Counterfactual Reasoning

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: ISO8601
    who: "Decision maker(s)"
    context: "Circumstances at decision time"
    alternatives_considered: [string]  # At the time
    
  outcome:
    result: "What actually happened"
    metrics:
      - metric: "Measurable outcome"
        value: number
        expected: number  # What was predicted
    timeline: "How long to outcome"
    
  assessment:
    success_level: high | medium | low | failed
    surprise_level: 0.0-1.0  # How unexpected
    
  causal_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: 3
        expected: 5
      - metric: "ARR"
        value: 150000
        expected: 250000
      - metric: "Sales cycle"
        value: 120  # days
        expected: 90
    timeline: "6 months"
    
  assessment:
    success_level: medium
    surprise_level: 0.4  # Somewhat below expectations
    
  causal_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:

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 time
    
  assumptions:
    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:

1. Identify decision point - Where paths diverge
2. Trace causal chain - What changes downstream?
3. Estimate outcomes - With probability weights
4. Consider multiple scenarios - Best/​worst/​expected

Components:

alternative:
  scenarios:
    - name: "Expected case"
      probability: 0.6
      outcome:
        deals: 6  # vs actual 3
        arr: 180000  # vs actual 150000
        cycle: 75  # days, vs actual 120
      reasoning: "Lower price = faster approval, more deals, but lower $ each"
      
    - name: "Optimistic case"
      probability: 0.25
      outcome:
        deals: 8
        arr: 240000
        cycle: 60
      reasoning: "Volume effect stronger than expected"
      
    - name: "Pessimistic case"
      probability: 0.15
      outcome:
        deals: 4
        arr: 120000
        cycle: 90
      reasoning: "Lower price signals lower value, some prospects hesitate"
      
  weighted_outcome:
    deals: 6.0  # (6×0.6 + 8×0.25 + 4×0.15)
    arr: 178000
    cycle: 74
    
  causal_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 projection
  
  key_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: 3
      alternative: 6.0
      difference: "+3 (100%)"
      direction: better
      
    - metric: "ARR"
      actual: 150000
      alternative: 178000
      difference: "+$28K (19%)"
      direction: better
      
    - metric: "Sales cycle"
      actual: 120
      alternative: 74
      difference: "-46 days (38%)"
      direction: better
      
    - metric: "ARR per deal"
      actual: 50000
      alternative: 29667
      difference: "-$20K (41%)"
      direction: worse
      
  qualitative:
    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: 0.65
    caveat: "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

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

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 uncertainty
    
comparison_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: string
    outcome: {result: string, metrics: [Metric]}
    success_level: string
    
  intervention:
    what: string
    change: {variable: string, from: any, to: any}
    was_available: bool
    
  alternative:
    scenarios: [Scenario]
    weighted_outcome: {metric: value}
    confidence: float
    
  comparison:
    quantitative: [{metric: string, actual: any, alternative: any, direction: string}]
    verdict: string
    confidence: float
    
  insight:
    learning: string
    applies_to: string
    recommendation: string
    
  action:
    retrospective: string  # What does this mean for past decision
    prospective: string    # What does this mean for future decisions
    
  next:
    suggested_mode: ReasoningMode  # Usually causal
    canvas_updates: [string]
    experiments_to_run: [string]
    
  trace:
    interventions_evaluated: int
    confidence_average: float
    duration_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