De-risking

Test your assumptions in the real world instead of spending too much effort upfront.

That way, you de-risk the decision by getting feedback on it before committing.

Prevent Premature Optimization by taking small bets.

A few concrete examples would be

• testing whether people want to read about X by tweeting about it rather than diving into writing a long-form article about it immediately
• building MVPs

If you’re not embarrassed by the first version of your product, you’ve launched too late.

— Reid Hoffman

The Third Story

Basically, to each situation involving two parties, there are three stories:

• yours
• theirs
• one told from the view of an impartial observer (the third story)

To deal with difficult situations, it’s important to be able to recognize and emphasize with the other person.

Your ability to tell the third story will help you understand the situation.

Understanding the gap between your own story and the other party’s story helps.

Even better if you can make the case for their story - and especially if you can make it better than they can. Then you truly understand. Even if it conflicts with your own.

This is a way to be less wrong / wrong less when dealing with people.

Use this mental model to overcome Fundamental Attribution Error.

Most Respectful Interpretation (MRI)

This is a model for dealing with people, helping you to emphasize with them.

In any given situation, there are multiple ways to explain a person’s behavior.

This mental model asks you to interpret the other parties’ actions in the most respectful way — giving people the benefit of the doubt.

Use this mental model to overcome Fundamental Attribution Error.

Disconfirmation Bias

Where people impose a stronger burden of proof on ideas they don’t want to believe.

As Psychologist Daniel Gilbert put it in his NYTimes article “I’m O.K., You’re Biased”:

When our bathroom scale delivers bad news, we hop off and then on again, just to make sure we didn’t misread the display or put too much pressure on one foot. When our scale delivers good news, we smile and head for the shower. By uncritically accepting evidence when it pleases us, and insisting on more when it doesn’t, we subtly tip the scales in our favor.

Moral Hazard

Moral hazard is a phenomenon where people take on more risk when they have information that makes them feel more protected.

It can involve one person, such as when wearing a bike helmet may give a false sense of security, leading to more reckless biking. But the person is obviously still responsible for any costs incurred from a crash.

This is also a common occurrence with the Principal-Agent Problem.

Goodhart’s Law

Goodhart’s Law is commonly known as

When a measure becomes a target, it ceases to be a good measure.

This phrasing is from Cambridge anthropologist Marilyn Strathern in her 1997 paper “‘Improving Ratings’: Audit in the British University System.”

The original formulation from Charles Goodhart actually goes

Any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.

as stated in a conference paper presented at the Reserve Bank of Australia in 1975.

Observer Effect

The observer effect means that when people observe something, it can have an effect on it.

For example, when you use a tire pressure gauge to measure the air pressure in a tire, you let out some of the air which makes the pressure go down.

Another example is when someone important, like the boss, comes to town. Everyone will act nicer and dress better.

Technical Debt & Path Dependence

Think about the Technical Debt you incur by making short-sighted decisions.

Technical debt is a term used in software development that refers to the extra work that builds up when a quick and easy, but not necessarily the best or most efficient, solution is chosen for a problem instead of a better approach that would take longer.

Imagine that you’re building a house. To save time, you decide to use some cheaper materials and skip some safety measures. It works for now, and you move in faster. But over time, you realize you’re spending more time and money fixing issues that wouldn’t have been there if you’d built the house properly in the first place.

This extra cost and work you have to deal with now is like “technical debt” in software development.

Likewise, consider the path dependence that comes as a result of your decision. Which paths does your decision close off? Open up?

Path dependence is a concept in economics and social sciences that suggests the decisions one faces are dependent on the pathway of past decisions or events, even though past circumstances may no longer be relevant.

Think of it like taking a hike. Once you’ve chosen a certain path, it’s not easy to backtrack or switch to another path - so the direction you started in influences where you end up.

The same idea applies to the decisions we make in life or in business; past choices often constrain future options, sometimes leading to outcomes that may seem illogical or inefficient when viewed independently of their history.

Preserving Optionality

The idea behind this mental model is to make choices that preserve future options.

For example, keeping a rainy-day fund, or dedicating time to learning new skills that can open new opportunities later.

Or you can delay making a decision to wait for more information.

This is good to aim for, but be careful that your hesitation or aim for more options don’t end up costing more than it’s worth.

80/20 & Power Laws

The Pareto principle, also known as the 80/20 rule, is a concept in economics that suggests that 80% of effects often come from 20% of the causes.

For example, in a business setting, it could be that 80% of a company’s profits come from 20% of its customers. Or, in a different context, it might be that 80% of the peas harvested in a garden come from 20% of the pea pods.

The numbers 80 and 20 are not exact; they’re just commonly observed proportions. The idea is that there’s often a significant imbalance where a small number of causes lead to a large portion of the results.

The 80/20 Rule is a power law distribution.

It’s a power law because the math that creates such a distribution involves exponentiation, aka power.

A power law is a mathematical relationship between two quantities, where a change in one quantity results in a proportional change in the other. Power laws are also known as scaling laws.

The relationship can be described by the equation:

Where:

• and are the quantities,
• is a constant,
• is the power, or exponent, which characterizes the power-law relationship.

The most distinctive attribute of a power law is the appearance of a straight line when both axes are on a logarithmic scale.

That’s because taking the Logarithm of both sides of this equation yields a linear relationship:

This means that as increases or decreases, increases or decreases exponentially according to the power .

Cost-Benefit Analysis

Cost-benefit analysis is used to evaluate potential positive and negative outcomes of an undertaking before making a decision.

You can do either scoring with -10 to 10 for a pros/cons-like thing.

Or you can do above but with monetary value. This is the more conventional approach.

Maslow’s Hammer

If the only tool you have is a hammer, you tend to see every problem as a nail.
— Abraham Maslow

Be careful not to over-rely on familiar or favourite tools.

I’m very aware of the mental model, but not it’s name. Cool to learn!

I’ve also heard of it as Handy Hammer Syndrome.