When assumptions become liabilities

Every strategy rests on assumptions. The problem is that once a strategy is approved, those assumptions can disappear from view.

Imagine the Philippine government announcing that every Filipino who reaches 101 will receive P1 million, with another P1 million for every birthday thereafter.

At first glance, this may seem manageable. But how many Filipinos will reach 101? How long will they live beyond that age? And what happens to fiscal exposure if longevity improves faster than expected?

This is not entirely hypothetical. Proposals have been filed in Congress to provide P1 million to Filipinos reaching 101, with additional benefits for succeeding birthdays.

Current law provides P100,000 to Filipinos who reach 100. Republic Act No. 11982, enacted in 2024, also provides P10,000 cash gifts at ages 80, 85, 90 and 95. In 2024, 1,750 centenarians received the P100,000 benefit.

The bigger leadership question is not simply how accurately we forecast the number of centenarians. It is how we govern the assumptions behind long-term commitments.

The same question applies in business when leaders make long-term bets based on assumptions about customers, growth, costs, technology, markets or competition.

When an assumption stops being an assumption

A forecast can be wrong without management having failed.

We forecast 2,000 beneficiaries; 3,500 actually qualify. That is forecast error.

But suppose the number rises to 3,500. Nobody is assigned to monitor it; the board is not alerted; the budget remains unchanged; and the policy continues without reassessment.

That is governance failure.

The dangerous assumption is, therefore, not necessarily the wrong one. It is the assumption that stops being treated as an assumption.

Once an assumption becomes embedded in a budget, strategy, investment or public policy, people often stop questioning it. The forecast becomes the plan. The plan becomes the commitment. That is when an assumption can become a liability.

From Pila to assumption governance

To help leaders examine the reasoning behind a strategy before capital or policy is committed, we developed the Pila (problem, insight, logic and assumptions) Reasoning Stack.

Pila asks:

• Problem: What problem are we trying to solve?
• Insight: What have we learned about the situation?
• Logic: Why should the proposed intervention work?
• Assumptions: What must be true for that logic to remain valid?

For a policy supporting people in extreme old age, assumptions might include:

• The qualifying population remains relatively small and predictable.
• Survival beyond the qualifying age remains within the fiscal model’s range.
• Government revenues and social-sector allocations can absorb the resulting obligation.

Pila identifies the assumptions. The 7As govern them. The 4Ts give the board visibility and control.

7As of assumption governance

Before committing capital or approving a long-term policy, leaders should ask seven questions:

• Accountability: Who has single-point accountability for this assumption?
• Ascertain: What evidence supports it?
• Adversarial challenge: Who is incentivized to try to break it?
• Analysis: What happens to cash flow, returns or outcomes if it is wrong by 20 percent or 50 percent?
• Audit: How often should it be revalidated against actual experience?
• Alert: What threshold requires a strategic reassessment?
• Action: What happens when the assumption proves wrong, before the liability compounds?

The sequence is: identify → rank → own → challenge → stress-test → monitor → trigger → act.

The objective is not to eliminate assumptions. It is to make consequential assumptions visible, testable and actionable before they become expensive.

Stress-testing longevity

Consider a purely illustrative policy based on 2,000 beneficiaries annually receiving P1 million each. The baseline annual cost would be P2 billion.

Now suppose the beneficiary population rises to 3,500. The annual payout becomes P3.5 billion, a 75-percent increase.

Then consider longevity. If that cohort receives P1 million for an average of 2.5 additional birthdays, cumulative payouts associated with the cohort would be P8.75 billion

This does not mean P8.75 billion automatically becomes the government’s annual budget requirement. It illustrates how cumulative exposure can diverge sharply from an initial annual estimate. That is why stress-testing matters.

Lessons beyond public policy

The same dynamic appears in business.

In the Philippine preneed sector, long-term promises depended on assumptions about investment returns, obligations and future claims.

As economic and industry conditions deteriorated, trust fund deficits accumulated. By June 2001, the International Monetary Fund reported an aggregate trust fund deficit of about P1.7 billion among 46 reporting preneed companies, with 33 of 82 trust funds in deficit.

The lesson is not simply that forecasts can be wrong. Long-term promises become dangerous when the assumptions are not continuously tested against reality.

A more recent example is the controversy surrounding the transfer of P89.9 billion in PhilHealth reserves to the national government. The episode exposed competing assumptions about what constituted “idle” reserves, the adequacy of health insurance funds and the government’s authority to reallocate them.

The Supreme Court subsequently struck down the legal basis for the transfer and ordered the return of P60 billion already transferred while permanently prohibiting the transfer of the remaining P29.9 billion.

The broader lesson is that assumptions about liquidity, reserves and future obligations cannot remain implicit when large, long-term commitments are involved.

The 4T board test

Management needs a process for governing assumptions. Boards need a simple way to determine whether that process is working. The 4T’s of assumption governance are:

• Transparent: Critical assumptions are visible to decision-makers.
• Tracked: They are monitored against actual experience.
• Tested: They are challenged and stress-tested.
• Triggered: Thresholds are linked to mandatory reassessment or action.

For a board chair, this can reduce a complex strategy discussion to four questions:

• What must be true for this strategy to work?
• Which assumptions could materially change our decision?
• Who is watching them?
• What is the trigger, and what will we do?

That is governance in practical form.

Board chairs: Require an assumption. Register for major investments, acquisitions, technology and strategic plans. Focus discussion on the few assumptions that could materially change the decision.

What leaders should do

CEOs and business owners: Identify the one to three assumptions on which the strategy most heavily depends. Find the fastest and cheapest way to test them.

Chief technology officers and innovators: Treat technology investments as hypotheses. Define leading indicators that reveal early whether adoption, cost, productivity, security or implementation assumptions are holding.

Policymakers: Require major long-term commitments to disclose and stress-test the assumptions underlying their projected fiscal exposure.

Business students: Understand that strategy is not simply about choosing the right answer. It is about knowing what must be true for the answer to remain right, and who is responsible for noticing when it no longer is.

Every long-term strategy is ultimately a bet on the future. Good governance is not predicting the future perfectly. It is knowing which assumptions the future is allowed to invalidate, who will notice and what will happen next.

The greatest risk is not being wrong.

It is being wrong without knowing it.

Josiah Go is a bestselling author, award-winning business educator and independent director of a universal bank. Chiqui Escareal-Go is a marketing anthropologist, CEO of Mansmith and Fielders Inc. and past chair of the Women’s Business Council Philippines. They are the co-creators of the Pila Reasoning Stack, Strategy Logic Chain and Trust Flywheel framework.