What are mental models? A mental model is an explanation of how something works. The term “mental model” is an overarching term for any kind of concept, framework, or worldview that you carry around in your head.
Mental models help you understand life. For example, supply and demand is a mental model that helps you understand how the economy works. Game theory is a mental model that helps you understand how relationships and trust work. Entropy is a mental model that helps you understand how disorder and decay work.
Mental models also guide your perception and behavior. They are the thinking tools you use to understand life, make decisions, and solve problems. Learning a new mental model gives you a new way of seeing the world – like Richard Feynman, who learned a new mathematical technique.
Mental models are imperfect, but useful. For example, there is no single mental model from physics or engineering that explains the entire universe flawlessly, but the best mental models from these disciplines have allowed us to build bridges and roads, develop new technologies, and even travel into space. As historian Yuval Noah Harari puts it, “Scientists generally agree that no theory is 100 percent correct. The true test of knowledge, then, is not truth, but utility.“
The best mental models are the ideas with the greatest utility. They are of great use in daily life. When you understand these concepts, you can make smarter decisions and act better. That’s why developing a broad base of mental models is critical for anyone who wants to think clearly, rationally, and effectively.
Mental Models in Economics and Strategy
What you are willing to sacrifice in order to do something else. The goal is to minimize the cost. Opportunity costs are real.
The time value of money is a central concept in economics. It means that today’s money is worth more than tomorrow’s money. This relationship is purely based on the opportunity costs.
Creative destruction, also known as Schumpeter’s gale after Austrian economist Joseph Schumpeter is a theory that explains economic innovation in a free market economy. This refers to the constant innovation of products and processes that replaces outdated production units or those without innovation.
The absence of innovation in a capitalistic environment does not lead to stagnation. It leads to decay.
Primary Source: Joseph Schumpeter
Luca Pacioli published the first book about double-entry accounting in Genoa, 1494. Since then, the method of balancing books using two accounts per entry has not changed.
Accounting’s dualistic view of the world can be a powerful tool for understanding economic and social events.
Primary Source: Luca Pacioli
David Ricardo, a Scottish economist, found that, as a model for international trade theory, all parties can benefit from voluntary trade and cooperation if they focus on their comparative strengths in terms of the opportunity cost.
Comparative advantage is held by the party that has the lowest opportunity cost to produce a good or a service and, therefore, the smallest possible loss of benefit.
Primary Source: David Ricardo
A method of generating income (economic rent) by exploiting others, rather than creating value. An example would be to use resources for political lobbying in order to promote legislation that is in one’s best interests.
Primary Source: David Ricardo
The costs of switching sellers or the disadvantages that a buyer faces.
After evaluating the rational choices and strategies of their opponents, two or more players in a noncooperative game will not be tempted to change their equilibrium strategies.
The model, named after John Nash the mathematician, proves that sometimes decisions that are good or individuals can be bad for groups.
Primary source: John Nash
The AD-AS model, based on John Maynard Keynes’ general theory of economics, explains prices and national income by examining the relationship between aggregate demand and supply. It’s a powerful tool when it comes to macroeconomic effects on the short, medium and long-term.
The model can accommodate Keynes’s Law, which is based on aggregate demand in the short term, as well as Say’s Law, which is based on aggregate supply over the long run.
The centre provides more flexibility and mobility in comparison to the competitor. If you let your opponent take control of the centre squares in chess, they will enjoy a much easier game. To control the central square, a piece doesn’t have to be physically on that square. The bishop, for example, can control the central square from afar.
Controlling the middle of a value-chain can be incredibly profitable in business. Brokerage firms and internet marketplaces like Alibaba are examples of business models.
Specialization, also known as division of labor or specialization of skill sets, is the process whereby participants in a market-based system are divided into different skill sets to improve efficiency. The whole system gains from increasing productivity in each area of specialization.
Primary Source: Adam Smith
Intellectual property rights have been an important catalyst for societal creativity. These rights cover intangible works of human intellect. Some countries recognize more types than others. Copyrights are the most common, followed by trademarks and trade secrets. These rights can be used by individuals and companies to create economic moats that are defended against their competitors. This model is extremely powerful as long as capital expenditures and ongoing research and developments can be managed.
It seems that very few economic moats, if any at all, are based on intellectual property. They are either expiring or become obsolete because of societal progress and destruction. They can be very durable.
Concept used to measure how consumer satisfaction affects decisions. The law of diminishing margin utility describes the fact that initial units of goods or services are more valuable than additional ones.
This concept dates back to the 19th century, when economists were trying to explain price discovery. The original idea was that this mechanism was solely driven by the utility of a product. Adam Smith proposed the “paradox of water and diamonds”, which made it difficult to explain why water was valued higher than diamonds.
It wasn’t until the discovery that economic decisions were made on the basis of marginal benefit, rather than total benefits, that this was understood. The consumer is not choosing between the value of all the water and diamonds in the entire world. Water is clearly more valuable. They are forced to choose between an additional diamond and one more unit of water.
Primary source: John Stuart Mill
Economic measure of the responsiveness of an economic variable (such as demand) to a change in a second economic variable, like price. A variable with an absolute elasticity greater than 1 responds to changes in dependent variables more than proportionally. Inelastic variables have an absolute elasticity less than 1 and respond less than proportionally when the dependent variable changes.
The supply and demand model is the most important price-determination model in economics. It explains many things around the world. Demand equals supply, and prices will settle at equilibrium.
It’s easy for people to accept the supply and demand model as it is. However, there are some blind spots. When viewed in context with behavioural psychology, contrasts, incentives, etc., the model may not be as rigid as economists assume. Charlie Munger says: “Suppose you increase the price of the product and then use the extra cash to bribe your competitor’s buying agent.”
Loss of economic efficiency caused by an imbalance between supply and demand. These causes can include rent and price controls, minimum wage, taxation, and monopolies.
Situation in which either party changes their behaviour after a contract has been signed, so that the probabilities associated with either party’s actions no longer apply. Moral hazard occurs when a party no longer feels the full impact of their own actions. It may be more inclined to act with less caution than usual.
If you push matter through a system faster than it can handle, the system will become clogged. Each system has its own limitations, some of which are critical while others are not. A system change will not result in an overall improvement unless it addresses the bottleneck. The narrow tip of a bottle is the inspiration for this term.
Bribery can be a bottleneck that is difficult to remove in human systems. In some cases, the concept can have a significant impact on other models, such as incentive-induced bias and price discovery.
Arbitrage is the attempt to make money by capitalizing on price differences between identical or similar financial products. Arbitrage opportunities decrease and disappear as more arbitrageurs join the market. Arbitrage is traditionally defined as a risk-free activity that does not involve any transaction costs. In practice, this is not always the case.
Limiting the availability of something leads to a trade-off. There are few things that have an unlimited supply except for the need. In order to get more of a scarce resource, one must make a sacrifice.
Benjamin Graham suggested imagining that the stock market was a manic, not very intelligent character who would come by each day to announce prices. Mr. Market doesn’t care if you show interest, but he will come every day. His mood can change drastically. He will have times when his price will be high because he will be optimistic about the future. There will be times he will be pessimistic, and his prices will therefore be low. It’s best to ignore most of his screaming. When Mr. Market is extremely excited, or depressed, you can take advantage of his out of boundary prices.
Mr. Market’s model is simple, but it has a problem. It sounds easy to implement. The truth is, there are real people on both sides of every transaction. This group may be more educated, possess more capital, more power and more experience. After a time, you might start to feel like Mr. Market is superior.
Even then, Mr. Market’s model is still paramount.
Primary source: Benjamin Graham
Named after Irving Fisher, an economist who formulated the idea of money neutrality. According to the Fisher effect, the real interest rate in an economy remains stable over time. Therefore, changes in nominal rates are a result of expected inflation. The nominal interest rate is equal to the sum of both the real interest rate and the inflation rate expected over a given time period.
Primary Source: Irving Fisher
Charlie Munger explains: I’ve had many friends in the sick-business-fix-up-game over a long lifetime. The cancer surgery formula is what they all do. They take a look at the mess and see if anything can survive on its own after they remove everything else. If they find something sound, they cut everything else away. If that doesn’t help, they will liquidate the company. But it often works.
Charlie Munger, primary source
If you can’t catch a wave, you won’t be in a position to surf. If you catch the wave, you will be able to stay on it. It’s important to catch the longest-lasting wave as soon as possible, and not get off. Microsoft was created by a 16-year-old who caught a wave in the software revolution.
Charlie Munger, primary source
Porter’s Five Forces, developed by Michael Porter in 1978, is a framework for analysing competitive forces within an industry. The five forces that cannot be denied are:
1) Threat of new entrants
2) Threat of substituting
3) Customers’ bargaining power is important.
4) The bargaining power suppliers.
5) Competitive rivalry.
Historical inverse relationship between unemployment rates and the corresponding rises in wages within an economy.
Primary Source: Williams Phillips
When two or more things are the same. In economics this could include equal wages, purchasing power or exchange rate. In order to simplify the definition of parity conditions, many assumptions are made.
For example, zero transaction costs, perfect knowledge that is accessible to all participants on the market, risk neutrality and freely adjustable prices.
Conditions for parity in international exchange rates:
- Parity of interest rates for covered bond
- Uncovered interest rate parity.
- Forward rate parity
- Parity of purchasing power
- International Fisher Effect
- Arbitrage enforces only the covered interest rate parity.
The costs of transactions can be divided into 3 broad categories.
The costs of searching for information and determining if the product is available on the market or where to find the best price are all part of the search and information costs.
Bargaining and decision costs are the costs incurred to reach a satisfactory agreement with the counterparty, draft a contract that is appropriate, etc. In the asset markets, and the market microstructure in general, the transaction costs are a function of the distances between the ask and bid.
Costs incurred for policing or enforcement are incurred in order to verify that the counterparty adheres to the agreement, or to take appropriate action (often by using the legal system) when it is proven that they don’t.
Micromanagement is the result of leaders who are emotionally attached to their companies and can’t delegate effectively, leading them to micromanage.
Even though a higher price may indicate a higher quality, it is less likely that the more expensive product will be used frequently than cheaper alternatives. Inverted U is the relationship between price, utility and quality.
Open cry auctions or bidding wars tend to have a winning bid that is higher than the intrinsic value. In a bidding battle, the winning side is usually the best.
In times of crisis, the government spends more but tends to not return to its pre-crisis level when the crisis has ended.
Primary source Alan Peacock and Jack Wiseman
A market that is openly competitive is a system that is always evolving, improving, and perfecting itself. If there are multiple markets, eventually the biggest one will become the only market. This is because if an individual, society or enterprise is excluded from the single market it will slowly fall behind, and ultimately will be forced to join.
The best way to increase your own strength as a nation is to eliminate all trade barriers and join the largest free market system on the planet. Close off to other countries is the best way to fall further behind.
Primary Source: Li Lu
According to Say’s Law, the supply of goods creates demand. This is because the income from past production and sales of goods creates spending which creates the need to buy current production. To be able to purchase, a purchaser must have first produced something for sale. The production is the source of demand. Kevin Costner said in the movie Field of Dreams that if you build it, they will come.
Eliminating consumer choice can reduce anxiety in users. This paradox has some limitations. Then, should there be no choice? What would the business be like if this were to happen? Would all industries that operate in an oligopoly then switch to a monopoly, leading to higher prices if this were the case?
Primary Source: Barry Schwartz
Hick’s Law, which is related to the paradoxical choice, states that the decision time will increase logarithmically as the number of options increases. The more options users are presented with, the longer they will take to make a decision. However, the marginal decision time for each extra choice decreases.
Primary Source: William Edmund Hick
The failure of a market occurs when those who gain from goods or resources do not pay the price, resulting in a shortage of goods or services. All sailors will benefit if someone builds a new lighthouse.
People tend to underestimate their values when asked to rate a public good in terms of the amount they are willing to pay.
There may be more negative events to come after bad news has been revealed. It’s not just one cockroach that lives in the kitchen.
In game theory, a subject that indicates a strategy which is unbreakable once implemented. The evolutionary stable strategy creates an “evolutionarily stable” Nash equilibrium: once it has been fixed in a group, natural selection is enough to stop other strategies from successfully gaining control.
For such a situation, two conditions must be met:
The entity employing a strategy must be superior to any other entity using the same strategy, or any other strategy.
If a new, equally good strategy is developed, the entity that used the original strategy will do better than an entity using both strategies.
Primary source: John Maynard Smith
Unknown unknowns are known risks, like cancelled flights and worker injuries. Unknown unknowns can be risks that come from situations so bizarre that you cannot imagine them in advance.
The term critical mass comes from physics and refers to the minimum amount that is required for something to continue on its own. Critical mass is the minimum number of users required to sustain a social network. It is the minimum number of fissile materials required for a nuclear chain reaction to continue.
Pricing strategy where a product or service is given away for free in order to encourage adoption, but a fee is charged for features or functionality that are proprietary. This business strategy has been in use since the 1980s by the software industry.
This model is used to solicit ideas or funds from a large number of participants, rather than employees or suppliers. This is a way to “outsource work to the crowd”.
Splitting the interest amongst multiple uncorrelated topics that move with certain volatility produces a collective volatility lower than any of these subjects. Diversification is a strategy that is used to reduce volatility by allocating capital across a variety of investments.
It is easy to determine the value of a financial institution based on its ability to use the 3-6-3 rule. This goes as follows: A bank pays 3% for savings accounts and lends money at 6% to companies with strong financials. Then, the banker leaves his office at 3 pm to go golfing.
The 3-6-3 rule is undermined by the presence of derivatives in excess on a bank’s books.
The initial significant occupant gains an advantage. The first-mover’s advantage can be achieved by technological leadership, or through early acquisition of resources. In certain growth markets, however, the last mover may be more competitive if they are able to introduce a last great innovation in the market and gain years of monopoly profit.
In relation to inversion, Grandmaster Chess Player Jose Raul Capablanca stated: “You must first study the endgame.”
This theory is used by many social sciences disciplines, mainly political science and economics.
The theory is based on relationships in which one party (the Principal) delegated the performance of an assigned task to another (the Agent). The principal wants his agent to do the job satisfactorily. However, he has a problem in that he must establish a payment system – or reward – which will give the agent enough incentive to complete the task according to the principal’s wishes.
Market failures are often caused by problems with principal-agents.
In the event of an informational imbalance between buyers and vendors, quality can be affected. A car is discovered to be defective by the buyer.
Primary Source: George Akerlof
The sudden fall in asset value that marks the end of an economic or credit cycle.
Primary source Hyman Minsky
Peter Thiel’s thought experiment stating that globalization and technology are two different types of progress. Globalization is horizontal and moves from 0 – n, while technology is vertical.
Primary Source: Peter Thiel
You can play any game as either a winner’s or loser’s game.
The winner’s games are those in which the result of the game depends entirely on the ability of the player, such as sprinting or chess.
Loser’s Games occur when players are unable to compete with, the game itself. Loser’s Games are those where you get ahead more by making smart decisions than avoiding mistakes.
It’s crucial to know which type you are facing and adapt your winning strategy accordingly.
Primary Source: Simon Ramo
Model used to assess how an agent’s actions are affected by a change in their environment. The model is commonly used in organizational behaviour and political science. It proposes that an agent can respond to a negative external effect by either leaving or voicing.
Primary Source: Albert Hirschman
It would be naive for one to attempt to predict economic policy changes based solely on relationships found in historical data. This is especially true when the data are highly aggregated.
Primary Source: Robert Lucas
Mental Models in Human Nature and Judgment
Trust plays a major role in human behaviour and affects everything we do. Trust increases speed and efficiency, improves ethical decision-making, and reduces costs.
It is a tendency to measure the frequency of world events by how easily you can recall examples. We are more likely to remember what is important, recent, salient and frequent. We make decisions based upon what we can most readily recall, but it is not accurate to judge the frequency and magnitude.
Primary source: Daniel Kahneman and Amos Tversky
It is a tendency to make subsequent decisions based on a piece of initial information. Anchoring cognitive bias is closely linked to the availability heuristic, since the mind anchors on what is familiar.
Primary source: Daniel Kahneman and Amos Tversky
It is a social norm to respond positively to an action that was positive, even when the original action was not desired. It is interesting to note that positive actions are often bigger than the original action.
Primary Source: Robert Cialdini
In an interconnected, globalized world, it is difficult to avoid envy. Human nature has been influenced by envy since ancient times. Even though the Stoics warned of the dangers of envy, it is still deeply ingrained into human nature. Warren Buffett said: Envy is what drives the world.
Denial has a powerful effect on the mind. Denial distorts reality until it is bearable. Refusing to accept truth or reality is a primitive survival or defence mechanism.
Situations that cause a biological reaction when faced with a significant challenge or perceiving a threat. Stress activates the fight-or flight response, which dates back to hunter-gatherer times.
Yerkes Dodson Law states that performance is increased by anxiety and excitement but only up to a certain point.
Researchers arranged for an individual to cross the road against the red light and into the traffic in a study. In half of the cases, he wore a suit and tie. He wore trousers and a shirt for the other half. In the study, it was found that when the man wore a suit, three times more pedestrians were swept into traffic against the light and against the law.
Robert Cialdini coined the term social proof to describe a powerful phenomenon in which people assume others’ actions and try to mimic them.
Primary Source: Robert Cialdini
If the options presented have a positive or negative connotation, it can influence your decision and determine what you do. Framing, when combined with the narrative fallacy can lead to errors in decision-making and be used by others as a way of controlling their behaviour.
Primary source Daniel Kahneman and Amos Tversky
A tendency to divide the money into separate pots, and then treat each one separately according to subjective criteria. Richard Thaler says that people tend to think in terms of relative value rather than absolute value. They are not only interested in the value of an item, but also its utility – the transactional quality. This phenomenon explains why people will spend more money when paying with credit cards than cash.
Primary Source: Richard Thaler
Ivan Pavlov’s learning method of pairing a stimulus and a conditioned reaction. Pavlov’s experiment with his dogs demonstrated how a bowl of food and a ringing bell (stimulus), would trigger an unconditioned reaction (salivation). Pavlov noticed that his dogs began to associate food with his lab assistant, creating an unconditioned response (salivation).
Primary Source: Ivan Pavlov
The use of rewards and punishment to teach. These methods can be used in a variety of natural settings, as well as more structured settings like the classroom or therapy sessions.
Primary source B. F. Skinner
Consistency bias is a tendency to follow through on previous actions. The commitment and consistency bias are a result of the fact that human actions, beliefs and commitments are important in forming self-perception. This makes it difficult to change an action course once chosen, even if someone else has forced you to do so.
Primary Source: Robert Cialdini
The sunk costs fallacy, which is closely related to the anchoring bias and the commitment biases, is the tendency to persist in an undertaking despite the resources and efforts invested even if it seems like a good idea to stop. Researchers have found that humans, rats, and mice are all sensitive to the sunk cost fallacy after deciding to pursue a particular reward.
Robert Cialdini says: “It’s not surprising that people are more likely to accept a request if they like and know the person making it.” Discovering genuine parallels or similarities between you and someone you wish to influence is a simple way to get things moving in your favour. This increases the rapport.
Primary Source: Robert Cialdini
A tendency to generalize too much about a group or population. This concept is closely linked to the availability heuristic.
A group’s desire to achieve harmony, compromise, and conformity can lead to irrational decisions, even if the goal of the group was the opposite.
Primary Source: William H. Whyte Jr.
It is a tendency in human behaviour to give greater weight to someone’s opinion who has authority. It can happen even if the individual thinks that following authority is wrong and there would be no penalty for disobeying it.
Stanley Milgram was a Yale University professor of psychology who conducted the now famous Milgram experiment in 1961. Participants were instructed to administer painful electric shocks, which could be harmful to another individual they couldn’t see. They did it even though they knew that they were doing something wrong and wanted to stop, because they felt compelled by the authority of the person conducting the experiment.
Primary Source: Stanley Milgram
The tendency to stick with the first conclusion or information that is presented for a problem and to resist the need to explore other options.
A tendency to interpret situations or look for evidence that supports pre-existing views. Charles Darwin was said to have not been able come up with his theory of evolution if he hadn’t constantly destroyed confirmation bias from his studies. He was always looking for and noting observations that contradicted his beliefs and making an effort to investigate these.
It’s also known as creeping determinism. This is the tendency to overestimate one’s ability of predicting an outcome which could not have been predicted. It is dangerous to have a hindsight bias because it prevents you from learning from your mistakes. We won’t examine the real reasons for something if we think we already knew what happened.
This is a form of bias in which the data illuminated by the survivors, or the subjects are evaluated disproportionately.
It is a widely held belief that equipment, machinery, and other goods produced in the past are often better made and last longer than similar items manufactured today. You often hear people say that they don’t build ’em the way they used to. It is inevitable, however, that only the items built to last have survived.
We find it difficult, once we have learned something, to imagine how it would be to not know it. It is also hard to see problems through the eyes of someone who has less knowledge. It becomes more difficult to explain an idea clearly and simply the more you learn about a topic. Knowledge itself can be a barrier in its own propagation.
Primary Source: Colin Camerer, George Loewenstein, Martin Weber
It is important to treat complex non-linear systems as though they were linear. The mismatch between the complexity of reality and the mental routines used to simplify it is the main cause of mistakes.
Incentives are a powerful tool to motivate people. Someone who pays someone to be irresponsible is more likely to act irresponsibly. You will usually get the result that you reward. You need to be careful how you create your rewards.
Linda is a 31-year-old woman who is bright, single and outspoken. She studied philosophy at university. She was deeply concerned about issues of social injustice and discrimination as a student.
Laura working at a Bank is more likely? Is it more likely she is a feminist activist and works in a bank?
The last option can lead to the representativeness heuristic, which is the tendency to confuse the likelihood of a result by comparing similar objects or events. The possibility that Linda works at a banking is higher because it is part of a larger category.
Primary source: Daniel Kahneman and Amos Tversky
Stories are incredibly powerful because we tend to understand the world by analysing cause and effect. You can imagine what kinds of errors could be caused by this. Remember the story of Linda from the previous model of representativeness.
It is easier to remember information that is unusual or controversial than something common.
This phenomenon, also known as the frequency illusion, is an illusion in which something that has been brought to your attention recently suddenly appears with an improbable amount of frequency soon afterward. You are then led to overestimate how common it really is. This phenomenon is closely related to the selection and recency bias.
The British government, during the colonial rule in India, was worried about the number of cobras that were venomous. They offered a reward for each dead cobra. Initially, the policy appeared to be successful. Over time, however, it became apparent that cobras were being bred to earn money. The government was made aware of the situation and the program was scrapped. This caused the cobra-breeders to release their snakes, which were now worthless. The wild cobra population increased as a result. The apparent solution made the problem worse.
The Cobra Effect is the result of a solution that makes the problem worse. Often, the root cause of a problem is a linear approach to solving it. This ignores the effects of feedback loops. The model shows how simplistic policies can backfire.
Unintended consequences of people being convinced to do something, but then doing the opposite. The boomerang effect, also known as the psychological reactance theory, occurs when people perceive someone is trying to limit their freedom.
Curiosity is the key to exploration, learning, and investigation. Science and technology wouldn’t exist without the curiosity of humans. Without curiosity, companies cannot survive.
The ability to speak is a natural human trait. This shows our cognitive structure. Steven Pinker believes that language is a human ability, created by evolution in order to solve the problem of social communication between hunter-gatherers.
Steven Pinker, primary source
The human mind is prone to stereotypes and tends to generalize from general rules derived from a small sample of data. Sometimes, however, when the data do not match the population’s characteristics, this can lead to an overgeneralization. Daniel Kahneman says: Extreme outcomes (both low and high) are more likely in small samples than large samples. This is not a causal explanation.
A tendency to compare one’s circumstances with those of others to assess how satisfied you are. The relative level of satisfaction is a major cause of jealousy and envy. Charlie Munger once said that envy is the stupidest sin, because you can’t have fun with it.
Emmanual Kant’s ethical theory of justice requires that an action be permissible if it can be applied to everyone without contradiction.
Humans are strongly drawn to the concept of fairness. Life isn’t always fair, and many people can’t accept that. It’s okay to tolerate a little injustice if it leads to greater fairness. Balance is important, but it’s not life.
It is the tendency to focus on personal traits and ignore contextual factors when judging other people’s actions and behaviours. This leads to the belief that people’s actions and behaviour reflect their personality.
Imagine that Alice, a motorist, is cut-off in traffic by Bob. Alice immediately attributes Bob’s behaviour to his basic personality, for example. He’s a selfish driver and an incompetent one. She doesn’t immediately consider the possibility that Bob could be late for his flight, his son’s birth or an accident. Alice could make the opposite error and say that she was influenced in some way by the situation. Actor-observer symmetry is another name for this.
Primary Source: Lee Ross
Humans have a tendency not to wait and watch. They will act, even if no action is required. Sometimes it’s best to just watch the grass grow.
The theory that humans, animals and machines that are well-designed will seek the path that is least resistant and that their effort will decrease as soon as they achieve the minimum result.
Primary Source: Guillaume Ferrero
Cognitive dissonance is the result of trying to simultaneously believe two things that are incompatible. Cognitive dissonance occurs when people smoke despite knowing that it is bad for them.
Primary Source: Leon Festinger
We tend to underestimate our abilities to do things easy and overestimate them. We tend to overestimate our ability to do something difficult and underestimate our ability to do something easy. This is related to the Dunning Kruger effect.
Primary Source: Leon Festinger
It is the tendency to place too much importance on small factors which are not important in the context of a bigger system. It’s the tendency to not see the forest through the trees. Daniel Kahneman said that nothing in life is as significant as you think you are when you are thinking it.
It is a tendency to weight recent information more than older information, even though the latter may be less important. It is closely related to availability heuristic.
Tasks take longer than anticipated. The planning fallacy was first proposed by Daniel Kahneman in 1979. It is an effect on optimism bias that describes not only underestimating time, but also costs and risks.
Primary source: Daniel Kahneman and Amos Tversky
Warren Buffett said: It takes twenty years to build up a good reputation, and five minutes to ruin one.
Nassim Taleb coined the term noise bottleneck to describe the situation whereby more sampling decreases the signal to noise ratio, increasing randomness and decreasing the likelihood of sound conclusions. It is natural to believe that more information will be better, except when it leads us to focus on irrelevant data.
Primary Source: Nassim Talab
A Keynesian beauty competition is closely related to the parimutuel system. It is used to describe a type of action based on an assumption of the public’s perception of a topic. It is possible to go one step further and take into consideration that each entrant will have their own perception of public perceptions. The strategy can then be applied to the next level and beyond, attempting to predict what the final outcome will be based on other rational agents’ reasoning.
John Maynard Keynes illustrated this with an analogy that was based on the fictional newspaper contest where contestants had to pick six of the most attractive faces out of a hundred photos. The winner was the person who chose the most popular face.
Keynes argued that it was not possible to choose the [faces] which, in one’s opinion, are the most beautiful, or even the ones that the average opinion thinks of as the most beautiful. In the third degree, we use our intelligence to predict what the average opinion will be. There are, I think, some who practice the fifth and higher degrees.
Primary source: John Maynard Keynes
The Serpico Effect is named after Frank Serpico who was known for his whistleblowing about police corruption during the 1960s and 1970s. It is the tendency of rationalizing an action just because others are doing it.
Hypothesis stating that people who are depressed make more realistic conclusions than people who are not depressed. The opposite of blissfully unaware. Depressive realism can be a useful mental tool, but the evidence is still largely debated.
Primary Source: Lauren Alloy, Lyn Yvonne Abramson
People who are good at something may be poor at another. A result of deciding to spend more time on one skill than another.
Small groups tend to show more compassion towards victims than large groups. This is because it’s easier to identify victims in smaller groups. We can be moved by a single victim, while a larger group seems more distant.
Chinese proverb which highlights the tendency of people to accept ridiculous information if it’s repeated by enough people. You might think that if one person says there is a tiger in town, they are lying. You start to doubt if two people say it. You’re more likely to believe it if three people say it is true.
Primary Source: Pang Cong
Buridan’s ass, named after French philosopher Jean Buridan is a form of decision paralysis in which two options that are equally good lead to no decisions.
The paradox can be explained by a story about a donkey who is both hungry and thirsty, and is placed exactly in the middle of a pile of hay or a pail filled with water. The paradox assumes that the donkey always chooses the option closest to it, so it will die of both hunger as well as thirst because it can’t make a rational decision.
Jean Buridan, primary source
Fear of being perceived as less talented by others. Impostorism is the term used to describe the feeling that one does not deserve what they have accomplished.
Primary source: Pauline R. Clance and Suzanne A. Imes
Semmelweis Reflex is similar to the first-conclusion bias. It is the tendency to reject any new information or evidence that contradicts existing norms, beliefs or paradigms. The Semmelweis reflex is named after Ignaz Semmelweis, a Hungarian physician who found that doctors who wash their hand before treating patients get less infections. However, he struggled to convince other people that this was true.
Primary source Ignaz Semmelweis
This is the tendency to falsely believe that your beliefs or views are held by a larger population than they actually are. This false consensus can increase or decrease self-esteem or cause an overconfidence effect. Relationship to the curse.
It’s named after Robert McNamara who was the US Secretary for Defense during the Vietnam War. The belief is that rational decisions should only be made on the basis quantitative evidence and ignore all other factors. McNamara based his assessment of success in the Vietnam War solely on enemy body counts. This led the US Army to lose sight of its strategic goals. Do not assume that something which cannot be measured is not important.
A refusal to give an honest opinion because of a desire to not offend the person responding. Employees are often reluctant to give their honest opinions to superiors. This impedes the flow of information for rational decision-making in a company.
The ludic Fallacy, identified by Nassim Talib and described in The Black Swan is the tendency of falsely associating simulations with reality. Simulations, which are “narrow worlds” of dice and game, fail to take into account the chaos that can occur in real life.
Primary Source: Nassim Talab
This cognitive bias is observed in people who have a low level of competence and tend to underestimate their own abilities. This effect was documented and named by psychologists David Dunning & Justin Kruger. It is explained by the lack of ability to identify one’s limits at this level. Intelligence is required to know the limits of your intelligence.
Primary source: David dunning and Justin Kruger
A group that decides on a course of action contrary to the feelings and thoughts of the individual members. This happens when members of a group fail to communicate their personal beliefs.
Primary source: Jerry B. Harvey
In-group favouritism, which is closely related to liking tendencies, is the tendency to give priority to members of your own social circle. Nepotism, for example, is an example.
Primary Source: William Sumner
Exaggerating the positive image or importance of a group to which one belongs.
Primary source Sigmund Fréud
It is common to think that threats and disasters will never happen because we believe things will continue as before.
It is the act of selecting the target after the shot to make it impossible to miss. The same data can be used to test and construct a hypothesis. This leads to incorrect conclusions.
The speaker tries to convince the audience that their ideas and themselves are “of people”.
It’s also called a smear technique. This is the act of presenting irrelevant negative information before an argument. It makes that person or argument seem untrustworthy. Please remember that before you listen to his words, he was in prison.
Primary Source: John Henry Newman
Argument that attempts to prove the truth or falsity of a hypothesis because its consequences are either desirable or unwelcome. It’s a fallacy.
Human behaviour and its inherent biases will never change. As Voltaire said: History never repeats itself; man, always does.
A tendency to avoid doing something out of fear that it will damage one’s self esteem.
Primary source Edward E. Jones and Steven Berglas
A cognitive attributional error is when one assumes that their qualities, traits and personal attributes are unique, but they aren’t. It’s the exact opposite of imposter Syndrome.
When presented with evidence that contradicts one’s beliefs, people tend to reinforce them. In a study of political voting, it was found that when people were given negative information about a candidate they liked, their support increased.
Self-deception in which individuals exaggerate their own abilities, decisions and self-esteem to avoid discomfort or boost self-esteem. A positive illusion can cause a downward spiral of justifying worse and worse choices.
Primary source Shelley Taylor and Jonathon Brown
Psychological process that involves suppressing certain thoughts in order to make them more likely to return to one’s mind.
Primary Source: Daniel Wegner
The Aumann Principle, named after the Israeli-American mathematician Robert Aumann is the idea that two rational people who are in a conflicting argument cannot and should not agree to disagree when they know each other’s beliefs.
Primary Source: Robert Aumann
The ostrich effect occurs when people avoid information that contradicts what they want to be true.
Primary Source: Dan Galai and Orly Sade
The human mind is limited in its capacity to retain and recall information, so rationality also has limitations.
Primary Source: Herbert Simon
Fluency Heuristic, also known as the narrative fallacy is the tendency to trust ideas that are easier to understand than those that require more explanation.
Blaming someone for bad news.
Charlie Munger said that the Persians did indeed kill the messengers who brought bad news. You think it’s dead? You should have seen Bill Paley’s last 20 years. He never heard a word he did not want to hear. Bill Paley was not happy to hear anything. This means the leader is in a cocoon, and he has made some very stupid decisions over the past 20 years.
Daniel Okrent, a writer, referred to a phenomenon whereby the media legitimizes fringe views that are not supported in order to appear fair.
He said that the pursuit of balance could create imbalance, because sometimes things are true.
Primary Source: Daniel Okrent
The German physiologist Karl von Vierordt formulated this law in 1868. It states that people perceive time differently over a range of durations. We tend to underestimate long time periods and overestimate shorter ones.
Primary source: Karl von Vierordt
Ward Cunningham said that the best way to find the answer on the Internet was not to ask questions. Posting the wrong answer is what’s most likely to get you an incorrect answer.
When you’re in front of an audience, you can get a different reaction. Outrage can elevate your status.
Internet rage is similar to road rage. Once you argue with a vehicle (or computer) instead of a person, the social norms disappear.
Primary source: Ward Cunningham
Situation in which a series small, rational decisions can create a dependency on a particular path. This dependence could negatively affect the context of subsequent decisions to the point that the original desire becomes irreversibly destroyed.
Primary source Alfred Kahn
The tendency to prefer rewards that come sooner than later. Humans discount future events. Interest rates are a result of this.
Primary Source: Richard Herrnstein
A person’s process of avoiding immediate rewards in favor of a reward that will come later.
Situations where an individual is observed but that observation changes the individual’s behaviour. Simply observing something will change it.
Performance tends to decrease when teachers, supervisors or bosses are low on expectations.
Motivational theory developed by Abraham Maslow, in 1943, that states humans have five different categories of needs: physiological, love, safety, esteem and self-actualization. When the previous need has been met, higher needs will appear in the hierarchy.
Primary source Abraham Maslow
Social observation: People are less likely than usual to assist a victim if others are in the room. The more bystanders there are, the less likely it is that someone will assist.
Primary Source: John M. Darley, Bibb Latane
The expectation that an event that was preceded by the consequences of a previous event will happen. A streak of successful shots can lead sports fans to believe that the probability of a player making the next shot is higher.
Primary source Amos Tversky, Thomas Gilovich, Robert Vallone
It’s also known as the Monte Carlo Fallacy. This is the incorrect belief that a series of specific results from a random process will make it less or greater likely to happen the next time.
A series of 10 coin tosses might result in all heads. A gambler might believe that the next coin toss will be more likely to end in tails.
Primary source: Daniel Kahneman and Amos Tversky
Absolute power corrupts absolutely.
Primary Source: John Dalberg Acton
It takes a lot more energy to make bullshit than it does to destroy it.
Primary Source: Alberto Brandolini is an Italian programmer
When security measures are mandated, people will engage in more risky behaviors.
Primary Source: Sam Peltzman
When an absolute change in one quantity leads to a proportional change in another quantity. Most empirical distributions do not follow a Power Law for all values, but instead follow one in the tail.
In a market-based economy, for example, income distribution follows a power law since inequality is built in to the wealth accumulation process itself. People in big cities attract more people. Capital in corporations attracts additional capital. Profits lead to more profit. Pareto is a power law.
We care about the order in which the elements are arranged, but not with combinations. Permutations and combination mathematics is extremely important because it helps us understand the probabilities in the real world.
Primary source: Blaise Pascal; Pierre de Fermat
The manipulation and study of mathematical symbols to show equivalence between subjects. Algebra is an important part of all studies in mathematics, science or engineering as well as applications such as medicine and economy.
No matter how big the number is, it will always become zero when multiplied by 0. This is a lesson that’s often only learned through hard experience. It’s dangerous to multiply your capital zero when trying to compound returns.
The world is full of randomness, but we often don’t understand it. A mistaken search for patterns can lead us to see patterns that do not exist. Nassim taleb says that we are “fooled” by randomness.
A group of random variables in the same probability space. Brownian motion, random walk theory and stochastic processes are all stochastic processes.
A persistently playing a game with a low probability will lead to bankruptcy. The gambler’s ruin could also explain why a player goes broke despite having a positive expectation value for each bet. The gambler will lose money if he raises his bet to a certain fraction of their bankroll after winning but does not reduce it after losing.
Primary source: Blaise Pascal; Pierre de Fermat
When interest is added regularly to the amount that earned interest, it creates a powerful force. Albert Einstein called it the “8th Wonder of the World”. It’s a mathematical idea that is the foundation of the finance field, but not limited to finance. Compound interest is the foundation for knowledge, ability, ideas, relationships and more. Naval Ravikant said: Play iterated or repeated games. Compound interest is the key to all returns, be it in wealth, knowledge, or relationships.
Compounding is a long-term process, so it’s important to understand the time value. Short-term gains can be hard to notice.
Entropy is another name for churn. It’s a measure of how many people or things leave a group in a certain time period (think of customers of subscription services or insurance companies). To reduce churn, the group must be constantly cared for.
The churn rate and growth rate are diametrically opposite factors. One measures the loss of the group, and the other measures the acquisition into the group.
The law states that the average result of a large number events should be near the expected value and tends to get closer as more events happen. The Swiss mathematician Jakob Bernoulli proved it in 1713.
The law of large number is apparent in business when comparing growth rates expressed as percentages. The percentage growth rate becomes more difficult to maintain as a company grows.
The statistical functions describe the probabilities and values that a random variate can have within a range. The standard deviation, skewness and kurtosis of the distribution will determine how it is arranged. This is most commonly found in science, finance, and engineering.
The sum of a number of independent random variable, with probabilities that may differ, but have finite variances will tend to a normal distribution.
Primary source Pierre-Simon Laplace
This is the measure of how well a sample estimate can explain the true value when it’s tested on a large population. The range of values in which we can be reasonably certain that our true value is located. Financial problems are often caused by a lack of understanding of the confidence interval.
This is what happens when many observations follow the Law of Large Numbers. Regression to the Mean is a statistical concept that suggests that if a random variable has extreme values on the first measurement, it will have fewer extremes on subsequent measurements.
The concept is easy to grasp. It’s easy to understand, but not knowing its limits or when it applies can be very dangerous. In the stock market, for example, huge amounts of money were lost by buying companies with a price-to book ratio below average in the mistaken belief that their value would follow the regression principle. The investor may not realize that the price of the stock is only the numerator, and the book value is the denominator.
Quantitative measure used for very approximate comparisons. Two numbers that differ by an order of magnitude are about ten times bigger than each other.
John Larry Kelly Jr., a scientist at Bell Labs in 1956, developed a formula to determine the optimal size of bets based on odds and the edge of the player. The formula was based on Claude Shannon’s information theory and Bernoulli’s St. Petersburg Paradox.
The formula is:
Edge or odds = Fractional part of your bankroll that you bet every time
The Kelly criterion, for example, suggests that a positive risk/reward wager of 1:2, with 50% odds of either outcome is the best bet size. (Reward, in the event of positive odds, is 2, and edge is 0, so 0.5/2 = 25%). The Kelly criterion is the only way to increase wealth without risking the bankroll.
Primary Source: John Larry Kelly Jr.
A curve that initially drops, but then rises steeply above its starting point.
This model is used to analyze the trajectory of a country’s terms of trading following a devaluation, or depreciation, of its currency under certain conditions.
The J-curve in private equity is used to show the tendency for private equity funds in the early years to have negative returns and then to see investment gains as portfolios mature.
It is a tendency to give more weight to appealing information in an individual’s situation and ignore the a posteriori probability. My son is one of the 6% who get into this school. He’s brilliant. I’m confident they will accept him.
Primary source Daniel Kahneman and Amos Tversky
Anscombe’s quartet, developed by statistician Francis Anscombe is when seemingly identical numbers don’t look the same when plotted. Graphs are not as precise as numerical calculations.
Primary Source: Francis Anscombe
A statistical error that occurs when a sample of data is not representative for the entire population.
This is a case in which conditional probabilities and correlations seem counterintuitive because of a bias due to sampling or selection.
Imagine a stamp collection of 1000 stamps. 300 are beautiful and 100 are rare. 30 are both beautiful and rare. The rarity of stamps is not determined by their beauty. Only 10% of stamps collected by collectors are rare.
Primary Source: Joseph Berkson
Psychological phenomenon in which random and meaningless impressions can be perceived as meaningful. This is a way of comforting the mind by explaining how the universe works. Patternicity is the ability to see patterns or connections where none exist.
Source: Klaus Conrad
In uncertain situations, the tendency to ignore probability when making decisions. Small risks are either completely ignored or vastly overrated. The tendency to ignore probability can lead to hindsight bias.
Ergodicity, which is a concept that comes from thermodynamics and the study of population dynamics, describes a situation whereby individual events are not affected by the population’s probabilities but rather become more even over time. Russian roulette is a game that can be played many times without dying.
Primary source Ludwig Boltzmann
Praise for an act that a person did not have complete control over. Nassim Taleb says: “Avoid calling heroes those who were forced to do it.”
Primary Source: Bernard Williams
The average person has fewer friends than the friends they have. It is due to a sampling bias, where people who have more friends are likelier to be your friend. The friendship paradox is a contradiction, because people tend to believe they have more close friends than their closest friends.
Primary Source: Scott L. Feld
Assuming falsely that clusters or streaks of small samples within a large data pool in random distributions indicates a non-random pattern.
Primary Source: Thomas Gilovich
Nonlinearity, closely related to the Kantian fairness trend, is a situation in which there is no straight-line relationship or direct relation between an independent variable (or variables) and a dependent one. The output does not match the change in the input. This can sometimes make the situation appear chaotic, unpredictable or counterintuitive. Understanding this topic is very important.
Situations where the relationship between variables is dependent on a third factor. A third variable, glue, could be the reason why two objects stick together thickly and thinly.
We tend to think that 10 $5 bills are less valuable than a single $50 bill, even though they have the same value. Stock splits also show the denomination effect.
Primary source Priya Raghubir and Joydeep Srivastava
It is a form of deception when people are misled into believing that information they have heard before, but which lacks any evidence, is actually evidence. Daniel Kahneman says: Repetition is a reliable way to get people to believe falsehoods, since familiarity cannot be distinguished from truth.
A method for acquiring knowledge by systematic observation, measurement and experimentation, as well as the formulation, testing and modification of hypotheses.
A variable that replaces an unmeasurable variable. To be a good substitute, the proxy value must be very close to that of the original.
The point at which a curve goes from concave to convex, or vice versa.
When a trend is evident on different data groups but not when the groups are combined.
Primary Source: Edward H. Simpson
The space outside a solid. The amount of steel needed to build a larger tank can hold more. This is a nonlinear relationship.
Maxima and minima, also known as extrema or extremes, are the highest and the lowest values in a given function. Pierre de Fermat, one of the earliest mathematicians, proposed a technique called adequacy for finding maxima and minima in functions.
Method of assessing stability of research findings by changing the conditions of each variable.
This law describes how different numbers are distributed in statistics as the first figure. Benford’s Law states, for example, that the first number should be 1 in 30,1% of cases, 2 in 17,6%, and 9 in 4,6% in very large amounts of data.
Frank Benford, primary source
Rare events with a big impact are hard to predict, and beyond the normal estimations.
Primary source Nassim Taleb
A measure that becomes a goal is no longer a good one. If we have a specific goal in mind, then people tend to maximize that goal regardless of any consequences.
Charles Goodhart: economist
Mental Models of Thinking
A visual representation of the chain of events that leads from one action to another. Decision trees are the basis of many algorithms.
Probability is the rule of the universe, so adopting probabilistic thinking as a skill and trait is essential. John Maynard Keynes said that it’s better to get things right in the middle than be completely wrong.
Think about effects and their effects. Second-order thinkers are those who ask, “And then what?”
Second-order reasoning is closely related to the use of decision trees and permutations. It is important in the investment industry. Ray Dalio said: Failure to consider second- and third order consequences is a cause of many painfully bad choices. It is particularly deadly when your first inferior option confirms you own biases.
Method of updating the probability estimate for a hypotheses as new information or evidence becomes available. Bayesian updating closely relates to subjective probabilities, which is why it’s in tune with the way things work. The Reverend Thomas Bayes was the inspiration for its name.
Primary Source: Thomas Bayes
Bloom’s Taxonomy, created by Benjamin Bloom in the year 1956, is a hierarchy of three levels of thought about any subject. The taxonomy is divided into three domains of learning: cognitive, affective and psychomotor. Each domain has a hierarchy of levels, where each level includes the previous levels.
The cognitive domains can be categorized as follows: knowledge, understanding, application, analyzation, synthesis and evaluation.
Primary source: Benjamin Bloom
Blind spots can occur when one moves outside of their circle of competence. When one cannot define or even think about their circle of expertise, they often feel the same level of confidence that one feels when operating within it. This is dangerous.
This concept is crucial because it allows people with limited but valuable insights to compete in a world of intense competition against other bright and hardworking people.
Warren Buffett as the primary source
Basic assumptions in a field that cannot be further deduced. Aristotle described first principles as the basis on which something is known. It is the idea that complex problems can be broken down into their simplest and most essential elements.
Primary source Aristotle
A hypothetical experiment is used to solve problems with potential consequences. Einstein used this concept to develop the theory of relativity. He imagined traveling on a light beam.
Reverse thinking is a way to find the core of a problem. Carl Gustav Jacob Jacobi taught his students to always invert their research topics when they are looking for ideas.
Primary Source: Carl Gustav Jacob Jacobi
You can find out the truth by asking yourself five whys.
Primary Source: Sakichi Toyoda
Occam’s Razor is the idea that, if all else is equal, the theory with the least assumptions should be preferred. It’s also known as the parsimony principal, and it is a fundamental idea in all of science. It suggests that the best explanation for the data should be the simplest. Ceteris paribus means, in terms of tree building, that the best hypothesis will be the one that involves the least amount of evolutionary change.
Primary Source: William of Ockham
It’s a method of eliminating unreliable explanations for human behaviour. Robert J. Hanlon once said: “Never attribute to malice what can be explained adequately by stupidity.”
Primary Source: Robert J. Hanlon
When you only have a hammer at your disposal, everything appears to be a nail. Also called the law of instrument. It is a law, because an instrument has a limited number of uses to achieve its original purpose.
Primary source Abraham Maslow
Divergent thinking is a way of thinking that involves exploring different solutions to come up with creative ideas. Convergent Thinking is the process to find a solution for any problem. It is important to find a balance.
Primary Source: Joy Paul Guilford
Argument or thought that older stuff is inferior than the current stuff, due to social progress.
Lewis says: “The assumption that whatever has gone out of date is discredited on this account.” Lewis says: “The assumption that something has become outdated is discredited on this account.” It is important to find out why something has become outdated. It was it ever refuted? (If so, by whom, when, and with what degree of certainty) Or did it simply die out as fashions do. This does not tell us anything about the truth or falsity of its claims. This leads to the conclusion that our age is also “a period” and has its own illusions, just like every other period.
Lewis said that it was a good rule to read as many older books as you do newer ones.
Primary source C. S. Lewis and Owen Barfield
When someone makes it appear as if they have answered a question clearly or made a statement that is clear, but in reality they are saying something vague or inconclusive. The words “better”, ‘improved’, and ‘gains’do not indicate the extent of an argument.
Frank Knight, an economist, argued that the term risk is used when we do not know what will happen in a given situation but are able to measure its probability. Uncertainty, on the other hand applies when we don’t have all the necessary information to calculate accurate probabilities.
Frank Knight, primary source
A map and the territory that it represents are two examples of abstract relationships between objects. If a person has only heard and read descriptions of an apple but never tried it, they will have no idea how it tastes.
Primary source: Alfred Korzybski
It’s a common aphorism used in statistics that states: “All models are wrong but some are helpful.” The thinking, attributed to George Box, is applicable to all models in science.
Primary Source: George Box
It is a fallacy to compromise two opposing viewpoints just because the middle ground exists. If, for example, one person claims that all elephants are able to fly and another states that none of them can, then it is a fallacy that you agree that some elephants may be able to fly.
Dwight Eisenhower was the 34th president of the United States and he had to constantly make difficult decisions about what tasks he would focus on every day. He created the Eisenhower Matrix to prioritize and decide which tasks were urgent and important. This helped him sort out tasks that were less urgent or important, and those he could delegate. He said that what is important is rarely urgent and what is important is rarely urgent.
Primary source for Dwight Eisenhower
Study of systems and their functioning, as well as how they relate to larger systems. Also, the study includes how systems break down, or become bottlenecks. This is a methodical approach to examining problems in greater detail.
Mario Bunge, primary source
Edward de Bono first coined the term in 1967. It’s a way of thinking that crosses otherwise irreconcilable disciplines to arrive at solutions which cannot be reached by deductive or logical methods. This is what we might call “thinking out of the box”.
Imagine this: A bartender asks a man for a drink of water when he walks in. The barman points a gun at the man. The man thanks the barman and leaves. Why?
The man was hiccuping.
Primary Source: Edward de Bono
It is important to study the past in depth because it makes up the majority of history. Niall Ferguson, a Scottish historian, said that the dead outnumber those alive 14 to 1. We ignore the experience of such an enormous majority of humanity at our peril if we do not study the past.
When a major change replaces the way you normally do or think about something.
Primary source: Thomas Kuhn
The researcher will move between theory and empirical evidence to allow for understanding to slowly emerge.
Primary source: Thomas Kuhn
Charlie Munger tells the story of Max Planck’s chauffeur in his book: “I often tell the apocryphal tale about Max Planck who, after winning the Nobel Prize, traveled around Germany, giving the same standard lectures on the new quantum physics.”
After a while, the chauffeur had memorized his lecture. He asked, “Would it be okay, Professor Planck? It’s boring to keep up with our routine.” Planck asked, “What if I did the lecture in Munich while you sat at the front wearing the chauffeur’s hat?” Planck replied, “Why not?” The chauffeur then stood up and delivered a long lecture about quantum mechanics. A physics professor then stood up and asked an absolutely horrifying question. The speaker replied, “I’m surprised to hear such a simple question in a city as advanced as Munich. My chauffeur will answer.
Planck knowledge is a product of hard work and aptitude. Chauffeur Knowledge has just started to talk the talk.
Charlie Munger, primary source
Blaise Pascal’s famous argument in favor of believing in God. Pascal said that believing in God was always a safer “bet”, because the value of what you can expect to gain by doing so is greater than if you don’t believe.
A third option (tertium ne datur) is not allowed on the question of God’s existence. There are two choices:
God does not Exist
One will have to choose between the two options.
If you bet that God exists and are right, then you will win all your money.
You can win nothing if you bet that God does not exist. But, you can also lose everything if you bet on this.
Blaise Pascal as the primary source
It is not worth debating if something cannot be resolved by experiment.
Mental Models of Systems
As an organization or system performs the same work more often, it tends to become more efficient, but can also develop inefficiencies, such as bureaucracy. Positive feedback loops are the reason why scale can be an advantage.
While it is safe to say that scale advantages create economic moats that are extremely durable, it’s important to note that economies of size don’t always create moats. Ford’s scale edge disappeared as other automakers caught up to Ford’s productivity.
The Pareto Principle, also known as the 80/20 Rule and a power law, states that in many situations, 80% of a situation’s results come from only 20% of its causes. VilfredoPareto developed the principle after he showed that 20% of Italians owned 80% of Italy’s land.
This principle can be used in many different areas, including manufacturing, management and human resources. It is also applicable to personal time management. Despite its broad application, the principle does not work in every situation. Take care.
Primary Source: Vilfredo Pareto
Ceterus paribus at some point, in all production processes, adding more one factor will result, ceterus pareibus, in a lower incremental return per unit. There are always limitations in the world. The broth is spoiled by too many cooks.
An algorithm is a way to solve a particular problem. A set of rules that are used to accomplish a task in a sequence of steps is an algorithm. A recipe is an obvious example.
Primary source: Muhammad ibn Musa al-Khwarizmi
Warren Buffett said that you need to know enough to be able to make an educated guess about the business value. You do not want to cut it too close. Ben Graham was referring to a safety margin when he said it. You wouldn’t buy a business worth $83,000,000 for only $80,000,000. You are leaving yourself a huge margin. You build a bridge and insist that it can support 30,000 pounds but only drive trucks up to 10,000 pounds across it. The same principle applies to investing.
The margin of safety, while useful for investing, is also a useful methodological concept that can be applied to nearly any endeavour in life.
Primary source: Benjamin Graham
A social network that only has one participant will not have any value. The value of a network is determined by the number users joining the network. This can sometimes lead to a “winner-takes-all” scenario.
Primary Source: Theodore Vail
Malcolm Gladwell popularized the term tipping point, which is the moment when a product or a trend becomes viral or epidemic. Gladwell introduces the three variables that lead to the tipping moment: the law for the few, the sticky factor, and context. This mental model is a powerful tool for understanding how ideas gain traction within society.
Malcolm Gladwell as the primary source
The number of possible arrangements that atoms can take in a given system. It’s also a measure for randomness or uncertainty. Entropy is evident due to probability, since there are a finite number of ordered states and an infinite number of chaotic ones.
The second law of thermodynamics is directly related to the entropy. It states that over time, the total entropy will increase in an isolated system.
Imagine a group of balls in a box bouncing in an initial pattern. Over time, balls will bounce more chaotically. The entropy in the system increases.
The principle of minimum energy, which is a restatement the second law thermodynamics, states that the total energy of a closed system, with entropy fixed, will be the lowest at equilibrium.
The outcome of a particular system can either reinforce or amplify the system in a positive or negative way. The output becomes an input in the next step. It is a great way to visualize cause-and-effect relations by connecting them into loops.
It is largely related with systems thinking. It’s largely related to systems thinking.
George Soros is the primary proponent of reflexivity, a theory which states that feedback loops that occur between economic fundamentals and expectations can lead to price movements that are substantially and persistently different from equilibrium prices. Soros’s reflexivity theory runs against the idea of economic equilibrium, rational expectation, and efficient market hypothesis.
Primary Source: George Soros
A very important mental model where a complete understanding of a system’s parts does not necessarily translate into a full understanding of its behavior. Cities, large corporations and markets are examples of complex adaptive systems.
Michael Mauboussin says: When you look at the colony as a whole, and not the individual ants that make it up, the colony appears to be an organism. It’s robust. It’s adaptive. It has a cycle. The individual ant, however, is only concerned with the local environment and interactions. It is not aware of the global system. You can’t grasp the whole system from the behavior of ants. This is the essence of an adaptive complex system, and what makes it so difficult to understand. Cause and effect are hidden by the emergent state. We don’t know what is going on.
Betting systems where all bets placed are pooled together and the odds of winning are calculated after the house takes. Horse race betting is a common example.
Charlie Munger said that the model he likes to simplify the idea of what happens in a stock market is the pari-mutuel at the racetrack. When you think about it, the pari-mutuel market is what a parimutuel system represents. Everyone goes to the pari-mutuel system and makes bets. The odds are affected by what is bet. This is what happens on the stock exchange.
A small change to an initial condition may have a large impact on a subsequent condition. The term is derived from the analogy of a butterfly flapping its wings in Chicago, and a tornado in Tokyo.
In today’s connected world, the social impact of butterfly effect theory cannot be denied. Social systems are made unpredictable by butterfly effects.
The popularity of something or the perception that it is better is a powerful force. Preferential attachment feeds network effects.
If the sum cannot be calculated by adding its parts, for example. When the sum of something is greater than its parts, e.g.
A system or object cannot be further reduced, decreased, or simplified.
If a resource that is depletable is shared by users who act according to their self-interests, then it tends to be depleted.
If fishing is a source of income, and there are no regulations in place to control the fishing ponds, each fisher will act according to his own interests and catch as many as they can even if the other fishermen do the same.
Primary Source: William Forster Lloyd
The system is named after Sir Thomas Gresham, a financier. “Bad money drives out the good”. The original law was based on the fact that minted coins tend to have less precious metals in them.
Imagine two coins of the same face value. Consider two coins, one made of copper and the other from silver. Gresham’s Law states that people will keep the silver coins but only use the copper ones as payment.
The law does not apply only to currencies. Avoid systems where bad behavior can win.
Primary Source: Sir Thomas Gresham
Nassim Taleb said this about antifragility. Some things thrive when they are exposed to randomness, disorder and stressors. They also love adventure, risk and uncertainty. There is no exact word to describe the opposite of fragile, despite the fact that the phenomenon is so common. We can call it antifragile. Antifragility goes beyond robustness or resilience. Antifragility is the opposite of resilience. The resilient can withstand shocks but remains the same, while the antifragile improves.
Primary source Nassim Taleb
The concept of backup system in engineering. Duplication of key components or functions in a system is done to increase its robustness or reliability. The numerous cables of a suspension bridge are an example of redundancy.
A system can be improved by removing certain elements. Paradox of choice: More options can result in poorer decisions. Via negativea is the answer.
Warren Buffett’s 5/25 Rule is a via negativa. List 25 goals that you would like to achieve within the next 10 years. Choose the top five goals and ignore the other 20.
It is the idea that objects, ideas or technologies, which are not perishable, should live as long as their age. It is reasonable to expect that something which has survived for X-years will continue to survive for another X-years. As each additional period of life implies a longer remaining lifespan, the expected mortality decreases over time.
Primary Source: Albert Goldman
Chain reaction: A reaction that starts out as a reaction to a certain outcome, but then escalates due to incomplete information.
Jay Forrester, primary source
The work expands in order to fit the time available. Cyril Northcote Parkinson first used the term in a funny essay in 1955 for The Economist.
Primary Source: Cyril Northcote Parkinson
When solving a problem seems so impossible or difficult that everyone involved is essentially shooting in the darkness.
Horst Rittel wrote in 1972: Expertise and ignorance are distributed among all participants of a wicked problem. The participants in a wicked problem are equally ignorant because no one knows more than the other. Experts find it frustrating that there are no experts. If experts exist, they only have expertise in the way to deal with a problem.
Probability of a future event, for example. The success rate of all those who have done the activity you are about to do.
People will tolerate inefficient and unjust systems as long as their personal incentives align with defending or maintaining them. John T. Jost, Mahzarin Banaji and others first proposed the theory in 1994.
Primary source: John T. Jost; Mahzarin R. Banaji
A popular saying is that 90% of everything is garbage. Theodore Sturgeon quoted this saying to show that the vast majority (90%) of work produced in any field is low-quality.
Theodore Sturgeon, primary source
The productivity of individuals tends to decrease as a group grows. The French agricultural engineer Maximilien Ringelmann was the inspiration for its name.
Imagine a tug-of-war. The average performance of the participants tends to drop as more people get involved, because they feel that their effort is not important.
Maximilien Ringelmann as the primary source
Max Planck once said: “A new scientific truth doesn’t triumph because it convinces its opponents or makes them see the light. It wins because they die, and a whole new generation is brought up with this new scientific truth.”
Assuming falsely that the views or decisions of a group collectively reflect those of all members.
Primary Source: Scott T. Allison and David M. Messick
Only 1 percent of social media users actively create content. Another 9 percent participate by rating, commenting or sharing content. The remaining 90 percent watch, read and look without responding.
Dietrich Braess, a German mathematician, observed that adding a road would worsen traffic because of the increase in shortcuts and congestion.
Primary Source: Dietrich Braess
It’s also known as the Nirvana Fallacy. This false dichotomy suggests that there is a perfect solution to a particular problem, and that certain actions should be avoided if only a small portion of the problem persists.
Primary Source: Voltaire
Employees are promoted in an organization until they reach a level of incompetence. Laurence J. Peter developed this principle.
Primary Source: Laurence J. Peter
Species which play a key role in the support of an ecosystem or a community. Many other species would not be able to survive in an ecosystem without these foundational species. The Federal Reserve and coral are both foundational species.
Primary Source: Paul K. Dayton
Google Sholar’s algorithm increases the preference for highly cited papers, since they appear at the top and receive more citations. New papers are rarely in the top positions, and receive less attention regardless of how important they may be to their respective fields.
Primary Source: Paul K. Dayton
If a 5% increase in fuel efficiency in a car results in a 2% decrease in fuel consumption, then there is a rebound effect of 60%. Driving faster or farther than usual could explain the 3% difference.
All that is possible will occur.
Primary Source: Edward Murphy
Donald Campbell is a social scientist. T. Campbell said that the more quantitative social indicators are used to make social decisions, the more they will be subject to corruption pressures.
It’s dangerous to quantitatively measure the wrong things and then set the wrong incentives by accident. This is because the situation is rarely noticed until the system fails. Take Enron’s accounting procedures. This is an example of cobra effect.
Donald T. Campbell, Primary source
According to decision trees, the past is important in determining future options. In any situation, the choices that people have to make are limited by their past decisions. Path dependence can be a negative surprise, as explained by the tyranny small decisions.
Externalities occur when a third-party is forced to pay or receive a benefit over which it had no control. Negative externalities include pollution from industry, which can affect the health and safety of residents in close proximity. An example of a positive externality is if an individual maintains a beautiful house, which benefits their neighbors by increasing the market value of their property.
Primary Source: Henry Sidgwick
Open platforms or systems are those whose contents or functionality can be changed in ways other than what the creator intended. A closed platform, on the other hand is one that is “off-the-rack” – the creator retains control over its content.
It is interesting to note that the number transistors in a microchip roughly doubles every two years, while the price of computers has been halved. The experts agree that computers will reach the physical limit of Moore’s Law in the 2020s, because transistors are too hot to be made smaller.
Gordon E. Moore himself said about the limits of the law: “It can’t go on forever.” It’s the nature of exponential function. They hit a brick wall.
The value of a communications system increases proportionally with the square of the total number of users (N2), or more precisely: N(N-1).
Metcalfe’s Law was first formulated by Robert Metcalfe in relation to Ethernet. However, it explains many network effects for technologies like the Internet, World Wide Web and Microsoft Windows.
Robert Metcalfe as the primary source
A philosophy of governance that was introduced by Dr. Eliyahu Goldratt to help and leverage organizations in order to achieve their goals. The title is derived from the statement that any manageable systems is limited in achieving multiple goals by only a small number of constraints, and that there will always be at least one constraint.
Primary source Eliyahu M.Goldratt
The short-term value of technology is underestimated, while the long-term value is greatly overestimated.
Roy Amara, Primary source
Mental Models of the Biological World
Encouragers who encourage humans and animals to perform certain actions. The idea is that people act in their best interests. It can be difficult to discourage an incentivized behavior, but it is equally hard to encourage one that’s not.
A complete natural environment, including all living and non-living organisms is called an ecosystem.
Ecological principles begin with the idea that all living organisms have a relationship that continues over time, both in terms of duration and permanence, to every element of their environment. It is important to consider all environmental conditions as part systems development.
Primary Source: Arthur Tansley
In ecosystems, an individual participant may flourish in a niche that is tailored to their needs. This is closely related to the circle competence.
Phenotype is the process of organisms changing over time due to changes in heritable traits. Charles Darwin developed the theory in 1859. It is supported by evidence from many scientific disciplines.
Darwin was relentless in his destruction of his ideas when he worked on the theory. He said that to kill an error was as good as and sometimes better than establishing a new fact or truth.
Primary source: Charles Darwin and Alfred Russel Wallace
When animals or organisms find that a common goal is more important than their own selfish interests, they are more likely to work together to achieve it.
Cooperation may be hindered by individual self-interest.
Prisoner’s Dilemma is a situation in which two people acting out of self-interest do not achieve an optimal result. The typical prisoner’s dilemma is set up so that both people choose to protect themselves, at the expense the other person.
Primary source: Merrill Flood and Melvin Dresher
Changes in structure, behavior, or function of organisms can increase their adaptability to the environment.
The species must adapt and evolve continuously to pass genes on to the next generations as well as resist extinction as other opposing types of species are evolving. The Red Queen told Alice in the sequel of Alice’s Adventures in Wonderland: You’ll need to run as fast as you can to stay in the same spot.
Primary Source: Leigh Van Valen
The biochemical copying of DNA within a cell. This is a requirement for successful cell division, as each daughter cell requires a full set of DNA in order to function.
People return to the same baseline level of happiness, despite major life events and changes. The feeling of satisfaction and expectations rises with the results.
Primary Source: Campbell Brickman
Self-preservation ensures the survival of living organisms. Sigmund freud suggested that the instinct for self-preservation is one of the two that motivate human behavior. The other instinct is the sexual instinct. Later, Freud combined both into eros.
It is interesting to note that self-preservation may not be in our hearts. A mother, for example, might give up her life to save her child.
The reward center of organisms, also known as the pleasure centre, is composed of a grouping of neural structures responsible for motivation salience (the desire to receive a reward), learning by association, and emotions like joy, ecstasy and euphoria. If we don’t exercise discipline, our reward system can be hijacked by unhealthy addictions.
Natural selection, or evolution, allows traits originally intended for a single purpose to be repurposed for another.
Exaptation was introduced by biologists Steven Jay Gould & Elisabeth Vrba. It makes the point, that a trait’s present use doesn’t necessarily explain its historic origin. Exaptation is one way that traits have evolved. Feathers, for example, are an example. They were originally used to keep warm or attract mates. Feathers became necessary for modern birds to fly.
Primary Source: Stephen Jay Gould, Elisabeth Vrba
A small dose of something may be beneficial to an individual but can be dangerous or fatal if used in excess – for example. Alcohol or excessive exercise. When less is more, it’s the best.
Hugo Schulz, primary source
Robin Dunbar, an anthropologist from the 1990s studied the relationship between the average size of social groups and the size of primate brains. He discovered that the neocortex is required to bond and socialize with animals and to remember previous interactions. Dunbar measured the neocortex of humans and estimated their ability to maintain relationships. He concluded that humans can maintain around 150 contacts.
Primary Source: Robin Dunbar
The SIR model is the most common model used to study and forecast epidemics. In their most basic form, epidemic models assume a disease’s infection rate and removal rate. The two factors will always determine how the epidemic develops.
Although epidemic models are excellent at explaining the spread and evolution of diseases, they can also be used to explain how small changes in other domains can lead to herd behavior. For example, by using epidemic models to better understand the transmission and reception of attitudes, we can better understand the feedback mechanisms which support financial bubbles as well as religious/political propagandists.
It’s much easier to recall pleasant memories than unpleasant ones. The subconscious mind is more optimistic than the conscious.
According to the Pollyanna Principle, the belief that society will decline if it focuses more on its negative aspects. The past is remembered as being better than what it actually was, and the future is expected to be worse.
Primary source Edward Gibbon
When an individual’s current mental state is different, they may underestimate the influence of mental state on behavior. A person who is calm may find it hard to predict their behavior if they are angered by someone.
Primary Source: George Loewenstein
Socrates believed that no one deliberately does anything wrong. Individuals can adapt their attitudes to actions. People care less about the well-being of cows when they eat beef jerky.
Primary Source: George Loewenstein
Empathy is the ability to transfer emotions from one person to another through observation. Happiness and sadness are best friends.
Once a species appears in the fossil record they become stable and show little evolution for most of their geological past.
Primary source: Niles Elldredge, Stephen Jay Gould
As with emotional contagion excitement and passion draw others into your orbit. Jason Roberts coined the phrase: “The amount of serendipity in your life is directly proportional the extent to which you are passionate about something combined with the number of people who hear you effectively. This is a very simple idea, but it’s extremely powerful because it suggests that you have direct control over the amount of good fortune you receive. You can make your own fortune.
Jason Roberts, primary source
Tribal loyalty is a policy that emphasizes the division of a group into tribes or the support for one or more tribes. Tribalism can be referred to as a way of thinking and acting in conformity. It is characterized by a loyalty to one’s tribe over one’s friends, country or other social groups.
Mental models in the physical world
Velocity, a vector dimension, describes the distance and direction of movement per unit time. Speed is a scalar that represents the size (length). One step forward, one step backwards shows velocity but not speed.
Natural world does not allow for any governing frames of reference. The laws of physics apply to everyone when something moves in a straight, constant line with no acceleration. The movement experienced by a man inside a moving train is different from the experience of an observer outside.
The more you try to accelerate, the heavier the object becomes. Albert Einstein showed that no mass-containing object can reach the speed light.
Primary source: Albert Einstein
The amount of energy required to produce a reaction. The energy required to ignite combustion in a Bunsen Burner is provided by the sparks produced when steel rubs against flint. After the sparks are extinguished, the blue flame will continue to burn because it is more energy-efficient.
Primary Source: Svante Arrhenius
A catalyst is any substance that speeds up a chemical reaction, without being consumed or converted by it. A catalyst is involved in the reaction, but it is not a product or a reactant.
Archimedes once said: If you give me a long lever, I will move the entire world. Leverage can be very powerful, or devastating, depending on how it is used.
The speed of all things will remain constant until they are affected by external forces that cause them to lose speed (e.g. The braking effect of a car, for example. Giving a vehicle gasoline or causing it to change directions.
Imagine a billiard-ball that was just pushed. The ball will only change direction and speed when it hits the band, or bumps into another bullet.
Primary Source: Isaac Newton
Sub-area of technical physics that considers the mass and forces of a moving body when describing the changes in movement quantities. Kinematics describes the motion of a body without considering forces or mass.
Combining metals with other substances can produce a new metal that has superior properties. The alloy can be harder, stronger, more malleable, or tougher than the original metal.
Inertia is the inertia or internal friction of a liquid or gas. Honey is “thick” and water is “thin”, so honey has a higher viscosity.
The substances are classified into Newtonian fluids and non-Newtonian liquids when measuring viscosity.
Newtonian fluids have a homogeneous viscosity that is independent of the speed at which they are stirred. Fluids of this type are defined by the exact proportionality between viscosity and tension required to stir the liquid. Non-Newtonian liquids are heterogeneous, and their viscosity changes as the rate at which they are stirred changes. The force opposing moving bodies is called friction.
Irreversibility is a thermodynamic concept that often arises. It means that a system’s state cannot be restored exactly to its original state without energy expenditure. Irreversible process increase the entropy in the universe.
A sufficiently advanced technology cannot be distinguished from magic. Clark’s fourth rule: for every expert there is an opposite expert.
Primary Source: Arthur C. Clarke
Classic mechanical device capable of retaining kinetic energy during rotation for a short or long period.
The flywheel also has a gyroscope function, which is the ability of the rotating body (tendency), to maintain the same direction of its rotation axis.
Primary Source: James Watt
The time taken to reduce an exponentially increasing size by half. This concept is used to describe decay processes which are either exponential (e.g. radioactive decay) or approximate exponential (e.g. biological decay).
It is impossible to determine the exact magnitudes of certain pairs. The more precisely one can determine the velocity (or momentum) of a particular particle, the less accurate one can be in determining its position.
Primary source Werner Heisenberg
According to ancient atomism the world is composed of millions of small particles called atoms separated by voids. Atoms are different in size and shape, and they cannot be felt by the senses. As their name suggests, they are the fundamental substance of the universe. The physical objects of the sensory universe are created when atoms combine in different ways. The world gradually evolves from an unstructured initial state as a result random movements of atoms. The only explanation that can be given is strictly materialistic and mechanistic.
Primary Source: Leucippus
Catalyst for a chemical reaction where an end-product acts as the catalyst. This catalyst is continuously formed, and it accelerates the reactions as long as there are enough starting materials. It’s positive feedback.
When something is defined by itself. Recursion can be used in many disciplines, from logic to linguistics. In mathematics and computer sciences, a function’s definition is often defined by applying it to itself. This clearly defines an endless number of instances (function value), but it is usually done so that no loops or infinite chains of references can happen.
The electromagnetic force is responsible for many everyday phenomena such as friction, induction, chemical reactions, normal force, (the force which prevents objects flowing into one another), and more.
Hans Christian Orsted, primary source
Theoretical description of the laws and properties of matter. It allows for the accurate calculation of physical properties at atomic scales and smaller.
Quantum mechanics is the foundation for the description of phenomena in atomic physics and solid-state physics as well as elementary particle and nuclear physics. It also forms the basis for related sciences, such a quantum chemistry.
Primary source Werner Heisenberg
Formula for calculating the transmission capacity of any communication channel. The law gives the maximum theoretically achievable with an optimal channel coding. It does not specify which method is used to reach this maximum.
Primary Source: Claude Shannon and Ralph Hartley
Mental models in military and war
Two parties with different military capabilities and methods of warfare. In this case, it is important for the weaker party to take advantage of their special advantages and the weaknesses of the other side in order to be able to accomplish its goals.
The end of a war in which the parties involved are so powerful that they can only reach an agreement by exhausting each other’s resources. The one with the most reserves wins.
Parties prefer to focus their efforts on a single front, as it is easier to do so.
When an ally enters the war, a new front is created. Both fronts are weaker because it’s harder to move troops from one front to the other than to move them along a single line.
A narrow or small area through which a large number of soldiers can’t pass. A less powerful opponent can easily defeat them as they are unable to attack.
Counterinsurgency is one of the most extensive areas in asymmetrical war. It describes different tactics and strategies to combat armed rebellion. Counterinsurgency is a blend of civilian and military efforts aimed at simultaneously containing insurgency while addressing its root causes.
Robert McNamara developed this doctrine in response to Cuba’s crisis in 1962. It is implied that both parties will be destroyed if either of the two sides in a conflict use their nuclear weapons. The doctrine is based on theories about terror balance that argue powerful weapons are necessary to prevent the enemy from using similar weapons. The doctrine forced the warring parties to aim their weapons at the big cities of the enemy.
A guerrilla movement is an organized armed conflict that aims to influence or control a government. States will usually be interested in classifying these movements as guerrillas. It means that what is regarded on one side as resistance or freedom struggles are on the other regarded as armed revolt and guerrilla movements.
The act of using strategies and tactics that have worked in the past but are no longer effective.
It is a psychological tactic that involves convincing an opponent that a fortification full of empty walls contains hidden soldiers or traps. This in turn causes the enemy to retreat.
Construction (literal or metaphorical) designed to fool others into believing that something is better than it is. The name comes from the Russian prince Grigorij, who built theater decorations depicting prosperous villages along the route of Catherine II in 1787 to give the impression he had achieved rapid prosperity on the newly-conquered peninsula.
The strategy of luring a warring side into allowing the enemy to sneak behind their defenses. Odysseus originally conceived of the strategy.
A strategy designed to stop a conflict from becoming a total war by achieving a quick operational victory.
Primary Source: Heinz Guderian
Massive strategic attack against the military and political leadership of an opponent, with the aim of eliminating its counterattack capability or at least reducing it significantly.
It is better to send a large part of your own force in small groups and attack them sequentially than to engage the entire enemy force at once.
The strategy of enclosing the enemy by coordinating attacks on both sides. When the units that are executing the pincer ambush come into contact on the other side, they close in the enemy and prevent them from retreating. They must either strike outside or seek help.
The use of overwhelming force to achieve rapid dominance against the enemy.
Use of a decentralized force against an opponent in a manner that emphasizes mobility, communication, unit autonomy, and coordination/synchronization.
The strategy of separating the defensive forces from their primary defensive positions to allow an attacker to reach the rear guard.
Sun Tzu said that a brilliant leader is one who can win without killing anyone.
The defensive side positions its units in such a way that they slowly absorb the strength and power of the attacking enemy.
Semi-permanent, permanent or semi-permanent defensive structure providing physical protection for a military unit.
The strategy of wearing down the enemy instead of engaging in field battles or frontal assaults. By disrupting logistics or by affecting the morale. When time is on the side of warring parties or there are no other options, they use this tactic.
Primary Source: George Washington
The tactic of destroying fields, buildings, factories and other structures during a retreat. It is done to keep them out of enemy hands and to stop them contributing to their resources.
Continued reinforcement of the front military force until it reaches its maximum strength, followed by an assault with the superior force.
Mental models in political failure
Fear of legal sanctions can cause a person to be reluctant or unwilling to exercise their rights. Free speech is a common example.
Primary source: John Milton
The metaphor is used to describe any topic that is so controversial it’s “untouchable”, in that any politician who approaches the subject will suffer politically.
Primary Source: Kirk O’Donnell
Form of political corruption in which a government agency, instead of acting for the good of the society, represents commercial or special interest of a certain interest group or lobby that dominates an industry or sector.
Primary Source: George Stigler
Systematic political corruption where private interests have a significant influence on a state’s decisions to their advantage.
The institutions will do everything they can to maintain the problem for which they are the solutions.
Clay Shirky as the primary source
Mental Models of Rule of Law
Obligation of a party to provide evidence in support of a claim.
The courts are a part of the legal system, and they can interpret the law as well as create it by setting precedents.
A court’s previous judgments, rulings or decisions are used to guide or rule in subsequent cases or in cases that have similar circumstances.
The principle of procedural law that everyone has a right to certain minimum protections, in order to ensure a fair and equitable outcome.
A legal obligation to exercise reasonable care and pay attention when performing acts that may cause harm.
It is also called bona fides. This refers to a party who has been excusably ignorant of a relationship. In this context, what matters is a person’s assessment of how a reasonable person would have acted in a similar situation.
If something happens because of carelessness in a specific situation.
Basic principle of criminal procedure which gives a person suspected of committing a crime, the right to be treated as innocent until proven guilty. This principle is so important, many democracies explicitly state it in their constitutions or laws.
In most criminal prosecution systems, the standard for evidence is that it must be beyond reasonable doubt.