CONCEPT
The 3P Framework
Damodaran's classification of forward-looking scenarios into possible, plausible, and probable — and the discipline of weighting each by probability rather than collapsing uncertainty into a single point estimate.
The 3P Framework is Damodaran's tool for evaluating uncertain futures, particularly those involving transformative technologies like AI. The classification: possible scenarios are those that could occur but lack supporting evidence; plausible scenarios are consistent with current evidence and existing patterns but are not the most likely outcome; probable scenarios are the most likely outcomes given current evidence. The discipline requires explicitly distinguishing among the three, weighting them by probability, and producing valuation estimates that incorporate the weighted average rather than a single point estimate. Applied to AI investment, the framework prevents the common error of treating possible outcomes (every company captures dominant share) as probable, and the inverse error of treating plausible outcomes (ecosystem advantages persist through the transition) as merely possible.
In The You On AI Field Guide
The framework is most useful for terminal value calculation, where uncertainty about the long-term competitive environment is unusually high. A single-point terminal value implies a precision that the analysis does not support. The 3P approach