Tag: Compounding

Mental Models For a Pandemic

Mental models help us understand the world better, something which is especially valuable during times of confusion, like a pandemic. Here’s how to apply mental models to gain a more accurate picture of reality and keep a cool head.

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It feels overwhelming when the world changes rapidly, abruptly, and extensively. The changes come so fast it can be hard to keep up—and the future, which a few months ago seemed reliable, now has so many unknown dimensions. In the face of such uncertainty, mental models are valuable tools for helping you think through significant disruptions such as a pandemic.

A mental model is simply a representation of how something works. They are how we simplify complexity, why we consider some things more relevant than others, and how we reason. Using them increases your clarity of understanding, providing direction for the choices you need to make and the options you want to keep open.

Models for ourselves

During a pandemic, a useful model is “the map is not the territory.” In rapidly changing situations like a global health crisis, any reporting is an incomplete snapshot in time. Our maps are going to be inaccurate for many reasons: limited testing availability, poor reporting, ineffective information sharing, lack of expertise in analyzing the available information. The list goes on.

If past reporting hasn’t been completely accurate, then why would you assume current reporting is? You have to be careful when interpreting the information you receive, using it as a marker to scope out a range of what is happening in the territory.

In our current pandemic, we can easily spot our map issues. There aren’t enough tests available in most countries. Because COVID-19 isn’t fatal for the majority of people who contract it, there are likely many people who get it but don’t meet the testing criteria. Therefore, we don’t know how many people have it.

When we look at country-level reporting, we can also see not all countries are reporting to the same standard. Sometimes this isn’t a matter of “better” or “worse”; there are just different ways of collating the numbers. Some countries don’t have the infrastructure for widespread data collection and sharing. Different countries also have different standards for what counts as a death caused by COVID-19.

In other nations, incentives affect reporting. Some countries downplay their infection rate so as to not create panic. Some governments avoid reporting because it undermines their political interests. Others are more worried about the information on the economic map than the health one.

Although it is important to be realistic about our maps, it doesn’t mean we shouldn’t seek to improve their quality. Paying attention to information from experts and ignoring unverified soundbites is one step to increasing the accuracy of our maps. The more accurate we can get them, the more likely it is that we’ll be able to unlock new possibilities that help us deal with the crisis and plan for the future.

There are two models that we can use to improve the effectiveness of the maps we do have: “compounding” and “probabilistic thinking.”

Compounding is exponential growth, something a lot of us tend to have a poor intuitive grasp on. We see the immediate linear relationships in the situation, like how one test diagnoses one person, while not understanding the compounding effects of that relationship. Increased testing can lead to an exponential decrease in virus transmission because each infected person usually passes the virus onto more than just one other person.

One of the clearest stories to illustrate exponential growth is the story of the man who asked to be paid in rice. In this story, a servant is to be rewarded for his service. When asked how he wanted to be paid, he asks to be paid in rice, using a chessboard to determine the final amount. Starting with one grain, the amount of rice is to be doubled for each square. One grain on the first square looks pathetic. But halfway through the chessboard, the servant is making a good yearly living. And after doubling the rice sixty-four times, the servant is owed more rice than the whole world can produce.

Improving our ability to think exponentially helps us understand how more testing can lead to both an exponential decrease in testing prices and an exponential increase in the production of those tests. It also makes clear just how far-reaching the impact of our actions can be if we don’t take precautions with the assumption that we could be infected.

Probabilistic thinking is also invaluable in helping us make decisions based on the incomplete information we have. In the absence of enough testing, for example, we need to use probabilistic thinking to make decisions on what actions to pursue. We ask ourselves questions like: Do I have COVID-19? If there’s a 1% chance I have it, is it worth visiting my grandparents?

Being able to evaluate reasonable probability has huge impacts on how we approach physical distancing. Combining the models of probabilistic thinking and map is not the territory suggests our actions need to be guided by infection numbers much higher than the ones we have. We are likely to make significantly different social decisions if we estimate the probability of infection as being three people out of ten instead of one person out of one thousand.

Bayesian updating can also help clarify the physical distancing actions you should take. There’s a small probability of being part of a horrendous chain of events that might not just have poor direct consequences but also follow you for the rest of your life. Evaluating how responsible you are being in terms of limiting transmission, would you bet a loved one’s life on it?

Which leads us to Hanlon’s Razor. It’s hard not to get angry at reports of beach parties during spring break or at the guy four doors down who has his friends over to hang out every night. For your own sanity, try using Hanlon’s Razor to evaluate their behavior. They are not being malicious and trying to kill people. They are just exceptionally and tragically ignorant.

Finally, on a day-to-day basis, trying to make small decisions with incomplete information, you can use inversion. You can look at the problem backwards. When the best way forward is far from clear, you ask yourself what you could do to make things worse, and then avoid doing those things.

Models for society

Applying mental models aids in the understanding the dynamics of the large-scale social response.

Currently we are seeing the counterintuitive measures with first-order negatives (closing businesses) but second- and third-order positives (reduced transmission, less stress on the healthcare system). Second-order thinking is an invaluable tool at all times, including during a pandemic. It’s so important that we encourage the thinking, analysis, and decision-making that factors in the effects of the effects of the decisions we make.

In order to improve the maps that our leaders have to make decisions, we need to sort through the feedback loops providing the content. If we can improve not only the feedback but also the pace of iterations, we have a better chance of making good decisions.

For example, if we improve the rate of testing and the speed of the results, it would be a major game-changer. Imagine if knowing whether you had the virus or not was a $0.01 test that gave you a result in less than a minute. In that case, we could make different decisions about social openness, even in the absence of a vaccine (however, this may have invasive privacy implications, as tracking this would be quite difficult otherwise).

As we watch the pandemic and its consequences unfold, it becomes clear that leadership and authority are not the same thing. Our hierarchical instincts emerge strongly in times of crisis. Leadership vacuums, then, are devastating, and disasters expose the cracks in our hierarchies. However, we also see that people can display strong leadership without needing any authority. A pandemic provides opportunities for such leadership to emerge at community and local levels, providing alternate pathways for meeting the needs of many.

One critical model we can use to look at society during a pandemic is Ecosystems. When we think about ecosystems, we might imagine a variety of organisms interacting in a forest or the ocean. But our cities are also ecosystems, as is the earth as a whole. Understanding system dynamics can give us a lot of insight into what is happening in our societies, both at the micro and macro level.

One property of ecosystems that is useful to contemplate in situations like a pandemic is resilience—the speed at which an ecosystem recovers after a disturbance. There are many factors that contribute to resilience, such as diversity and adaptability. Looking at our global situation, one factor threatening to undermine our collective resilience is that our economy has rewarded razor-thin efficiency in the recent past. The problem with thin margins is they offer no buffer in the face of disruption. Therefore, ecosystems with thin margins are not at all resilient. Small disturbances can bring them down completely. And a pandemic is not a small disturbance.

Some argue that what we are facing now is a Black Swan: an unpredictable event beyond normal expectations with severe consequences. Most businesses are not ready to face one. You could argue that an economic recession is not a black swan, but the particular shape of this pandemic is testing the resiliency of our social and economic ecosystems regardless. The closing of shops and business, causing huge disruption, has exposed fragile supply chains. We just don’t see these types of events often enough, even if we know they’re theoretically possible. So we don’t prepare for them. We don’t or can’t create big enough personal and social margins of safety. Individuals and businesses don’t have enough money in the bank. We don’t have enough medical facilities and supplies. Instead, we have optimized for a narrow range of possibilities, compromising the resilience of systems we rely on.

Finally, as we look at the role national borders are playing during this pandemic, we can use the Thermodynamics model to gain insight into how to manage flows of people during and after restrictions. Insulation requires a lot of work, as we are seeing with our borders and the subsequent effect on our economies. It’s unsustainable for long periods of time. Just like how two objects of different temperatures that come into contact with each other eventually reach thermal equilibrium, people will mix with each other. All borders have openings of some sort. It’s important to extend planning to incorporate the realistic tendencies of reintegration.

Some final thoughts about the future

As we look for opportunities about how to move forward both as individuals and societies, Cooperation provides a useful lens. Possibly more critical to evolution than competition, cooperation is a powerful force. It’s rampant throughout the biological world; even bacteria cooperate. As a species, we have been cooperating with each other for a long time. All of us have given up some independence for access to resources provided by others.

Pandemics are intensified because of connection. But we can use that same connectivity to mitigate some negative effects by leveraging our community networks to create cooperative interactions that fill gaps in the government response. We can also use the cooperation lens to create more resilient connections in the future.

Finally, we need to ask ourselves how we can improve our antifragility. How can we get to a place where we grow stronger through change and challenge? It’s not about getting “back to normal.” The normal that was our world in 2019 has proven to be fragile. We shouldn’t want to get back to a time when we were unprepared and vulnerable.

Existential threats are a reality of life on earth. One of the best lessons we can learn is to open our eyes and integrate planning for massive change into how we approach our lives. This will not be the last pandemic, no matter how careful we are. The goal now should not be about assigning blame or succumbing to hindsight bias to try to implement rules designed to prevent a similar situation in the future. We will be better off if we make changes aimed at increasing our resilience and embracing the benefits of challenge.

Still curious? Learn more by reading The Great Mental Models.

The Best of Farnam Street 2019

We read for the same reasons we have conversations — to enrich our lives.

Reading helps us to think, feel, and reflect — not only upon ourselves and others but upon our ideas, and our relationship with the world. Reading deepens our understanding and helps us live consciously.

Of the 31 articles we published on FS this year, here are the top ten as measured by a combination of page views, responses, and feeling.

How Not to Be Stupid — Stupidity is overlooking or dismissing conspicuously crucial information. Here are seven situational factors that compromise your cognitive ability and result in increased odds of stupidity.

The Danger of Comparing Yourself to Others — When you stop comparing yourself to others and turn your focus inward, you start being better at what really matters: being you.

Yes, It’s All Your Fault: Active vs. Passive Mindsets — The hard truth is that most things in your life – good and bad – are your fault. The sooner you realize that, the better things will be. Here’s how to cultivate an active mindset and take control of your life.

Getting Ahead By Being Inefficient — Inefficient does not mean ineffective, and it is certainly not the same as lazy. You get things done – just not in the most effective way possible. You’re a bit sloppy, and use more energy. But don’t feel bad about it. There is real value in not being the best.

How to Do Great Things — If luck is the cause of a person’s success, why are so many so lucky time and time again? Learn how to create your own luck by being intelligently prepared.

The Anatomy of a Great Decision — Making better decisions is one of the best skills we can develop. Good decisions save time, money, and stress. Here, we break down what makes a good decision and what we can do to improve our decision-making processes.

The Importance of Working With “A” Players — Building a team is more complicated than collecting talent. I once tried to solve a problem by putting a bunch of PhDs in a room. While comments like that sounded good and got me a lot of projects above my level, they were rarely effective at delivering actual results.

Compounding Knowledge — The filing cabinet of knowledge stored in Warren Buffett’s brain has helped make him the most successful investor of our time. But it takes much more than simply reading a lot. In this article, learn how to create your own “snowball effect” to compound what you know into opportunity.

An Investment Approach That Works — There are as many investment strategies as there are investment opportunities. Some are good; many are terrible. Here’s the one that I lean on the most when I’m looking for low risk and above average returns.

Resonance: How to Open Doors For Other People — Opening doors for other people is a critical concept to understand in life. Read this article to learn more about how to show people that you care.

More interesting things, you might have missed

Thank you

As we touched on in the annual letter, it’s been a wonderful year at FS. We are looking forward to a wider variety of content on the blog in 2020 with a mix of deep dives and pieces exploring new subjects.

Thank you for an amazing 2019 and we look forward to learning new things with you in 2020.

Still curious? You can find the top five podcast episodes in 2019 here. Our Best of Farnam Street archive can be found here.

The Surprising Power of The Long Game

It’s easy to overestimate the importance of luck on success and underestimate the importance of investing in success every single day. Too often, we convince ourselves that success was just luck. We tell ourselves, the school teacher that left millions was just lucky. No. She wasn’t. She was just playing a different game than you were. She was playing the long game.

The long game isn’t particularly notable and sometimes it’s not even noticeable. It’s boring. But when someone chooses to play the long game from an early age, the results can be extraordinary. The long game changes how you conduct your personal and business affairs.

There is an old saying that I think of often, but I’m not sure where it comes from: If you do what everyone else is doing, you shouldn’t be surprised to get the same results everyone else is getting.

Ignoring the effect of luck on outcomes — the proverbial lottery ticket —doing what everyone else is doing pretty much ensures that you’re going to be average. Not average in the world, but average to people in similar circumstances. There are a lot of ways not to be average, but one of them is the tradeoff between the long game and the short game.

What starts small compounds into something more. The longer you play the long game, the easier it is to play and the greater the rewards. The longer you play the short game the harder it becomes to change and the bigger the bill facing you when you do want to change.

The Short Game

The short game is putting off anything that seems hard for doing something that seems easy or fun. The short game offers visible and immediate benefits. The short game is seductive.

  • Why do your homework when you can go out and play?
  • Why wait to pay for a phone in cash, when you can put it on your credit card?
  • Why go to the gym when you can go drinking with your friends?
  • Why invest in your relationship with your partner today when you can work a little bit extra in the office?
  • Why learn something boring that doesn’t change when you can learn something sexy that impresses people?
  • Why bust your butt at work to do the work before the meeting when you can read the executive summary and pretend like everyone else?

The effects of the short game multiply the longer you play. On any given day the impact is small but as days turn into months and years the result is enormous. People who play the short game don’t realize the costs until they become too large to ignore.

The problem with the short game is that the costs are small and never seem to matter much on any given day. Doing your homework today won’t give you straight A’s. Saving $5 today won’t make you a millionaire. Going to the gym and eating healthy today won’t make you fit. Reading a book won’t make you smart. Going to sleep on time tonight won’t make you healthier tomorrow. Sure we might try these things when we’re motivated but since the results are not immediate we revert back to the short game.

As the weeks turn into months and the months into years, the short game compounds into disastrous results. It’s not the one day trade off that matters but it’s accumulation.

Playing the long game means suffering a little today. And why would we want to suffer today when we can suffer tomorrow. But if our intention is to always change tomorrow, then tomorrow never comes. All we have is today.

The Long Game

The long game is the opposite of the short game, it means paying a small price today to make tomorrow’s tomorrow easier. If we can do this long enough to see the results, it feeds on itself.

From the outside, the long game looks pretty boring:

  • Saving money and investing it for tomorrow
  • Leaving the party early to go get some sleep
  • Investing time in your relationship today so you have a foundation when something happens
  • Doing your homework before you go out to play
  • Going to the gym rather than watching Netflix

… and countless other examples.

In its simplest form, the long game isn’t really debatable. Everyone agrees, for example, we should spend less than we make and invest the difference. Playing the long game is a slight change, one that seems insignificant at the moment, but one that becomes the difference between financial freedom and struggling to make next month’s rent.

The first step to the long game is the hardest. The first step is visibly negative. You have to be willing to suffer today in order to not suffer tomorrow. This is why the long game is hard to play. People rarely see the small steps when they’re looking for enormous outcomes, but deserving enormous outcomes is mostly the result of a series of small steps that culminate into something visible.

Conclusion

In everything you do, you’re either playing a short term or long term game. You can’t opt out and you can’t play a long-term game in everything, you need to pick what matters to you. But in everything you do time amplifies the difference between long and short-term games. The question you need to think about is when and where to play a long-term game. A good place to start is with things that compound: knowledge, relationships, and finances.

 

This article is an expansion of something I originally touched on here

Why Early Decisions Have the Greatest Impact and Why Growing too Much is a Bad Thing

I never went to Engineering school. My undergrad is Computer Science. Despite that I’ve always wanted to learn more about Engineering.

John Kuprenas and Matthew Frederick have put together a book, 101 Things I Learned in Engineering School, which contains some of the big ideas.

In the author’s note, Kuprenas writes:

(This book) introduces engineering largely through its context, by emphasizing the common sense behind some of its fundamental concepts, the themes intertwined among its many specialities, and the simple abstract principles that can be derived from real-world circumstances. It presents, I believe, some clear glimpses of the forest as well as the trees within it.

Here are three (of the many) things I noted in the book.

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#8 An object receives a force, experiences stress, and exhibits strain.

force-stress-strain

Force, stress, and strain are used somewhat interchangeably in the lay world and may even be used with less than ideal rigor by engineers. However, they have different meanings.

A force, sometimes called “load,” exists external to and acts upon a body, causing it to change speed, direction, or shape. Examples of forces include water pressure on a submarine hull, snow loads on a bridge, and wind loads on the sides of a skyscraper.

Stress is the “Experience” of a body—its internal resistance to an external force acting on it. Stress is force divided by unit area, and is expressed in units such as pounds per square inch.

Strain is a product of stress. It is the measurable percentage of deformation or change in an object such as a change in length.

#48 Early decisions have the greatest impact.

Early Decisions Have Greater Impact

Decisions made just days or weeks into a project—assumptions of end-user needs, commitments to a schedule, the size and shape of a building footprint, and so on—have the most significant impact on design, feasibility, and cost. As decisions are made later and later in the design process, their influence decreases. Minor cost savings sometimes can be realized through value engineering in the later stages of design, but the biggest cost factors are embedded at the outset in a project’s DNA.

Everyone seems to understand this point on the surface and yet few people consider the implications. I know a lot of people who make their career on cleaning up their own mess. That is, they make a poor initial decision and then work extra hours while running around with stress and panic as they clean up their own mess. In the worst organizations these people are promoted for doing an exceptional job.

Proper management of early decisions produces more free time and lower stress.

#75 A successful system won’t necessarily work at a different scale.

Systems Scale

An imaginary team of engineers sought to build a “super-horse” that would be twice as tall as a normal horse. When they created it, they discovered it to be a troubled, inefficient beast. Not only was it two times the height of a normal horse, it was twice as wide and twice as long, resulting in an overall mass eight times greater than normal. But the cross sectional area of its veins and arteries was only four times that of a normal horse calling for its heart to work twice as hard. The surface area of its feed was four times that of a normal horse, but each foot had to support twice the weight per unit of surface area compared to a normal horse. Ultimately, the sickly animal had to be put down.

This becomes interesting when you think of the ideal size for things and how we, as well intentioned humans, often make things worse. This has a name. It’s called iatrogenics.

Let us briefly put an organizational lens on this. Inside organizations resources are scarce. Generally the more people you have under you the more influence and authority you have inside the organization. Unless there is a proper culture and incentive system in place, your incentive is to grow and not shrink. In fact, in all the meetings I’ve ever been in with senior management, I can’t recall anyone who ran a division saying I have too many resources. It’s a derivative of Parkinson’s Law — only work isn’t expanding to fill the time available. Instead, work is expanding to fill the number of people.

Contrast that with Berkshire Hathaway, run by Warren Buffett. In a 2010 letter to shareholders he wrote:

Our flexibility in respect to capital allocation has accounted for much of our progress to date. We have been able to take money we earn from, say, See’s Candies or Business Wire (two of our best-run businesses, but also two offering limited reinvestment opportunities) and use it as part of the stake we needed to buy BNSF.

In the 2014 letter he wrote:

To date, See’s has earned $1.9 billion pre-tax, with its growth having required added investment of only $40 million. See’s has thus been able to distribute huge sums that have helped Berkshire buy other businesses that, in turn, have themselves produced large distributable profits. (Envision rabbits breeding.) Additionally, through watching See’s in action, I gained a business education about the value of powerful brands that opened my eyes to many other profitable investments.

There is an optimal size to See’s. Had they retained that $1.9 billion in earnings they distributed to Berkshire, the CEO and management team might have a claim to bigger pay checks, they’d be managing ~$2 billion in assets instead of $40 million, but the result would have been very sub-optimal.

Our pursuit of growth beyond a certain point often ensures that one of the biggest forces in the world, time, is working against us. “What is missing,” writes Jeff Stibel in BreakPoint, “is that the unit of measure for progress isn’t size, it’s time.”

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Other books in the series:
101 Things I Learned in Culinary School
101 Things I Learned in Business School
101 Things I Learned in Law School
101 Things I Learned in Film School