Thought experiments are “devices of the imagination used to investigate the nature of things.” Anytime you say “imagine” or “what if” and let your mind explore an idea you’re conducting a thought experiment. It’s a classic tool used by great thinkers across many disciplines, such as philosophy and physics, to examine what can be known. …
Thought Experiment: How Tesla Solved Difficult Problems Read More »
Scarcity refers to a gap between limited resources and theoretically limitless wants. It involves making a tradeoff, sacrificing or giving something up to obtain more of the desired resource. Scarcity applies to physical goods as well as abstract ideas such as time and energy. We place a higher value on scarce objects and a lower …
Both nature and economic life are fundamentally a competition for limited resources. Biologically we compete for usable energy, economically we compete for customer wealth, time and attention. The forces that make market economics work are supply and demand. What is The Law of Demand The law of demand states that there is an inverse relationship …
Supply and Demand: A Mental Model To Understand The Economy Read More »
“Nothing is easier than self-deceit. What a man wishes, he also believes.” – Demosthenes As the ancient Greeks found 2500 years ago, have a tendency to cherry-pick information that confirms our existing beliefs or ideas. We call this tendency confirmation bias. It’s a deeply ingrained mental habit that’s energy-conserving and comfortable. Imagine our ancestors hunting. …
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We have an instinctual desire to remain consistent with our past actions and beliefs. There’s a social benefit to it: we value consistency and conviction, even if it’s wrong, because it reduces uncertainty toward one’s future actions and beliefs. This creates trust. Yet this bias toward consistency and commitment can lead us to behave in …
The Availability Bias (or Availability Heuristic) is a mental shortcut that affects our judgment and decisions based on how easily we can think of examples. It works on the notion “if you can think of it, it must be important.” We tend to most easily recall what is salient, important, frequent and recent. First-hand experience …
Doing one thing means giving up on another. Opportunity cost is about tradeoffs: comparing an option against its alternatives to decide the best use of scarce resources. The adage “there is no such thing as a free lunch” summarizes the concept of opportunity cost well. To make it more vivid, imagine buying a car. You …
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Imagine: All of these stop or slow a flow: of water, blood or traffic. All of these are bottlenecks. Bottlenecks are all around us but are especially important in business. One small part in our manufacturing process or in our sales funnel can greatly (negatively) affect our overall performance. As Thomas Reid once said: “A …
Bottleneck: Identify The Weak Link To Improve Performance Read More »
Incentives are anything that persuades a person to change their behaviour. In English we know incentives as “the carrot and the stick,” but it’s such a proven and time-tested system that every culture has a version of this in its own language. It’s a force that exists throughout nature. Plants, animals and humans are constantly …
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A feedback loop is created when reactions affect themselves: A causes B, which in turn influences A (and C), and so on – it feeds back into itself. The continual movement of the loop frequently results in higher-order effects. Feedback loops can be positive or negative: Positive feedback, by itself, leads to instability via exponential …
Arbitrage is the practice of taking advantage of a price difference between two or more markets. A simple example: you may find a luxury product costing $50 at a thrift store or an auction, but luxury-conscious customers may pay $500 for that same luxury product at a boutique or online. That $450 is the arbitrage …
Margin of safety is an engineering concept used to describe the ability of a system to withstand loads that are greater than expected by building reserve capacity or “slack” into the system. Warren Buffett explains it best with two analogies – one for investing and one for building a bridge: “You don’t try to buy …
Margin of Safety: How To Protect Yourself Effectively Read More »