> ## Documentation Index
> Fetch the complete documentation index at: https://docs.chicago.global/llms.txt
> Use this file to discover all available pages before exploring further.
# Scenario Design and Falsification
> Building Bear, Base and Bull cases that reflect different operating assumptions, and stating what would prove each case wrong
A valuation range should represent coherent alternative operating states, each with explicit assumptions and observations that would invalidate it. It should not be an arbitrary percentage band around a central estimate.
## The Economic Question
Which operating outcomes are plausible, what evidence separates them, and how much downside can the investor absorb if the base case is wrong?
The future is uncertain and expected returns cannot be observed directly. Precision therefore comes from clear conditional logic, not from narrow ranges.
## First-Principles Derivation
Bear, Base and Bull cases should differ in the small set of drivers that define the business: volume, price, margin, reinvestment, financing and competitive duration. Each case carries its own internally consistent path. The spread in value is the consequence of those paths.
[`Margin of safety`](/glossary/margin-of-safety) `= independently supported value − price paid`
Margin of safety absorbs analytical error, bad luck and adverse change. It is not a fixed percentage attached to every stock. Greater duration, leverage, accounting uncertainty and financing dependence all require a wider cushion.
## Model Mechanics
Cases are linked, not independent. A weaker demand case may reduce pricing, delay margin improvement, increase working capital and prolong financing needs. A stronger case may improve unit economics while also attracting competition and requiring more investment.
Limited liability means the client-facing Bear value cannot fall below zero. Parallax floors a negative Bear display at zero and preserves the raw negative calculation in the underlying record. Base and Bull must remain positive and correctly ordered for an intrinsic range to appear at all.
[APV](/glossary/adjusted-present-value) separates all-equity operating value from financing side effects. It is useful when leverage changes materially, tax shields are unstable, or subsidized financing matters. For a stable capital structure, APV often resembles a [WACC](/glossary/weighted-average-cost-of-capital) DCF because both discount the same operating economics. Similarity is expected. It is not an additional vote of confidence.
## A Worked Case
A recent IPO has a Base value of 45.0, a Bull value of 75.0 and a raw Bear value of −10.0. The displayed Bear is zero, while the underlying calculation retains −10.0.
That result does not automatically make the IPO a Strong Sell. The valuation explains which growth and margin assumptions the current price requires, the factor evidence describes systematic characteristics, and the rating reflects the full evidence with explicit uncertainty.
IPOs often arrive with favorable sentiment, fresh capital and conservative near-term guidance. They also have limited public history and elevated expectations. The methodology has to represent both facts.
## Interpretation Note
Bear, Base and Bull cases describe different operating outcomes for demand, pricing, margins, reinvestment and financing. Discount-rate stresses supplement those cases by examining changes in risk pricing.
## How to Assess the Result
Write one sentence describing the operating world in each case, without mentioning price. Then identify the two reported metrics that would move the company from Base toward Bear or Bull. Each case should connect its valuation to a clear set of operating assumptions.
## When to Reassess
The cases change unrelated assumptions in contradictory directions; the Bear omits the central downside mechanism; the Bull requires no extra reinvestment; or the range stays narrow despite high duration and financing risk.
## How Parallax Applies This
Parallax constructs linked operating scenarios, preserves raw values, floors only the displayed negative Bear, and blocks a range entirely when Base or Bull is nonpositive or the scenarios are not correctly ordered. Warnings remain visible to the reader and never alter the valuation math.
**Research finding.** Describes exposures and statistical relationships, not returns or performance. Not investment advice.
The information and opinions in this report were prepared or are disseminated by **Chicago Global Capital Pte Ltd**, regulated by the **Monetary Authority of Singapore**.
This report is **not intended to, and does not, constitute an offer or solicitation** to buy and sell securities or engage in any investment activity. This report is for **informational purposes only**.
Statements in this report are not made with respect to any particular investor or type of investor. Securities, financial instruments, or strategies mentioned herein may not be suitable for all investors, and this material is not intended for any specific investor and does not take into account an investor's particular investment objectives, financial situations, or needs.
Chicago Global Capital recommends that investors **independently evaluate particular investments and strategies**.
Where systematic factor evidence supports or challenges a valuation thesis.
Reading a valuation range without confusing it with a forecast.