In the 19th century, Italian economist Vilfredo Pareto found that approximately 80% of the land in Italy was owned by 20% of the population. The Pareto Principle, which we commonly know as the 80/20 rule (or law of the vital few), was born and states: 80% of the outcomes are due to 20% of the …
Simply stated: start with the end in mind. Take your desired goal or outcome and work backwards to identify the steps that get you to that outcome. Working backwards is one of the most useful and powerful mental models. It takes away uncertainty and anxiety: you no longer wonder if and how you can reach …
Probabilistic Thinking is trying to estimate the likelihood of any specific outcome, using logic and a bit of math. This helps us improve the accuracy of our decisions and focus on the most likely outcomes. You’ll be less influenced by the words of others, recent developments skewing your opinion (recency bias) and less likely to …
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Albert Einstein once said: “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it”. Compounding is the process by which we add interest to the original sum, which then earns interest on the previous sum and the newly added interest, and then earns interest on …
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Legendary investor Warren Buffett summarized the concept as: “Know your circle of competence, and stick within it. The size of that circle is not very important; knowing its boundaries, however, is vital.” In other words: know what you know and know what you don’t know. Your circle of competence is a combination of what you’re …
Circle of Competence: How Warren Buffett Avoids Problems Read More »
Hanlon’s Razor can be summarized as follows: Never attribute to malice that which is adequately explained by stupidity. In other words: don’t assume the worst intention in the actions of others. This helps you see the world in a more positive light, stop negative assumptions, and improve relationships. Like Occam’s Razor, it forces us to …
Hanlon’s Razor: Relax, Not Everything is Out to Get You Read More »
A philosophical razor is a tool used to eliminate improbable options in a given situation.Occam’s Razor (also known as the “law of parsimony”) can be summarized as: Among competing hypotheses, the one with the fewest assumptions should be selected. In other words: the simplest explanation is preferable to (and more likely to be true than) …
First-order thinking is fast and easy. We look for something that solves the immediate problem without considering the consequences. Second-order thinking is more deliberate. You think in terms of interactions and time and consider the subsequent effects of an action. This way of thinking helps you realize that, despite our intentions, our actions can have …
Second-Order Thinking: What Smart People Use to Outperform Read More »
First principles thinking has been made popular in recent years by Elon Musk. The idea is to break complicated problems down into basic elements and reassemble them from the ground up. Instead of thinking based on analogy – how have others done it before me? – you think based on fundamental truths – what are …
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Inspired by the German mathematician Carl Gustav Jacob Jacobi’s “invert, always invert,” this model is used to solve difficult problems. We tend to think one way about a problem: forward. We are at point A. We want to get to point B. How do we get there? Inversion makes us flip the problem around and think backwards: …