Maxims for Thinking Analytically

1. Simplify Thinking with Extreme and Simple Cases

When you are having trouble getting your thinking straight, go to an extreme case.

Extreme scenarios clarify. When grappling with a complex problem, considering extreme scenarios can reveal underlying principles and expose flawed assumptions. By pushing the boundaries of a situation, you can often identify the core drivers and constraints that influence the outcome.

Simple cases provide clarity. Similarly, simplifying a problem to its most basic elements can strip away unnecessary complexity and make it easier to understand. This approach involves reducing the number of variables, relationships, or agents involved to gain a clearer perspective.

Examples of simplification:

• In economics, analyzing a market with only two consumers and two goods to understand basic supply and demand dynamics.
• In negotiation, imagining a scenario with only two parties and a single issue to identify the zone of possible agreement.
• In policy, considering the extreme case of immortality to understand the economic consequences of longer lifespans.

By starting with extreme or simple cases, you can develop a solid foundation of understanding before tackling the complexities of the real world.

2. Embrace Uncertainty: The World Is Less Predictable Than You Think

The world is much more uncertain than you think.

Certainty is an illusion. Many people underestimate the degree of uncertainty inherent in the world, leading to surprise and disappointment when unexpected events occur. Recognizing the limits of our predictive abilities is crucial for making sound decisions.

Black swan events. Nassim Taleb's concept of "black swan" events highlights the impact of rare, unpredictable occurrences that have a disproportionate effect. Examples include:

• The 9/11 terrorist attacks
• The 2008 financial crisis
• The COVID-19 pandemic

Probabilistic thinking. Instead of viewing the future as a fixed path, it's more accurate to think in terms of probabilities. Assigning probabilities to different outcomes, even if subjective, can help you prepare for a range of possibilities.

By acknowledging the inherent uncertainty of the world, you can avoid overconfidence, develop more robust plans, and be better prepared to adapt to unforeseen circumstances.

3. Think Probabilistically: Assign and Update Beliefs

Think probabilistically about the world.

Quantify uncertainty. Assigning probabilities to events, even subjectively, allows for a more nuanced understanding of risk and potential outcomes. This involves estimating the likelihood of different scenarios based on available information and judgment.

Bayesian updating. As new information becomes available, it's essential to update your probability assessments using Bayesian principles. This involves adjusting your prior beliefs based on the strength and relevance of the new evidence.

Examples of probabilistic thinking:

• Estimating the chances of a project's success based on market research and team capabilities.
• Assessing the likelihood of a medical treatment's effectiveness based on clinical trial data.
• Updating your investment strategy based on economic indicators and market trends.

By embracing probabilistic thinking, you can make more informed decisions, adapt to changing circumstances, and avoid being blindsided by unexpected events.

4. Uncertainty Favors the Status Quo, But Not Always Wisely

Uncertainty is the friend of the status quo.

Status quo bias. People tend to prefer the current state of affairs, even when alternative options may be superior. This bias is often amplified by uncertainty, as the perceived risks of change outweigh the potential benefits.

Defaults matter. The default option often becomes the preferred choice, even if it's not the best one. This is because people tend to stick with what's familiar and avoid the effort of making a change.

Examples of status quo bias:

• Sticking with the same credit card or bank account for years, even if better options are available.
• Remaining in a job or relationship that is no longer fulfilling due to fear of the unknown.
• Failing to update software or security settings, leaving systems vulnerable to threats.

By recognizing the power of status quo bias, you can challenge your assumptions, explore new possibilities, and make more deliberate choices that align with your goals.

5. Good Decisions Can Yield Poor Outcomes: Focus on the Process

Good decisions sometimes have poor outcomes.

Resulting is a trap. Judging the quality of a decision solely based on its outcome is a common mistake. A good decision can lead to a bad outcome due to chance or unforeseen circumstances, and vice versa.

Focus on the process. Instead of fixating on the result, evaluate the decision-making process itself. Consider:

• What information was available at the time?
• Were the relevant factors considered?
• Was a rational framework used to weigh the options?

Decision trees. Decision trees are a tool to visualize choices and uncertainty involved, which can be informative and insightful even if you don’t solve the tree as formally.

By focusing on the quality of the decision-making process, you can learn from both successes and failures, improve your judgment, and avoid being swayed by hindsight bias.

6. Weigh Errors of Commission and Omission Equally

Errors of commission should be weighted the same as errors of omission.

Action vs. inaction. People tend to feel more regret for actions that lead to negative outcomes (errors of commission) than for inactions that result in missed opportunities (errors of omission). However, both types of errors should be evaluated equally.

Omission bias. This bias can lead to risk aversion and a reluctance to take action, even when the potential benefits outweigh the risks. It can also result in missed opportunities and a failure to adapt to changing circumstances.

Examples of omission bias:

• Avoiding investing in a promising stock due to fear of losing money, even if the potential gains are significant.
• Failing to speak up in a meeting when you have a valuable idea or concern.
• Not pursuing a personal or professional goal due to fear of failure.

By consciously weighing errors of commission and omission equally, you can overcome this bias, make more balanced decisions, and avoid being paralyzed by fear of regret.

7. Expand Your Options: Don't Be Limited by What's in Front of You

Don’t be limited by the options you have in front of you.

Challenge constraints. Sometimes, the best decision involves rejecting the available options and seeking out alternatives. This requires creativity, resourcefulness, and a willingness to think outside the box.

Expand your horizons. Don't settle for the first solution that comes to mind. Explore different perspectives, gather additional information, and consider unconventional approaches.

Examples of expanding options:

• Negotiating a salary beyond the initial offer by researching industry standards and highlighting your unique skills.
• Finding a creative solution to a problem by brainstorming with people from different backgrounds.
• Rejecting a prescribed medical treatment and seeking out alternative therapies or lifestyle changes.

By refusing to be limited by the options presented to you, you can unlock new possibilities, find more effective solutions, and achieve better outcomes.

8. Policy Analysis: Long Division Reveals True Value

Long division is the most important tool for policy analysis.

Cost-benefit thinking. Policy decisions should be based on a careful comparison of costs and benefits. This involves quantifying the resources required to implement a policy and the value it generates for society.

Output per unit of input. Long division provides a simple but powerful way to assess the efficiency of a policy. By calculating the output (e.g., lives saved, jobs created, pollution reduced) per unit of input (e.g., dollars spent, time invested), you can compare different options and identify the most cost-effective solutions.

Examples of long division in policy:

• Calculating the cost per vaccination to determine the most efficient allocation of resources for public health campaigns.
• Assessing the benefits per dollar spent on infrastructure projects to prioritize investments that generate the greatest economic return.
• Evaluating the reduction in crime rates per dollar spent on law enforcement programs to optimize crime prevention strategies.

By applying the principle of long division, policymakers can make more informed decisions, allocate resources effectively, and maximize the impact of their interventions.

9. Elasticities: A Powerful Tool for Understanding Marginal Impact

Elasticities are a powerful tool for understanding many important things in life.

Responsiveness to change. Elasticity measures the responsiveness of one variable to changes in another. This concept is particularly useful for understanding how people and systems react to incentives, policies, and external forces.

Thinking at the margin. Elasticity encourages thinking at the margin, which involves considering the impact of small changes rather than focusing on averages or totals. This can lead to more nuanced and effective decision-making.

Examples of elasticity in action:

• Price elasticity of demand: How much does the quantity demanded of a product change when its price increases?
• Income elasticity of demand: How much does the quantity demanded of a product change when people's incomes increase?
• Elasticity of labor supply: How much does the quantity of labor supplied change when wages increase?

By understanding elasticities, you can better predict how people will respond to different policies and incentives, design more effective interventions, and make more informed decisions.

10. Heterogeneity Matters: Recognize Differences Within Populations

Heterogeneity in the population explains many phenomena.

Beyond averages. Averages can be misleading when there is significant variation within a population. Recognizing and understanding this heterogeneity is crucial for designing effective policies and interventions.

Targeted approaches. Policies that treat everyone the same may be ineffective or even harmful. Instead, it's often more effective to tailor interventions to the specific needs and characteristics of different subgroups within the population.

Examples of heterogeneity in policy:

• Recognizing that COVID-19 mortality rates vary significantly by age and underlying health conditions to prioritize vaccination efforts.
• Tailoring educational programs to the specific learning styles and needs of different student populations.
• Designing social safety nets that address the unique challenges faced by different demographic groups.

By acknowledging and addressing heterogeneity, policymakers can create more equitable and effective solutions that meet the diverse needs of the population.

11. Capitalize on Complementarities: Seek Synergistic Partnerships

Capitalize on complementarities.

Synergy is key. The value of two inputs or activities is greater when they are combined than when they are used separately. Recognizing and capitalizing on these complementarities can lead to significant gains in efficiency and effectiveness.

Positive cross-partial derivatives. In economic terms, complementarity exists when the cross-partial derivative of a production function is positive. This means that increasing the quantity of one input increases the marginal productivity of the other input.

Examples of capitalizing on complementarities:

• Combining tennis courts and instructors to maximize the number of people who can learn and play tennis.
• Pairing fertilizer with irrigation to increase crop yields.
• Forming partnerships between individuals with complementary skills to achieve greater success in business or research.

By seeking out and leveraging complementarities, you can create synergistic relationships that generate greater value than the sum of their parts.

12. Cultivate a Fulfilling Life: Banish Envy and Regret

Strive hard not to be envious – see your friend’s success as your gain.

Envy is destructive. Envy is a potent source of unhappiness and can damage relationships. Instead of resenting others' success, strive to see it as an inspiration and a source of potential benefit.

Regret is wasteful. Dwelling on past mistakes or missed opportunities is unproductive. Learn from your experiences, but don't let regret consume you. Focus on making the best decisions you can in the present.

Anticipate pleasure. Increase your overall happiness by anticipating pleasurable events and savoring positive memories. Planning vacations, setting goals, and reflecting on past successes can all contribute to a more fulfilling life.

By cultivating a mindset of gratitude, acceptance, and forward-thinking optimism, you can create a more meaningful and satisfying life.

Last updated: February 11, 2025