Scenario analysis

Changing several assumptions together into internally consistent pictures of the future, rather than moving one at a time.

A bull case worth ₹1,400 a share at 25% probability, a base case at ₹1,000 with 50%, and a bear case at ₹600 with 25% gives an expected value of ₹1,000.

The discipline that makes it useful is coherence. In a recession, volumes fall and margins compress and receivables stretch together, so a scenario that moves only volume is not a scenario. In a boom, competitors add capacity, which is why the bull case for a commodity producer should include the supply response.

Write the bear case first. It is the one that decides position size.