Possible, Probable, And Plausible Criticisms

Back in 2014, the Dean of Valuation, Prof. Aswath Damodaran got a note from famed venture investor Bill Gurley regarding a blog post.

Gurley was giving Damodaran a heads up that he’d read his Uber valuation note, disagreed, and would be publicly responding, “pulling no punches.”

Aswath read the counter-post and replied directly to Gurley’s email letting him know how much he loved it. The post definitely had been a take down of his valuation of the company, but it was it was done thoughtfully. He saw it as a “teachable moment” and wrote to see he’d be using it in class.

You can read all about the back and forth here, but I want to highlight the 3 tenets of each’s approach you can apply just about anywhere.

Any time you are connecting numbers to a narrative (or vice versa), make sure you address what is Possible, what is Probable, and what is Plausible alongside your logic.

Kyla Scanlon’s metaphor of “the uncertainty cake” is really useful for this. Scanlon says we should separate what we Expect from Reality with Theories in the middle. Prof. Damodaran’s 3 P’s all apply to Scanlon’s Theories, in the middle of her proverbial cake.

Damodaran both walk through an Uber valuation based on what they think is Possible in the company’s future given prior examples, what is Probable given the current opportunities as they understand them, and is Plausible given the factors at play. These are all interpretations of expectations played forward as theories into reality. They are definitionally incorrect in that they are unreal and expressed only as theories.

You don’t have to be right, you just have to not stay wrong.

Again, faith is more important than dogma. Damodaran and Gurley both know this. Their exchange is a great reminder.

ps. Did you watch our Excess Returns interview with Prof. Damodaran yet?