Farnam Street
Mastering the best of what other people have already figured out
Iatrogenics is when a treatment causes more harm than benefit. As iatros means healer in Greek, the word means “caused by the healer” or “brought by the healer.” Healer, in this sense, need not mean a doctor, but …
Charlie Munger, the business partner of Warren Buffett and Vice Chairman of Berkshire Hathaway, is famous for his quote “All I want to know is where I’m going to die, so I’ll never go there.” That thinking was …
The widespread misunderstanding of randomness causes a lot of problems. Today we’re going to explore a concept that causes a lot of human misjudgment. It’s called the bias from insensitivity to sample size, or, if you prefer,the law …
There are many ways in which you can visualize the concept of equilibrium, but one of the simplest comes from Boombustology where a ball sits on a simple curved shape. A situation in which equilibrium is possible is one in which over time, …
In statistics, a base rate refers to the percentage of a population (e.g. grasshoppers, people who live in New York, newborn babies) which have a characteristic. Given a random individual and no additional information, the base rate tells …
From Game Theory, by Morton Davis: The theory of games is a theory of decision making. It considers how one should make decisions and to a lesser extent, how one does make them. You make a number of decisions every day. Some involve deep …
Charles Lutwidge Dodgson (1832-1898), better known by his pseudonym Lewis Carroll, was not only an author but a keen observer of human nature. His most famous works are Alice’s Adventures in Wonderland and its sequel Through the …
Loss Aversion. In sports, on a game show, or just on the job, what causes people to choke when the stakes are high? A new study by researchers at the California Institute of Technology (Caltech) suggests that when there are high financial …
I came across that passage while reading “Industry and Humanity,” by former Canadian Prime Minister Mackenzie King. We’ll add this to our previous knowledge on Gresham’s Law. In the reign of Queen Elizabeth, an …
The prisoners’ dilemma is the best known strategy game in social science. The game shows why two entities might not cooperate even when it appears in their best (rational) interest to do so. What is rational for the individual in …
Welcome to the conjunctive and disjunctive events bias. Why are we so optimistic in our estimation of a projects cost and schedule? Why are we so surprised when something inevitably goes wrong? Because of the human tendency to underestimate …
Feedback loops are created when reactions affect themselves and can be positive or negative. Consider a thermostat regulating room temperature. This is an example of a negative feedback loop. As the temperature rises, the thermostat turns …
Black swans are the unexpected outliers, the rare and unpredictable events that defy our usual expectations and profoundly impact our world. They are the surprises that no one sees coming, the game-changers that reshape the landscape of the …
The Kantian Fairness Tendency refers to the pursuit of perfect fairness which causes a lot of terrible problems. Stop expecting the world to be fair and adjust your behavior accordingly. To learn about this mental model we turn to Charlie …
What is common to many is taken least care of, for all men have greater regard for what is their own than for what they possess in common with others. — Aristotle The rules pay you to do the wrong thing. — Garrett Hardin The Tragedy of the …
There are 3 things you should know about the availability heuristic: We often misjudge the frequency and magnitude of events that have happened recently. This happens, in part, because of the limitations on memory. We remember things better …
“The reliability that matters is not the simple reliability of one component of a system, but the final reliability of the total control system.” — Garrett Hardin *** We learn from Engineering that critical systems often require …
Other things being equal when the price of a good rises, the quantity demanded should fall. Economics refer to this as the law of demand. Because there are many counter-examples to this law it’s more of a quick rule of thumb. Giffen …
Whenever coins containing precious metals have been used along with base metal coins of the same denomination, both legally accepted as tender, the bad coins have driven the good coins out of circulation. Gresham’s Law is named after …
Catherine “Kitty” Genovese, a New York City woman who was stabbed to death near her home in the Kew Gardens section of Queens, New York on March 13, 1964. Genovese was buried in a family grave at Lakeview Cemetery in New Canaan, …
“Where all think alike, no one thinks very much.” — Walter Lippmann “The five most dangerous words in business are: ‘Everybody else is doing it.'” — Warren Buffett *** The Basics Consider a university freshman, …
We often pay attention to irrelevant information when making decisions. One way this can play out is in the form of ‘anchoring.’ When we make an estimate, we can end up using irrelevant information as our ‘anchor.’ We then adjust from …
In economics, comparative advantage refers to the ability of a person or nation to produce a good or service at a lower opportunity cost than another person (or nation). This is why trade can create value for both parties—because each …
Hindsight bias occurs when we look backward in time and see events are more predictable than they were at the time a decision was made. This bias, also known as the “knew-it-all-along effect,” typically involves those annoying …