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The Plausibility Game

Unimaginative commentators and professional services providers like to suggest that we live in times of ‘unprecedented uncertainty,’ a cliché decried in Writing Has Become Coding. The phrase is overused to grab attention and suggest to their audience that their skills will be in high demand.

 

The cheap trick may also play into a self-motivation technique called ‘pre-emptive resilience.By amplifying instead of minimizing challenges ahead, individuals mentally brace themselves for facing world. Even better, they set the stage for self-congratulation once a period of uncertainty is declared overcome. Thus, I fear the world will always feel like experiencing unprecedented times.

 

Looking at 2024 from the first month of the year is admittedly daunting. Questions about macroeconomics (growth vs. inflation), microeconomics (pricing vs input costs), politics (elections), geopolitics (supply chains, energy price), technology (generative AI), health (covid), or investor preferences (long-term risk premium/cost of capital, sustainability) weigh on business certainty. And that, of course, is the unprecedently large tip of the unprecedently huge iceberg.

 

Thus, more than ever, scenario planning has become de rigueur. This management tool was last discussed in What if? (2020). A recent discussion with Normann Partners, a leading consultancy in this field, highlighted the importance of plausibility instead of probability when developing scenarios.

 

Probability has serious drawbacks when it comes to formulating views about the future: while suggesting objectivity through a mathematical formulation, it relies on subjective experience; ascribing a specific percentage of likelihood creates a falsely reassuring sense of certainty; a focus on probability kills the creativity needed to discuss black swans events (e.g., the invasion of a European country or a pandemic) or uncover grey rhinos (e.g., the impact of higher rates on the value of everything); and, finally, ‘base case’ scenarios end up gaining all the attention and driving decision-making.

 

Devising scenarios based on plausibility helps address these issues. Gone are percentages and their pull toward middle-of-the-road scenarios. It is no surprise that plausibility is prescribed by the TCFD.

 

No firm has ever earned abnormal returns by relying on the most probable future outcomes. It is like betting odds at a casino. Engaging with uncertainty through plausible scenario planning is the way to gain competitive advantages and make a difference.

 

Once two to four equally plausible scenarios relevant to a firm are defined with a 2030 horizon, executives need to take the time to question the robustness of their group strategy, identify vulnerabilities and opportunities, and be ready to consider alternative actions, depending upon the circumstances. At that stage, a common pitfall is to challenge the scenarios instead of the strategy.

 

So, to get started, what if the 10-year US Treasury yield gets anchored at 5%? What if oil prices collapse to $40 after the Republicans win the ‘24 elections? What if AI drives massive productivity gains in the short term for early adopters in any industry? What if 2024 leads to global social unrest compelling firms to adopt a political stance?


2024, here we come.

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