Why Should I Believe Your Assumptions?

It seems just yesterday that we had one of the most tumultuous presidential election in the country, but another one is coming up very soon. American public is going be again seeing a lot of opinion polls. You may have wondered that how can a poll of only 1004 people represent the 240 million plus eligible voters with an often stated margin of error of 3%? It turns out that there are many hidden assumptions with this mathematical abstraction. The actual errors in surveys can be much larger for a number of reasons.

First of all, a "3% margin of error" mathematically means that there is a 95 percent chance that the survey result will be within 3 percent of the population value. Secondly, the 3 percent margin of error is an understatement because opinion changes. A poll is a snapshot, not a forecast. More importantly, the fundamental assumption of this mathematical concept is that the survey respondents have to be sampled at random from the population, meaning that people are selected one at a time, with all eligible voters in the U.S. being equally likely to be picked at each point. It is much more difficult than many realize but pollsters do not share with you what assumptions they used for the sampling process.

Without properly validated assumptions, the poll results would naturally be all over the place. Increasing sample size can theoretically help, but would cost more money. In addition, increasing sample size does not necessarily address the issue that people change their opinions or not share their true opinions at all.

This is not just a political issue.

Scientists make assumptions for all their research work. All research studies have limitations. The difference between a true scientist and a grade-school science-fair project is to recognize and accurately describe these assumptions and limitations.

Likewise, venture capital investors evaluate thousands of business ideas from entrepreneurs. Many business proposals would include very aggressive projections. There are many different methods to asses startup valuations. However, one of the most important aspects of startup valuation is understanding the assumptions being made. Many times, these assumptions are implicit and not explicitly stated. As such, it is important to try to identify all of the hidden assumptions that are being made in order to properly assess their impact. The assumptions could be regarding to addressable market size, growth rate of the market, competitive responses, and inherent business risks.

Next time when you are in a position to evaluate a business proposal or a brilliant innovation idea, ask for the key assumptions and challenge why you should believe their assumptions? That tends to become a much more insightful discussion than just focus on the actual proposal or the conclusions.

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