What is Scenario Analysis?

Scenario Analysis is a mental model used for better thinking and decision-making.

How do you apply Scenario Analysis?

To apply Scenario Analysis, identify situations where this framework is relevant, then use it as a lens to evaluate your options and decisions. The model is most useful when combined with other complementary mental models.

What category does Scenario Analysis fall under?

Scenario Analysis falls under the Mathematics & Probability category of mental models. Other models in this category can be found on the Mathematics & Probability hub page.

Why is Scenario Analysis important?

Scenario Analysis is important because it provides a structured way to think about problems that would otherwise be approached with intuition alone. Understanding this model helps you avoid common reasoning errors and make better decisions.

Where does Scenario Analysis come from?

Scenario Analysis is discussed in the tradition of Pierre Wack.

Scenario Analysis Mental Model…

Scenario analysis replaces a single forecast with a small set of distinct futures — typically base, upside, and downside — and asks what happens in each. The goal is not to assign precise probabilities but to stretch thinking: what would we do if X happened? What would break? What would we need? The method forces explicit consideration of outcomes that point forecasts ignore. When the base case is "revenue grows 20%," scenario analysis adds "revenue falls 30%" and "revenue grows 50%" and traces the implications for cash, team, and strategy in each world.

Shell popularised scenario planning in the 1970s to cope with oil shocks and geopolitical uncertainty. Pierre Wack and others built narratives — "what if oil stays high?" "what if demand collapses?" — and used them to test strategy and prepare the organisation. The value is not prediction; it is robustness. Decisions that hold up across scenarios are more resilient. Decisions that only work in the base case are fragile. Scenario analysis is a stress test for strategy.

The discipline is to make scenarios plausible and meaningfully different. Two scenarios that are 5% apart add little. Scenarios should differ on drivers that matter: regulation, demand, competition, technology. Name the scenarios (e.g. "soft landing," "recession," "supply shock") and spell out the logic. Then map decisions to scenarios: what do we do in each? What triggers move us from one scenario to another? The output is not a forecast but a prepared mind.

Scenario Analysis

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