Evaluate alternative scenarios by simulating interventions on past decisions or hypothetical futures. Use when assessing decisions in hindsight, planning scenarios, or comparing paths not taken. Produces comparative analysis with probability-weighted outcomes.
Evaluate alternative scenarios by simulating interventions on past decisions or hypothetical futures. Use when assessing decisions in hindsight, planning scenarios, or comparing paths not taken. Produces comparative analysis with probability-weighted outcomes.
Counterfactual Reasoning
Simulate alternative realities. The logic of "what if" and decision evaluation.
Type Signature
Counterfactual : Actual → Intervention → Alternative → Comparison
Where:
Actual : Decision × Outcome → ActualWorld
Intervention : ActualWorld × Δ → ModifiedPremise
Alternative : ModifiedPremise → ProjectedOutcome
Comparison : (ActualWorld, ProjectedOutcome) → DifferenceAnalysis
When to Use
Use counterfactual when:
Evaluating past decisions ("Should we have...")
Scenario planning ("What if X happens...")
Comparing options not taken ("If we had chosen...")
Strategic simulation ("If competitor does X...")
Learning from outcomes ("Was our decision right?")
Don't use when:
Executing known process → Use Causal
Explaining observation → Use Abductive
Resolving disagreement → Use Dialectical
Core Principles
Minimal Intervention
Change only what's necessary to test the hypothesis:
Modify one variable at a time where possible
Keep everything else constant (ceteris paribus)
Trace downstream effects carefully
Probability Weighting
Alternative outcomes aren't certain:
Assign probability to each projected outcome
Consider multiple possible alternatives per intervention
Avoid overconfidence in projections
Asymmetry Awareness
Counterfactual analysis has inherent biases:
Hindsight makes alternatives seem clearer
Survivors don't see paths that led to failure
Confidence in projections often too high
Four-Stage Process
Stage 1: Actual World
Purpose: Document the decision made and observed outcome.
Components:
actual:decision:what:"The choice that was made"when:ISO8601who:"Decision maker(s)"context:"Circumstances at decision time"alternatives_considered: [string] # At the timeoutcome:result:"What actually happened"metrics:-metric:"Measurable outcome"value:numberexpected:number# What was predictedtimeline:"How long to outcome"assessment:success_level:high|medium|low|failedsurprise_level:0.0-1.0# How unexpectedcausal_chain:-step:"Decision led to X"-step:"X led to Y"-step:"Y produced outcome"
Example:
actual:decision:what:"Priced enterprise tier at $50K/year"when:"2024-06-01"who:"Founders"context:"First enterprise launch, no market data"alternatives_considered:-"$30K/year (lower barrier)"-"$75K/year (higher margin)"-"Usage-based pricing"outcome:result:"Closed 3 deals in 6 months, $150K ARR"metrics:-metric:"Deals closed"value:3expected:5-metric:"ARR"value:150000expected:250000-metric:"Sales cycle"value:120# daysexpected:90timeline:"6 months"assessment:success_level:mediumsurprise_level:0.4# Somewhat below expectationscausal_chain:-step:"$50K price point set"-step:"3/5 prospects required CFO approval at this level"-step:"CFO approval added 30 days to cycle"-step:"2 deals lost to budget cycle timing"
Stage 2: Intervention
Purpose: Define the alternative decision to evaluate.
Intervention Types:
Type
Description
Example
Price
Different pricing decision
"$30K instead of $50K"
Timing
Earlier or later action
"Launched 3 months earlier"
Strategy
Different strategic choice
"SMB-first instead of enterprise"
Resource
Different allocation
"Hired sales earlier"
Partner
Different relationship
"Partnered with X instead of Y"
Components:
intervention:what:"The alternative choice"change:variable:"What's being changed"from:"Actual value"to:"Alternative value"rationale:why_consider:"Why this alternative is worth evaluating"was_available:bool# Was this actually an option at the time?assumptions:held_constant:-"What we assume stays the same"ripple_effects:-"Expected downstream changes"
Example:
intervention:what:"Price at $30K/year instead of $50K"change:variable:"Enterprise tier annual price"from:"$50,000"to:"$30,000"rationale:why_consider:"Test if lower price would have increased velocity"was_available:true# This was considered at the timeassumptions:held_constant:-"Same product features"-"Same sales team"-"Same market conditions"-"Same target customer profile"ripple_effects:-"Different approval threshold (manager vs CFO)"-"Potentially different customer expectations"-"Lower margin per deal"
Stage 3: Alternative Projection
Purpose: Project what would have happened under the intervention.
Projection Method:
Identify decision point - Where paths diverge
Trace causal chain - What changes downstream?
Estimate outcomes - With probability weights
Consider multiple scenarios - Best/worst/expected
Components:
alternative:scenarios:-name:"Expected case"probability:0.6outcome:deals:6# vs actual 3arr:180000# vs actual 150000cycle:75# days, vs actual 120reasoning:"Lower price = faster approval, more deals, but lower $ each"-name:"Optimistic case"probability:0.25outcome:deals:8arr:240000cycle:60reasoning:"Volume effect stronger than expected"-name:"Pessimistic case"probability:0.15outcome:deals:4arr:120000cycle:90reasoning:"Lower price signals lower value, some prospects hesitate"weighted_outcome:deals:6.0# (6×0.6 + 8×0.25 + 4×0.15)arr:178000cycle:74causal_reasoning:-"At $30K, most prospects can approve at director level"-"Director approval takes ~45 days vs CFO 90+ days"-"Faster cycle = more deals in same period"-"But: lower price per deal = lower total ARR per deal"confidence:0.65# How confident in this projectionkey_uncertainties:-"Would lower price attract different (worse?) customers?"-"Would sales team close at same rate at lower price?"-"Would competitors have responded differently?"
Stage 4: Comparison
Purpose: Compare actual vs alternative, extract insights.
Components:
comparison:quantitative:-metric:"Deals"actual:3alternative:6.0difference:"+3 (100%)"direction:better-metric:"ARR"actual:150000alternative:178000difference:"+$28K (19%)"direction:better-metric:"Sales cycle"actual:120alternative:74difference:"-46 days (38%)"direction:better-metric:"ARR per deal"actual:50000alternative:29667difference:"-$20K (41%)"direction:worsequalitative:better_in_alternative:-"Faster sales velocity"-"Lower customer acquisition cost"-"More reference customers faster"worse_in_alternative:-"Lower margin per customer"-"Potentially lower perceived value"-"Less room for discounting"verdict:assessment:"Alternative likely better overall"confidence:0.65caveat:"Lower price creates different customer dynamics long-term"insight:learning:"At this stage, velocity matters more than margin"applies_to:"Early enterprise sales with unproven product"recommendation:"Consider price reduction or tier restructuring"action_implication:retrospective:"Pricing decision was suboptimal but not catastrophic"prospective:"For next segment, start lower and raise after validation"
Quality Gates
Gate
Requirement
Failure Action
Actual documented
Outcome with metrics
Gather actual data
Intervention minimal
Single variable change
Simplify intervention
Scenarios weighted
Probabilities sum to 1.0
Adjust probabilities
Confidence bounded
State uncertainty explicitly
Add confidence intervals
Insight actionable
Clear learning for future
Extract practical lesson
Intervention Validity
Not all counterfactuals are useful:
Valid interventions:
Was actually an option at the time
Changes something controllable
Has traceable downstream effects
Provides actionable insight
Invalid interventions:
"What if we had known X" (not available info)
"What if competitor hadn't existed" (not controllable)
"What if market was bigger" (not a decision)
Common Failure Modes
Failure
Symptom
Fix
Hindsight bias
Alternative seems obviously better
Account for what was knowable at decision time
Single scenario
Only one alternative considered
Generate multiple scenarios with probabilities
Overconfidence
High certainty in projections
Widen confidence intervals
Untraceable
Can't explain why alternative differs
Build explicit causal chain
Fantasy
Intervention wasn't actually available
Verify intervention was feasible
Multiple Interventions
For complex decisions, evaluate multiple alternatives:
interventions:-name:"Lower price ($30K)"outcome: {arr:178000, deals:6}
-name:"Higher price ($75K)"outcome: {arr:150000, deals:2}
-name:"Usage-based pricing"outcome: {arr:200000, deals:4}
confidence:0.5# Higher uncertaintycomparison_matrix:best_arr:"Usage-based"best_velocity:"Lower price"best_margin:"Higher price"best_overall:"Lower price (velocity matters most at this stage)"
Output Contract
counterfactual_output:actual:decision:stringoutcome: {result:string, metrics: [Metric]}
success_level:stringintervention:what:stringchange: {variable:string, from:any, to:any}
was_available:boolalternative:scenarios: [Scenario]
weighted_outcome: {metric:value}
confidence:floatcomparison:quantitative: [{metric:string, actual:any, alternative:any, direction:string}]
verdict:stringconfidence:floatinsight:learning:stringapplies_to:stringrecommendation:stringaction:retrospective:string# What does this mean for past decisionprospective:string# What does this mean for future decisionsnext:suggested_mode:ReasoningMode# Usually causalcanvas_updates: [string]
experiments_to_run: [string]
trace:interventions_evaluated:intconfidence_average:floatduration_ms:int
Example Execution
Context: "Should we have taken the Series A when offered 18 months ago?"
Stage 1 - Actual:
Decision: Declined $5M Series A at $20M valuation
Outcome: Bootstrapped to $600K ARR, now raising at $30M valuation
Success level: Medium-high (slower growth, higher ownership)
Stage 2 - Intervention:
What: Accepted $5M Series A
Change: Funding status from bootstrapped to funded
Was available: Yes, term sheet was on the table
Stage 3 - Alternative:
Scenarios:
- Expected (60%): $1.5M ARR now, but 25% dilution
- Optimistic (25%): $2M ARR, enterprise sales team
- Pessimistic (15%): $800K ARR, burned capital on wrong bets
Weighted: $1.4M ARR, 75% ownership vs current $600K ARR, 100% ownership
Stage 4 - Comparison:
ARR: Alternative 133% higher
Ownership value: Alternative $31.5M (75% × $42M) vs Actual $30M (100% × $30M)
Net: Roughly equivalent in value, different risk profiles
Verdict: Decision was reasonable given risk tolerance
Insight: Bootstrapping is viable if willing to accept slower growth
Recommendation: Current path validated, continue unless growth accelerates
