“It is easier to conquer than to administer.
With enough leverage, a finger could overturn the world;
but to support the world, one must have the shoulders of Hercules.”
— Jean-Jacques Rousseau, The Social Contract
***
The Basics
A good place to begin understanding the concept of leverage is the etymology of the word. We can trace its origins back to the Proto-Indo-European ‘legwh’ which described something light, agile, or easy. From this, the Latin ‘levare’ formed, which referred to something that was ‘not heavy.’ But the word absorbed into English in the 14th century from Old French, where ‘levier’ referred to raising something (hence the reflexive verb, ‘se lever’ which, in general, is used in the context of getting up in the morning.) So in essence, leverage refers to making something light by raising it in a specific manner.
The fusion of these two ideas perfectly describes a physical lever- a pole connected to a fulcrum which serves to create additional strength or force. A lever does not bend or create additional friction.
Three main types of physical levers have been identified
- Levers with the fulcrum in the middle. A force is applied on one side and the load is on the other side (such as a crowbar.)
- Levers where the load is placed in the middle and the force is applied on one side, with the fulcrum located on the other (such as a bottle opener.)
- Levers where the force is applied in the middle (such as our lower jaw bones.)
Archimedes is credited with establishing the concept of leverage, over 2000 years ago. He famously stated that, given a lever long enough and enough distance, he could lift the earth.
In On the Equilibrium of Planes, Archimedes wrote: “Magnitudes in equilibrium at distances are reciprocally proportional to their weights.”
However, the Peripatetic School (the followers of Aristotle) wrote of levers before the birth of Archimedes. In Mechanica, a work believed to have been written by members of this school of thought, they state:
Why is it that small forces can move great weights by means of a lever, as was said at the beginning of the treatise, seeing that one naturally adds the weight of the lever? For surely the smaller weight is easier to move, and it is smaller without the lever. Is the lever the reason, being equivalent to a beam with a cord attached below, and divided into two equal parts? For the fulcrum acts as the attached cord: for both these remain stationary, and act as a centre. For since under the impulse of the same weight the greater radius from the centre moves the more rapidly, and there are three elements in the lever, the fulcrum, that is the cord or centre, and the two weights, the one which causes the movement, and the one that is moved : now the ratio of the weight moved to the weight moving it is the inverse ratio of the distances from the centre. Now, the greater the distance from the fulcrum, the more easily it will move. The reason has been given before that the point further from the centre describes the greater circle, so that by the use of the same force, when the motive force is farther from the lever, it will cause a greater movement.
Like many of our mental models, leverage is a scientific concept which has applications in many other areas.
Leverage is an idea which humans have used to great effect for thousands of years, enabling them to gain disproportionate strength. For example, the ancient Egyptians used levers to lift stones weighing up to 100 tons in order to build the pyramids and obelisks. Many of humanity’s tools, used for centuries all over the world, incorporate levers- scissors, pliers, door handles, wheelbarrows, fishing rods and more.
The concept of leverage has been applied to other areas over the last century or so. In Decision Making, Alan C McLucas defines leverage and leverage points as:
Leverage is built on the notion that small, well-focused actions can sometimes produce significant, enduring improvements if they are applied in the right place. Tacking a difficult problem is often a matter of seeing where the high leverage lies.
… A leverage point is where a small difference can make a large difference. Leverage points provide kernel ides and procedures for formulating solutions. Identifying leverage points helps us: create new courses of action, develop increased awareness of those things that may cause a difficult before there are any obvious signs of trouble and figure out what is causing a difficult.
Leverage in Negotiations and Business
“You don’t convince people by challenging their longest and most firmly held opinions. You find common ground and work from there. Or you look for leverage to make them listen. Or you create an alternative with so much support from other people that the opposition voluntarily abandons its views and joins your camp.”
— Ryan Holiday, The Obstacle Is the Way
***
Roger J Volkema provides an example of how people use leverage for their own benefit in negotiations:
It is one of the hottest days of the year and something is wrong with your refrigerator…the temperature seems too warm. You contact a repairman who promises to come that afternoon. You ask about the likely cost. He says it could be around $80… The repairman arrives, late in the afternoon. He believes the problem is with your freezer. He takes out all the frozen foods, unscrews panels, cuts wires. There is the problem: a coil had gone bad. It will cost you $230. Sound familiar? You are now at the mercy of the repairman. You know little to nothing about freezer coils…you lack a choice and agree to pay the price. This story has been repeated dozens of times in your life…in each case, you felt at a disadvantage… They had leverage.
This tactic is used commonly by businesses. Buying a drink or snack on an airplane will always be expensive because the airline knows people lack an alternative, giving them the leverage. Spotify and Youtube can subject users to endless advertisements because the service is otherwise free and this gives them control. Companies with a monopoly (due to a patent, for example) can charge more because they own a particular market. A doctor can present an extortionate bill because we have no option to return the service (“hey doc, can you undo these stitches? I can get a cheaper operation elsewhere.”)
Volkema goes on to explain the key principles of leverage:
1. Leverage is based on perceptions. If a party to a negotiation has an advantage and nobody perceives that the advantage exists…there is no leverage. This is especially true for the party with the disadvantage…Thus, it is perceived cost, real or imaginary that enables leverage.
… 2. Leverage is dynamic. Leverage can change as quickly as new information becomes available…These sorts of changes occur during formal business negotiations as well. If, for example, information central to an upcoming bidding process known only to one company becomes available to the other company, then leverage among companies has shifted.
…3. Leverage is situation specific…The aforementioned company with privileged information might have an advantage over another company, but in another situation, the advantage could be reversed (for example, the second company has just made a technical breakthrough the will revolutionize the industry.) Sometimes the situations that create leverage overlap or can be linked in some way.
…4. Leverage is a social or relational construct. Therefore, one has advantage over another individual only as long as the relationship exists. If one part leaves the relationship…leverage ceases to exist…Without another party, it is like being on a seesaw by yourself.
In one of his iconic letters to shareholders, Warren Buffett declared: “Don’t ask the barber whether you need a haircut.” To do so transfers leverage to the barber, who will always say yes. To retain leverage would necessitate telling the barber you certainly do not need a haircut, leading them to offer you an attractive deal.
Anyone who has ever haggled at a market or with a salesperson will understand the principle of using leverage in a negotiation. The trick is to declare their product or service to be so flawed and worthless that you are doing them a favor by buying it. Subsequently, the next step is usually to offer a low price which they counter with a slightly higher one that is still much lower than the asking price.
Another amusing example of leverage in negotiation comes from Jarod Kintz:
Money is not equal for all people. A strong personal brand adds more lift and leverage. One dollar from me may buy a soda from a car dealership, but one dollar from Justin Bieber may get him a Ferrari. And they would pay him to drive away.
Related Mental Models and Concepts
- Critical mass — Also known as a boiling point or tipping point, critical mass is the point where something (an idea, belief, trend, virus, behavior etc) is prevalent enough to grow at an exponential rate. It becomes contagious and is everywhere in a short span of time. We can combine this mental model with leverage to understand how drastic changes can be created with minimal effort. The critical mass serves as a lever. Imagine a teacher who wants to encourage the 30 pupils in her class to read more. Research has shown that just 10% of a population are necessary to form a critical mass. Rather than seeking to convince all 30 pupils to read more, she needs to persuade 3 popular ones. Once they begin reading more, the teacher can leverage them to spread their new love of books. Once this is achieved, it can pass on to the rest of the school.
- Power law — A power law is a relationship between two things when a change in one can lead to a large change in the other, regardless of the initial quantities. In the case of leverage, a power law relationship exists between the effort exerted on the lever (actual or metaphorical) and the outcome. For example, consider two children on a seesaw. If both children are an equal weight, the seesaw will go up and down with ease. If one goes away and a heavier child replaces them, a small difference in their weights will lead to a large increase in the speed at which the seesaw moves.
- Pareto’s principle — This principle states that 80% of outcomes are the result of 20% of inputs. Recognizing the 20% can provide us with a great deal of leverage. If a business receives 80% of its income from 20% of customers, the latter group can be leveraged to increase profits (e.g. by offering special deals and treatment to them, increasing their loyalty.)If 20% of the foods we eat comprise 80% of our diets, we can leverage these to improve our health (e.g. if a person eats bread each day, they could switch from white bread to wholegrain.)
- Tribal leadership — This concept involves leveraging ‘tribes’ within an organisation to further an agenda and grow a company culture. Tribes go through five stages towards maximum productivity and each has different leverage points.
- Outsourcing — Outsourcing certain tasks (such as cleaning or making transcripts) enables us to leverage one asset – money- to free up more time and make more money as a result.
- Commitment consistency bias — We have a desire to remain consistent with our past behaviour. Companies and manipulative people leverage this cleverly. If our favorite coffee shop raises their prices, we are unlikely to switch to somewhere else- after all, we have a loyalty card and the baristas know our usual order. If we realize the interest rates at our bank are lower than elsewhere, we are unlikely to change- we must have chosen them in the first place for a good reason. If an old friend suddenly becomes obnoxious and insulting, we are unlikely to stop spending time with them, due to the sunken costs of all the time spent together in the past
- Activation energy — Activation energy is the initial amount of energy necessary to commence a chemical reaction. We can apply this to leverage – the energy required to move the lever is the activation energy required to create movement.
