Pre-Mortem Analysis: A Step-by-Step Guide
Before your next investment tanks, read this. The pre-mortem method exposes failure before it happens. Used by pros like Mauboussin.
TL; DR
A pre-mortem analysis is a forward-looking tool that helps investors anticipate what might go wrong before making a decision.
It improves risk assessment, reduces overconfidence, and aligns your decisions with real-world volatility.
You imagine a failed investment, then work backward to identify what caused the failure—before you invest.
Encourages critical thinking, honest collaboration, and more resilient investment strategies.
Imagine this.
You’re a year into what seemed like a promising investment—and it’s gone completely sideways. The company missed earnings, the market turned, and your thesis didn’t hold. You’re left asking: What did I miss?
Now flip that around.
What if you could see those pitfalls before they happen?
That’s the power of a pre-mortem analysis.
What is a pre-mortem analysis?
A pre-mortem analysis is a proactive tool that helps investors anticipate potential failures before making an investment decision. Unlike a post-mortem, which assesses what went wrong after an outcome, a pre-mortem requires imagining a future where an investment has failed, then working backward to identify possible reasons for that failure. Originally popularized by psychologist Gary Klein and further championed by investor Michael Mauboussin, the pre-mortem analysis can help reduce overconfidence, encourage critical thinking, and improve decision-making quality.
According to Mauboussin in an interview with The Motley Fool:
A pre-mortem was developed by a social psychologist named Gary Klein. He has a very different concept. He says before we actually make the decisions, so we've not put any money to work yet. Let's launch ourselves into the future, and let's just say it's July 2013, a year from now. Let's say that we made the investment and it turned out badly. Now each of us independently should write down on a piece of paper, or maybe even write a little article about what went wrong.
And it turns out when people go through that exercise, they are able to identify up to 30% more factors or variables than they would just standing in the present looking to the future. So somehow this idea of extracting yourself, putting yourself into the future looking back to the present, opens up your mind a little bit versus standing in the present and looking into the future. And it's a funny thing because you can think about all sorts of predictions people have made about the world, about whatever it is, about energy prices, gold prices, economic growth, what have you, and you can see it's very difficult to anticipate what's likely to happen, so pre-mortem can help open up your mind and get you to contemplate or evaluate these variables.
Why you should write a pre-mortem analysis
Years ago, I invested in a nanocap stock that caught my attention for two reasons. First, a friend of mine—an asset manager who specializes in microcaps—brought it to my radar. Second, a well-known investor I deeply respect had acquired a majority stake in the company with the goal of turning things around. That gave me the conviction to dig in, and eventually, to invest.
It was a textbook deep value play: the company was incredibly illiquid, and its book value was actually higher than its market cap.
But the fundamentals were deteriorating. Revenue was declining YoY. The silver lining? That same investor initiated a new line of business within the company that showed real promise.
Still, the stock didn’t move—for three years. No volume. No momentum. No excitement.
Eventually, I sold.
A year later, that investor found a strategic buyer. The stock spiked—exactly the outcome I had hoped for, just not on my timeline. Today, the company still exists and continues to grow steadily.
What I realized later is that a pre-mortem analysis could’ve helped me frame this decision better. I never asked myself, “What if the thesis plays out, but it takes longer than I can stomach?” That single question might’ve helped me reframe my expectations and hold through the boredom.
Pre-mortems don’t predict the future—they make us honest about it.
Steps for conducting a Pre-Mortem Analysis
Here’s a structured approach to conducting a pre-mortem analysis:
Prepare for the Exercise: Set aside time to conduct the pre-mortem in a relaxed, distraction-free environment. Gather relevant information about the investment and ensure that all stakeholders understand the purpose of the exercise.
Imagine the Worst-Case Scenario: Visualize that you’ve made the investment, but it has failed disastrously. Picture what that failure looks like—significant losses, a sudden downturn, or an unforeseen event impacting the asset’s value.
List Potential Reasons for Failure: Spend a few minutes brainstorming all possible factors that could have contributed to this hypothetical failure. Encourage everyone to think broadly, considering risks like:
Competitive pressures
Market or industry disruptions
Poor management or governance
Economic downturns or regulatory changes
Unforeseen events like supply chain disruptions or technological obsolescence
Compile and Discuss Reasons: If working in a team, compile individual lists and discuss each reason openly. Record these reasons on a board or document to create a comprehensive view of potential risks.
Review the Investment Plan Against Identified Risks: Reevaluate your original investment thesis in light of the potential risks identified. Ask yourself whether the investment strategy accounts for these challenges and if any adjustments are needed to mitigate risks.
Periodic Review of Identified Risks: Keep the list of identified risks accessible and periodically revisit it to stay vigilant. This step helps maintain awareness of potential pitfalls, encouraging ongoing monitoring of risk factors as circumstances evolve.
Sample Pre-Mortem Checklist
Here’s a sample checklist to guide a pre-mortem analysis. Using this checklist before finalizing an investment decision can provide a comprehensive view of potential risks and enhance decision quality.
Market Risk: What are the potential changes in the market that could negatively impact this investment? How sensitive is the asset to economic cycles or shifts in consumer demand?
Competitive Dynamics: Who are the primary competitors, and what are their strengths? Could new entrants or existing rivals undercut this investment’s competitive edge?
Management and Governance: Is the company’s leadership reliable and capable? Are there governance concerns that could lead to ethical lapses, strategic missteps, or operational issues?
Technological and Industry Disruption: Could advancements in technology or changes in industry standards render this investment obsolete or less valuable?
Regulatory Environment: Are there any existing or potential regulatory threats? Could government intervention or regulatory changes impair growth or profitability?
Operational and Execution Risks: Is there a risk of execution failure, such as inability to meet production targets, supply chain issues, or quality control problems?
Macroeconomic Factors: How would global economic conditions, like inflation, interest rate changes, or geopolitical events, impact this investment?
Unforeseen Events: Are there any potential “black swan” events (rare, unpredictable occurrences) that could disproportionately impact the investment, such as pandemics, natural disasters, or global supply chain disruptions?
Example of a Pre-Mortem Analysis
Investment: ABC Technologies, a mid-cap software company focused on AI applications
Goal: Long-term growth through AI adoption in healthcare and finance sectors
Hypothetical Failure: Three years after investing, ABC Technologies underperforms significantly, causing a 40% loss.
Reasons for Hypothetical Failure:
Competitive Pressure: Larger tech firms develop similar AI solutions, gaining market share and reducing demand for ABC’s products.
Technological Obsolescence: A new AI technology emerges, rendering ABC’s software less efficient.
Regulatory Issues: Healthcare regulations limit the use of AI for patient diagnostics, narrowing ABC’s target market.
Execution Challenges: ABC faces delays in launching new products, impacting its competitive edge.
Economic Downturn: A global recession reduces companies’ budgets for tech investment, decreasing demand for ABC’s products.
Risk Mitigation Adjustments:
Strengthen Competitive Analysis: Increase monitoring of competitors and establish criteria for revisiting the investment if certain competitors gain significant traction.
Technological Advancements: Build a trigger for review if a competing technology shows signs of adoption.
Scenario Planning: Develop alternative scenarios for recession and regulatory impacts, adjusting expectations accordingly.
Integrating the Pre-Mortem into Your Investment Process
Commit to a Routine: Conduct a pre-mortem analysis for all major investment decisions. Regular use of this exercise can embed a habit of risk awareness and encourage deeper, more reflective decision-making.
Maintain a Decision Journal: Document each pre-mortem, recording the risks identified and the adjustments made to your investment thesis. This journal can serve as a valuable reference for reviewing past decisions and refining your approach.
Encourage a Culture of Critical Thinking: For team settings, make the pre-mortem a collaborative practice, encouraging open discussion and critique. This approach reduces groupthink and broadens the collective understanding of risks.
Run Your Own Pre-Mortem with This Free Checklist
Not sure where to start with your own pre-mortem analysis? I’ve got you covered.
I’ve created a simple, step-by-step checklist to help you apply this powerful method to any investment decision.
It’s free, easy to use, and designed to help you spot what could go wrong—before it does.
Great article!! Definitely rereading this multiple times.