The West Wing: Embracing Probability in Politics and PE Value Creation
Value Creation Plan Newsletter #106
Welcome back, to the new season of the West Wing.
We are a month away from the U.S. presidential election. Regardless of your political preferences, it’s always fascinating to follow the prediction models on who will move into the West Wing next.
One of the leading figures in political forecasting is Nate Silver, the poker player turned election statistician. He gained prominence during the 2008 election cycle—around the same time "Moneyball" was bringing statistical thinking to the world of sports.
Nate Silver’s methodology got me thinking: Are we able to apply the same probabilistic thinking to PE value creation?
The Signal and the Noise
In his first book “The Signal and the Noise”, Nate offers a compelling guide on how to combine historical and real-time data to predict outcomes in fields as diverse as elections, sports, climate change, and financial markets.
His forecasts don’t offer certainty and are not always “right”. Instead, they provide probabilities — an important distinction that echoes through many areas of life. Silver’s approach reminds us that making predictions is never as simple as we’d like it to be. It also explains how thinking in probabilities, rather than absolute outcomes, can often lead to better decision-making, especially in unpredictable environments.
Living with Uncertainty
One of the biggest challenges to adopting probabilistic thinking is our own psychology. Uncertainty triggers stress. We become hyper-alert, as our brains scramble to assess potential threats and decide between "fight or flight." Over time, this uncertainty morphs into anxiety, leading to erratic, often irrational, decision-making.
Humans crave certainty. Whether it's in our personal lives or in the workplace, we feel more comfortable when we can lock in defined outcomes.
For many professions—scientists, market researchers, and doctors, to name a few—working in probabilities is standard practice. However, in the world of business, especially when it comes to leadership, certainty often reigns supreme.
We prefer leaders—whether in business or politics—who exude conviction, even if they might be wrong. Doubt or indecision is viewed as a weakness.
The Comfort Blanket of Managing with Certainty
In the early stages of a PE deal, probabilistic thinking is very much in play.
Valuation models consider multiple scenarios. Lenders assess the probability of default. Due diligence teams aim to verify the likelihood of various financial outcomes by assessing commercial, operational, and talent strengths.
However, once the deal is done and the value creation plan is underway, this probabilistic thinking often gets lost.
As plans are cascaded down to management and staff, everything becomes more precise and concrete. An initiative needs certainty in timelines and impact. A budget needs certainty in costs. Planning becomes mechanical and communications to staff become hard coded rather than expressed in probabilities.
The comfort of hard targets replaces the nuanced thinking of scenario planning.
While it reduces anxiety in the short term, this deterministic approach often leads to headaches when plans don’t unfold as expected, and management is left scrambling to explain why.
Thinking in Probabilities for Better Value Creation
From my experience driving value creation initiatives, embracing probabilistic forecasting can significantly improve outcomes.
Some teams naturally will already think in probabilities: Sales will look at pipeline revenue forecasting as a probabilistic game, Operations will run statistical analysis on workflows and KPIs to identify improvements, HR might be thinking about the odds that a new hire will fit into the company and hedge the outcome by putting forward a probation period, etc.
However, other teams will need more coaching to embrace this mindset. Here are a few examples of how probabilistic thinking can be applied in various functions:
Project Management: Timelines are often pre-set and mandated in an arbitrary way, but critical path identification and tools like PERT can offer more realistic ranges. I’ve often seen CTOs and CDOs set overly optimistic hard dates for complex migrations to “give our PE owners confidence”, only to see that credibility blow up when the project inevitably runs over.
R&D and Innovation: Experimentation is inherently uncertain, yet companies often expect breakthroughs on a tight schedule. In VC environments, the "fail fast" and “spray and pray” mindset allows for probabilistic thinking, but even in private equity it is possible to set expectations that not every initiative will succeed as planned and should be seen as a learning experience.
Pricing and Packaging Strategy: Assuming that customers will accept higher prices or that competitors won’t react is a recipe for disappointment. Running war games or role-playing exercises can test assumptions and provide a clearer understanding of the range of possible outcomes.
Exit Readiness: Preparing for an exit means thinking creatively about who might acquire your company and what their needs are. The range of assumptions on how to get the best "exit multiple" needs to be revisited and discussed rather than taken for granted.
So, the next time you’re making a decision, whether in business or as a political pollster, try to embrace the uncertainty.
Instead of pretending we have all the answers, let’s ask ourselves:
What if this goes well?
And what if it doesn’t?
Are you feeling lucky?
PS: I highly recommend Nate’s “Silver Bulletin” to follow the US Presidential election