hallow, then they need to add in the additional choices that Player C could make (which might also lead to choices that Player A could make). This is because applying Hostility prevents all remaining damage to the affected player. If instead each player controlled some creatures, they would need to apply the effects of all three replacement effects, because Hostility only prevents damage to players leaving Hallow with the ability to prevent damage to affected creatures that the active player controls.
Conclusion
Even with such a simple example, you can tell how the order of replacement effects can have a great effect on the results of an event. With just one event, and 3 replacement effects, you have a wide diversity of outcomes. You can think of the possible outcomes as a decision tree, with the Active Player making choices and either leading to a lower branch or ending. Player A will receive either (0/2/4/6/8 tokens, and Player B will gain 4/6/8/10/12 life) all dependent upon who the Active Player is, and the decisions they make.
-Player B Active (Player A +8/+10 life or Player A +2/+4 tokens and proceed to C Active Player add results from their decisions)
-Player C Active (Player A +8/+10 life or Player A +2/+4 tokens and proceed to A Active Player add results from their decisions)
-Player A Active (Player B +8/+12 life if A is Active Player)
1) (+6/+12 from A's decisions if C is Active Player)
2) (+4/+8 from A's decisions if B is Active Player)