Pareto Principle

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This is another mental model that you’ve likely heard of before — the Pareto Principle, often known as the “80/20 rule”, where 20% of the effort can produce 80% of the results.

A great example in my life is my big reading shortcut using Blinkist. I can “finish” a book in 20% of the time, but still get roughly 80% of the benefit from it.

As we dig in, though, know that the Pareto Principle doesn’t always need to be exactly 80/20; perhaps it’s 50/15 or 95/10. Whatever the exact number, the idea is that a subset of effort can often lead to large achievements.

Website Traffic

Another great example is when it comes to SEO (Search Engine Optimization) on your website. While it’s generally wise to optimize as much as you can, you’ll often find that 80% of the traffic arriving to your site from Google only land on 20% of your pages.

I just looked at the GreenMellen stats for July, and it matches up almost perfectly. 2,373 people landed on 281 different pages of our site. However, the top 45 pages (16% of pages) where were roughly 80% of users (1896) landed. The other 236 pages were certainly valuable, but just a fraction of our traffic came through those.

Keep some, lose some

As you identify 80/20 areas in your life, you’ll find some are worth keep and some are worth losing. Your town may discover that 80% of the traffic is on 20% of the roads, but the rest of the roads are likely worth keeping… On the other hand, if your company derives 80% of their revenue from 20% of their clients, a consolidation might make sense.

To chew on it a bit more, here is a great list of 100 potential 80/20 situations you might see. Some may be valid, others not, but it’s a good list to get you started thinking about this.

Occam’s Razor

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The next mental model is one that I already use from time to time, but I thought was worth unpacking a bit more. Occam’s Razor is simply stated as “entities should not be multiplied unnecessarily“, but that can be a little hard to apply. I prefer the more useful version of:

“when you have two competing theories that make exactly the same predictions, the simpler one is the better”

This can apply to medicine when making a diagnosis. While your symptoms might be caused by a super rare disease, if they also match up with a common cold, that’s more likely the answer. Doctors often use the phrase “when you hear hoofbeats, think horses, not zebras” to express it and direct their thinking.

This also often comes into play with conspiracy theories, both large and small.

If you fail an important test, you may have two possible explanations:

  1. You should have studied more.
  2. Your teacher is out to get you.

Or if you’re considering whether the earth might be flat:

  1. Hundreds of thousands of researchers are being paid off, every rocket launch has been faked, and there are armed guards surrounding Antarctica.
  2. The earth is an sphere (well, an oblate spheroid), like we’ve all known for years.

This doesn’t mean it’s foolproof. You might indeed have a mystery illness, or your teacher might be mad at you because of your attitude, but most times Occam’s Razor will reveal the truth.

When searching for an answer Occam’s Razor is a great place to start, but that doesn’t mean you should always stop there.

Law of Small Numbers

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The next mental model to unpack is the Law of Small Numbers. The basic idea here is that the smaller a sample size you have, the more variation in patterns you will see. As a result, don’t trust estimates unless they’re based on a large sample size.

I enjoy messing with this law early in sports seasons. For example, if a baseball player hits two home runs on opening day, I might jokingly say to wife “Wow, he’s on pace to 324 homers this season!”. Clearly that won’t happen, but the estimate isn’t technically inaccurate.

Tossing a coin is the same way. After a few tosses, there’s a good chance that it won’t be 50/50. For example, if you toss a coin 4 times, there’s only 37% chance of landing each side twice; you’re actually more likely to be 3/1. However, the more tosses you make, the closer the numbers will get to 50/50.

It’s fun to play with this in terms of sport, but can be dangerous when looking at the stock market, medical trends, or politics. Always look at the sample size to determine if it’s large enough to really be showing a trend, or if it’s a small sample size with an odd outcome that would likely go away with more volume.

Inversion

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The next mental model that I’m looking at is the idea of inversion. The idea is very simple, yet counterintuitive — to find the answer you’re looking for, start by listing possible solutions that you know won’t work.

I see this two different ways.

First, is just listing the downsides to two different situations. If you’re deciding between two locations to travel for vacation, list the potential negative sides to each option and see if that clarifies your vision.

The other way to see this is the idea of “show me all of your bad ideas first“. If you’re trying to solve a problem, and you’re stuck, build a list of things that you know won’t get the job done. Often times, an item on that list will trigger an idea that leads you to the right solution.

Charlie Munger put it this way:

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Invert, always invert: Turn a situation or problem upside down. Look at it backward. What happens if all our plans go wrong? Where don’t we want to go, and how do you get there? Instead of looking for success, make a list of how to fail instead. Tell me where I’m going to die, that is, so I don’t go there.

It can be a weird thing to do, but often has amazing results. A few times when I’ve been stuck on a problem I just started writing lists of bad ideas, and somewhere in there the right answer always seems to seep out.

Incentives

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Some of the mental models that I’ve been sharing can be a bit difficult to understand, but that’s not the case here. People can be motivated by incentives, and choosing the right reward can bring huge benefits.

Charlie Munger has a great example of this with FedEx:

As he explains, the integrity of the FedEx system relies heavily on the ability to unload and then quickly reload packages at one central location within an allotted time. Years ago, the company was having a terrible problem getting its workers to get all the boxes off and then back on the planes in time. They tried numerous different things that didn’t work, until someone had the brilliant idea of paying the workers by the shift as opposed to by the hour. Poof, the problem was solved.

FedEx’s old pay-by-the-hour system rewarded those who took longer to get the job done. They were incentivized to take longer. By switching to pay-by-the-shift, workers were motivated to work faster and without error so they could go home, yet still earn the wages of a full shift.

If you can align your incentives with your goals, you can make magic. FedEx could have chosen to simply pay those workers more and hope that it would motivate them, but instead they effectively gave them each a raise that they could earn themselves.

Andrew McVagh agrees, and says it this way:

The key idea is that by providing people with the proper incentives you can alter their behavior towards whatever goal you have in mind.

Set your goals, align incentives with them, and things can work out very well.

Hanlon’s Razor

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If something bad happens to you, there are a few ways you can process what happened:

  1. It was a random error (software crash, failed brakes, etc).
  2. Someone made an unintentional mistake.
  3. Someone did this to me on purpose.

There’s nothing you can do about the first item, but many instances of the third (“someone did this to me on purpose”) are misplaced.

Hanlon’s Razor is pretty clear: never attribute to malice that which is adequately explained by stupidity. That’s not to say that malice doesn’t exist, but rather that our default should be to assume the other party made a mistake and they’re probably not out to get you.

We see these kinds of situations all the time.

  • Our neighbors are so loud that they must be doing this to irritate us. In reality, most of the time, they’re unaware that they’re causing a problem.
  • Someone fails to return your phone call, so they must hate you. Maybe, but it’s more likely that they got busy and simply forgot.
  • A car cut you off in traffic, so they must have been trying hit you. There is a far better chance that they simply didn’t see you or they were occupied with their phone. That’s stupidity, for sure, but not malice.

The Farnam Street blog summarizes it like this:

Hanlon’s Razor teaches us not to assume the worst intention in the actions of others. Understanding Hanlon’s Razor helps us see the world in a more positive light, stop negative assumptions, and improve relationships.

People can and will do malicious things to you, so you should be prepared for that. However, it likely happens far less often than you think, and remembering this razor is a great way to improve your perspective in a lot of situations.

First Principles Thinking

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First Principles Thinking is a mental model that encourages you to boil down questions and ideas to their most basic form, and then go from there.

An example from Elon Musk (shared by Catherine Clifford on CNBC) explains his take on it:

Musk used the cost of batteries as an example. “People would say, ‘Historically it’s cost $600 per kilowatt-hour, and so it’s not going to be much better than that in the future.’ And you say, ‘No, what are the batteries made of?’ First principles means you say, ‘Okay, what are the material constituents of the batteries?’

“You just have to think of clever ways to take those materials and combine them into the shape of a battery cell, and you can have batteries that are much, much cheaper than anyone realizes.”

Another great example comes from Tim Urban, explaining how a chef often uses first principles thinking, while a cook relies more on processes and memorization:

The words “cook” and “chef” seem kind of like synonyms. And in the real world, they’re often used interchangeably. But in this post, when I say chef, I don’t mean any ordinary chef. I mean the trailblazing chef—the kind of chef who invents recipes. And for our purposes, everyone else who enters a kitchen—all those who follow recipes—is a cook.

The chef reasons from first principles, and for the chef, the first principles are raw edible ingredients. Those are her puzzle pieces, her building blocks, and she works her way upwards from there, using her experience, her instincts, and her taste buds.

The cook works off of some version of what’s already out there—a recipe of some kind, a meal she tried and liked, a dish she watched someone else make.

Urban is careful to point out that there is nothing wrong with simply being a “cook”, as there is certainly a need for it. However, if you want to push ahead and make a difference, taking the first principles approach like a chef will lead to you great new places.

If you struggle with breaking something down into a small enough piece, the five whys can be a great way to keep digging deeper and deeper until you hit that initial level, and then you can work up from there.

Division of Labor

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Today’s mental model is on the idea of “Division of Labor”. In short, it’s about having a group of people work together who each focus on the areas where they are best, versus having everyone in your group try to excel at everything.

One good example of this is a band. While there is some crossover in skills, they generally have a drummer that is great at drumming, a bass player that is awesome on the bass, etc. If you had a band full of people that were pretty good at everything, versus awesome at their one thing, they likely wouldn’t be as successful.

Another example is simply a company like ours. Ashlea is a fantastic developer, Joanna is a top-notch designer, Robert is one of the best writers I know, and everyone on the team has their role. If I were to ding Robert because it’s not an amazing designer, that’d be foolish of me. He knows his role and excels at it, and with everyone doing their part we can do amazing work.

It takes time

When you’re starting a new company, you generally need to do everything. Ali and I had a bit of split in roles from day one (she designed, I developed), but we both needed to be decent at everything else (writing, social media, sales, finance, etc). Over time, we’ve been able to hire professionals for those roles, which is a huge benefit to all of us.

Andrew McVagh says it this way:

As different people master different skills we develop a sort of Collective Intelligence that makes a whole which is greater than the sum of the parts. Together we can make things much bigger than ourselves.

Early on in a business, it’s easy to say “I’m too busy so I’ll just try to hire another person with my same skillset”, but the more quickly you can start to truly divide the labor, the better off you’ll be in the long run.

Creative Destruction

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Creative destruction is the mental model that markets often churn through companies, with new ideas and processes replacing the old ones. Some companies are able to keep up with these changes, and some cannot.

According to Andrew McVagh, the power of creative destruction is to know that it’s coming and not be scared of it. In his words:

Creative Destruction reminds us that things will change over time and that all we can really do is adapt. However, with change comes opportunity and so the death of one industry means if we hustle we have a chance to be even more successful in whatever industry replaces it.

We’ve seen this many times in recent years, as Facebook replaced MySpace, digital photography killed Kodak, and high-speed internet destroyed AOL. Seth Godin discussed this on his blog today, sharing how being willing to try to new things is a great way to stay in business longer.

In some of these cases, there wasn’t much a company could do. If your entire business was based on developing print photos, the last 15 years certainly have been brutal. In the case of Kodak, though, they actually invented the digital camera and then buried it to keep their core business alive. If they had instead invested more in the future, things could be much different today.

Change is coming

No matter what industry you’re in, change is coming. The automotive world will change greatly in the next 20 years with electric and self-driving vehicles, and the delivery of goods will continue to get cheaper and faster as drones become more sophisticated. In our industry, design and development will continue to get easier with new tools, and the world of social media and digital marketing will likely only see greater acceleration in change.

Don’t worry about IF change is coming; it is, so just do what you can to prepare for it.

Circle of Competence

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The next mental model I’m digging into is the idea of your “circle of competence”. This is something I’ve talked about a few times on here, most recently with my post asking “where is your perimeter?“, and finding the edges of your circle.

As Warren Buffett puts it:

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“You have to stick within what I call your circle of competence. You have to know what you understand and what you don’t understand. It’s not terribly important how big the circle is. But’s terribly important that you know where the perimeter is.”

Taking it further, according to Albert Einstein, as you’re able to grow your circle of competence, you’re also quietly expanding your “circumference of darkness” around it. Another way to put it might be “the more you know, the more you know you don’t know”. This is generally a good thing.

Problems arise when you’re not accurate in defining your circle of competence, and you think you’re more informed on a subject than you really are. In Adam Grant’s words, this is when “confidence exceeds competence“. That tends to be a bad place to live.

Some people can get a bit embarrassed to admit where their competence ends, but it’s a powerful thing to be self-aware about. I know the areas where I can help others, and I know the areas where I need help, and keeping those two straight makes life much easier.