Mental models are frameworks for thinking. They simplify complex things so your brain can reason through them.

They are shortcuts through the noise.

You use them to make good decisions without needing to know everything about a situation. They help you assess how systems work. They help you make better decisions.

A

Activation Energy

A fire is not much more than a combination of carbon and oxygen, but the forests and coal mines of the world are not combusting at will because such a chemical reaction requires the input of a critical level of “activation energy” in order to get a reaction started. Two combustible elements alone are not enough.

Activation energy is the minimum energy which must be available to a chemical system with potential reactants to result in a chemical reaction.

Active Listening

Listening that requires that the listener fully concentrates, understands, responds and then remembers what is being said.

Ad Hominem

Attacking your opponent’s character or personal traits in an attempt to undermine their argument.

Adaptation

Species tend to adapt to their surroundings in order to survive, given the combination of their genetics and their environment.

Populations of species adapt through the process of evolution by natural selection, as the most-fit examples of the species replicate at an above-average rate.

Adverse selection

When traders with better private information about the quality of a product will selectively participate in trades which benefit them the most

Affective forecasting

Predicting how happy you will be in the future based upon some event or change is hard.

We normally guess that the magnitude of the effect will be larger than it actually is, because 1) we’ve just been asked to think about that event, which makes it seem more important than it actually is in our everyday happiness, and 2) we underestimate our ability to adapt.

Agnosticism

The view that the truth values of certain claims-especially metaphysical and religious claims such as whether God, the divine, or the supernatural exist.

Algebraic Equivalence

The introduction of algebra allowed us to demonstrate mathematically and abstractly that two seemingly different things could be the same.

Algernon’s Law

IQ is nearly impossible to improve in healthy people without tradeoffs.

If we could get smarter by a simple mechanism, like upregulating acetylcholine, which had no negative side effects, then perhaps evolution would have upregulated acetylcholine already.

Algorithms

An algorithm is generally an automated set of rules or a “blueprint” leading a series of steps or actions resulting in a desired outcome, and often stated in the form of a series of “If → Then” statements.

Algorithms are best known for their use in modern computing, but are a feature of biological life as well. For example, human DNA contains an algorithm for building a human being.

Alloying

When we combine various elements, we create new substances. In the alloying process is that 2+2 can equal not 4 but 6 — the alloy can be far stronger than the simple addition of the underlying elements would lead us to believe.

Alternative Dispute Resolution (ADR)

Dispute resolution processes and techniques that act as a means for disagreeing parties to come to an agreement short of litigation.

Anchoring

A cognitive bias where an individual relies too heavily on an initial piece of information—the “anchor”—when making decisions.

Anecdotal

Using a personal experience or an isolated example instead of a sound argument or compelling evidence.

Anti-pattern

A solution that seems reasonable, but does more harm than good (and there’s a better alternative). An antipattern is just like a pattern, except that instead of a solution it gives something that looks superficially like a solution but isn’t one.

Apophenia

The natural tendency of humans to see patterns in random noise. i.e: hearing satanic messages when playing songs in reverse.

Appeal to Emotion

Manipulating an emotional response in place of a valid or compelling argument.

Appeasement

A diplomatic policy of making political or material concessions to an enemy power in order to avoid conflict.

Arbitrage

Taking advantage of different prices between markets for the same products. Nearly all arbitrage situations eventually disappear as they are discovered and exploited.

Asymmetric Warfare

The asymmetry model leads to an application in warfare whereby one side seemingly “plays by different rules” than the other side due to circumstance. Generally, this model is applied by an insurgency with limited resources. Unable to out-muscle their opponents, asymmetric fighters use other tactics, as with terrorism creating fear that’s disproportionate to their actual destructive ability.

Attrition warfare

A military strategy in which a belligerent attempts to win a war by wearing down the enemy to the point of collapse through continuous losses in personnel and material.

Aumann’s agreement theorem

If two rational agents disagree when they both have exactly the same information, one of them must be wrong.

The ‘same information’ qualifier is crucial; very often disagreement is due to differences in information, not failure of rationality. So you should take disagreement seriously if you have reason to believe the other person has significant information that you don’t.

Availability Bias

People tend to heavily weigh their judgments toward more recent information, making new opinions biased toward that latest news.

https://en.wikipedia.org/wiki/Availability_heuristic

B

Backup Systems/Redundancy

A good engineer never assumes the perfect reliability of the components of the system. He or she builds in redundancy to protect the integrity of the total system. Without the application of this robustness principle, tangible and intangible systems tend to fail over time.

Two is one, one is none.

Bandwagon

Appealing to popularity or the fact that many people do something as an attempted form of validation.

Barriers to Entry

A cost that must be incurred by a new entrant into a market that incumbents don’t or haven’t had to incur.

Backward chaining

Working backward from your goal.

Bateman’s principle

The most sexually selective sex will be that which has the most costs from rearing the offspring.

In humans, women have more costs associated with raising offspring (maternal mortality, breastfeeding, rearing) and are the more selective sex. In seahorses, the opposite is true: male seahorses carry the offspring in their pouch, and are more selective with those they choose to mate with.

Bayes’ Theorem

Describes the probability of an event, based on conditions that might be related to the event. For example, suppose one is interested in whether a person has cancer, and knows the person’s age. If cancer is related to age, then, using Bayes’ theorem, information about the person’s age can be used to more accurately assess the probability that they have cancer.

Bayesian reasoning / Bayesian Updating

The Bayesian method is a method of thought (named for Thomas Bayes) whereby one takes into account all prior relevant probabilities and then incrementally updates them as newer information arrives. This method is especially productive given the fundamentally non-deterministic world we experience: We must use prior odds and new information in combination to arrive at our best decisions.

• Assigning a probability before an event, receiving evidence, and updating the probability you assigned.

Keep in mind the words of John Maynard Keynes: “When the facts change, I change my mind. What do you do, sir?”

Beachhead

A temporary line created when a military unit reaches a landing beach by sea and begins to defend the area while other reinforcements help out until a unit large enough to begin advancing has arrived.

Bell Curve/Normal Distribution

The normal distribution is a statistical process that leads to the well-known graphical representation of a bell curve, with a meaningful central “average” and increasingly rare standard deviations from that average when correctly sampled.

Best Alternative to a Negotiated Agreement (BATNA)

The most advantageous alternative course of action a party can take if negotiations fail and an agreement cannot be reached.

Bias from Incentives

Highly responsive to incentives, humans have perhaps the most varied and hardest to understand set of incentives in the animal kingdom. This causes us to distort our thinking when it is in our own interest to do so.

Bikeshedding (aka Law of triviality)

Substituting a hard and important problem for an easy and inconsequential one.

Parkinson’s law of triviality is C. Northcote Parkinson’s 1957 argument that members of an organization give disproportionate weight to trivial issues.

Parkinson provides the example of a fictional committee whose job was to approve the plans for a nuclear power plant spending the majority of its time on discussions about relatively minor but easy-to-grasp issues, such as what materials to use for the staff bike shed, while neglecting the proposed design of the plant itself, which is far more important and a far more difficult and complex task.

The law has been applied to software development and other activities. The terms bicycle-shed effect, bike-shed effect, and bike-shedding were coined as a metaphor to illuminate the law of triviality.

Binary Search

A search algorithm that finds the position of a target value within a sorted array. It compares the target value to the middle element of the array; if they are unequal, the half in which the target cannot lie is eliminated and the search continues on the remaining half until it is successful.

Black box

A device, system or object which can be viewed in terms of its inputs and outputs (or transfer characteristics), without any knowledge of its internal workings. Its implementation is ‘opaque’ (black).

Black or White

When two alternative states are presented as the only possibilities, even though more possibilities exist.

Black Swan

Popularized by Nassim Taleb, a Black Swan is a rare and highly consequential event that is invisible to a given observer ahead of time.

If you have seen only white swans, you cannot categorically state that there are no black swans, but the inverse is not true: seeing one black swan is enough for you to state that there are black swans.

Black Swan events are necessarily unpredictable to the observer (as Taleb likes to say, Thanksgiving is a Black Swan for the turkey, not the butcher) and thus must be dealt with by addressing the fragility-robustness-antifragility spectrum rather than through better methods of prediction.

A metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

Boots on the Ground

The belief that military success can only be achieved through the direct physical presence of troops in a conflict area.

Botnet

A number of Internet-connected computers communicating with other similar machines in which components located on networked computers communicate and coordinate their actions by command and control (C&C) or by passing messages to one another.

Bottlenecks

A bottleneck describes the place at which a flow (of a tangible or intangible) is stopped, thus holding it back from continuous movement.

As with a clogged artery or a blocked drain, a bottleneck in production of any good or service can be small but have a disproportionate impact if it is in the critical path.

Bribery

Given the chance, it is often easier to pay a certain agent to look the other way than to follow the rules. The enforcer of the rules is then neutralized. This principle/agent problem can be seen as a form of arbitrage.

Broken windows theory

Maintaining and monitoring urban environments to prevent small crimes such as vandalism, public drinking, and toll-jumping helps to create an atmosphere of order and lawfulness, thereby preventing more serious crimes from happening.

Bulverism

Dismissing a claim on the basis of how the opponent got there, rather than a reasoned rebuttal.

Business Case

It is often presented in a well-structured written document, but may also sometimes come in the form of a short verbal argument or presentation. It captures the reasoning for initiating a project or task.

Butterfly Effect

The concept that small causes can have large effects.

Bounded Rationality 

When given a choice, people will always follow a path that is simple and something they are used to (even if it’s not the most optimal outcome).

Byzantine Generals Problem 

A situation where parties must agree on a single strategy in order to avoid complete failure, but where some of the involved parties are corrupt and disseminating false information or are otherwise unreliable.

This problem is built around an imaginary General who makes a decision to attack or retreat, and must communicate the decision to his lieutenants. A given number of these actors are traitors & they cannot be relied upon to properly communicate orders.

C

Capital Allocation Options

Five capital allocation choices CEOs have:

1. invest in existing operations;
2. acquire other businesses;
3. issue dividends;
   
4. pay down debt;
   
5. repurchase stock.

Along with this, they have three means of generating capital:

1. internal/operational cash flow;
2. debt issuance;
   
3. equity issuance.

Cargo culta

Millenarian movement first described in Melanesia which encompasses a range of practices and occurs in the wake of contact with more technologically advanced societies.

The name derives from the belief which began among Melanesians in the late 19th and early 20th century that various ritualistic acts such as the building of an airplane runway will result in the appearance of material wealth, particularly highly desirable Western goods (i.e., cargo), via Western airplanes.

Carrot and stick

A policy of offering a combination of rewards and punishment to induce behavior.

Catalyst

A substance which increases the rate of a chemical reaction. A catalyst either kick-starts or maintains a chemical reaction, but isn’t itself a reactant. The reaction may slow or stop without the addition of catalysts. Social systems, of course, take on many similar traits, and we can view catalysts in a similar light.

Chain Reaction

A sequence of reactions where a reactive product or by-product causes additional reactions to take place. In a chain reaction, positive feedback leads to a self-amplifying chain of events.

Chaos Dynamics (Sensitivity to Initial Conditions)

In a world such as ours, governed by chaos dynamics, small changes (perturbations) in initial conditions have massive downstream effects as near-infinite feedback loops occur; this phenomenon is also called the butterfly effect. This means that some aspects of physical systems (like the weather more than a few days from now) as well as social systems (the behaviour of a group of human beings over a long period) are fundamentally unpredictable.

Chaos theory

When the present determines the future, but the approximate present does not approximately determine the future.

Chesterton’s fence

If you don’t see a purpose for a fence, don’t pull it down, lest you be run over by an angry bull which was behind a tree.

If you can’t see the purpose of a social norm, like whether there is any value to having family unit, you shouldn’t ignore it without having thought hard about why it is there.

Asking people who endorse the family unit why it’s important and noticing their reasoning is flawed often isn’t good enough either.

Chilling Effect

The inhibition or discouragement of the legitimate exercise of natural and legal rights by the threat of legal sanction.

Any coercion or threat of coercion (or other unpleasantries) can have a chilling effect on a group of people regarding a specific behaviour, and often can be statistically measured or be plainly observed.

Churn

Churn is present in many business and human systems: A constant figure is periodically lost and must be replaced before any new figures are added over the top. Insurance companies and subscription services are well aware of the concept of churn — every year, a certain number of customers are lost and must be replaced.

Standing still is the equivalent of losing, as seen in the model called the “Red Queen Effect.”

Cialdini’s Six Principles of Influence

1. Reciprocity: People tend to return a favor.
2. Commitment: If people commit…they are more likely to honor that commitment.
3. Social Proof: People will do things they see other people are doing.
4. Authority: People will tend to obey authority figures.
5. Liking: People are easily persuaded by other people they like.
6. Scarcity: Perceived scarcity will generate demand.

Circle of Competence

An idea introduced by Warren Buffett and Charles Munger in relation to investing: each individual tends to have an area or areas in which they really, truly know their stuff, their area of special competence. Areas not inside that circle are problematic because not only are we ignorant about them, but we may also be ignorant of our own ignorance. Thus, when we’re making decisions, it becomes important to define and attend to our special circle, so as to act accordingly.

Classical conditioning

You’ve probably heard about Pavlov’s dog. Classical conditioning is a learning method in which a biologically potent stimulus—such as food—is paired with a previously neutral stimulus—let’s say a bell. The neutral stimulus comes to create a response (salivation) that is usually similar to the one created by the potent stimulus (in this case, food).

Clarke’s Third Law

Any sufficiently advanced technology is indistinguishable from magic.

Click farm

A large group of low-paid workers are hired to click on paid advertising links for the click fraudster.

Coase theorem

If trade in an externality is possible and there are sufficiently low transaction costs, bargaining will lead to a Pareto efficient outcome regardless of the initial allocation of property.

Coda

A term used in music primarily to designated a passage that brings a piece to an end. People psychologically expect codas, and so they can be used for influence.

Cognitive biases

Tendencies to think in certain ways that can lead to systematic deviations from a standard of rationality or good judgments.

These are systematic flaws in how we think. We don’t look for information that proves us wrong. We estimate that events we can easily recall (perhaps because they happened more recently, or frequently appear in the media) are more likely to occur than they are. We’re overconfident. Particularly relative to our level of expertise. And a whole bunch more. The plot thickens: it’s only our friends and colleagues who are biased.

Cognitive dissonance

Holding two conflicting beliefs causes us to feel slightly uncomfortable, and to reject (at least) one of them. For instance, holding the belief that science is a useful way to discover the truth would conflict with another belief that vaccines cause autism. If you held both of these beliefs, one would have to be discarded.

Collateral damage

Deaths, injuries, or other damage inflicted on an unintended target.

Commandos vs Infantry vs Police

Three distinct groups of people that define the lifetime of a company: Commandos, Infantry, and Police.

Whether invading countries or markets, the first wave of troops to see battle are the commandos… Grouping offshore as the commandos do their work is the second wave of soldiers, the infantry… But there is still a need for a military presence in the territory they leave behind, which they have liberated. These third-wave troops hate change. They aren’t troops at all but police.

Common knowledge

Kknowledge that is known by everyone or nearly everyone, usually with reference to a particular community. Common knowledge doesn’t necessarily mean truth, but most people will accept it as valid.

Coefficient of determination

How well a model fits or explains data (i.e. how much of the variance it explains).

Commitment & Consistency Bias

Humans are subject to a bias towards keeping their prior commitments and staying consistent with our prior selves when possible. This trait is necessary for social cohesion: people who often change their conclusions and habits are often distrusted.

If people commit to an idea or goal, they are more likely to honour the commitment if establishing that idea or goal is consistent with their self-image. Even if the original incentive or motivation is removed after they have agreed, they will continue to honour the agreement. For example, once someone has committed themselves to a viewpoint in an argument, rarely do they change ‘sides’.

The desire to be and appear consistent with what we have already done.

Comparative Advantage

An agent has a comparative advantage over another in producing a particular good if they can produce that good at a lower relative opportunity cost or autarky price, i.e. at a lower relative marginal cost prior to trade.

The Scottish economist David Ricardo had an unusual and non-intuitive insight: Two individuals, firms, or countries could benefit from trading with one another even if one of them was better at everything. Comparative advantage is best seen as an applied opportunity cost: If it has the opportunity to trade, an entity gives up free gains in productivity by not focusing on what it does best.

The ability to carry out a particular economic activity—such as making a specific product—more efficiently than another activity.

Complex Adaptive Systems

A complex adaptive system, as distinguished from a complex system in general, is one that can understand itself and change based on that understanding.

Complex adaptive systems are social systems.

The difference is best illustrated by thinking about weather prediction contrasted to stock market prediction. The weather will not change based on an important forecaster’s opinion, but the stock market might.

Complex adaptive systems are thus fundamentally not predictable.

Compound Interest / Interest on interest

Compounding is the process by which we add interest to a fixed sum, which then earns interest on the previous sum and the newly added interest, and then earns interest on that amount, and so on ad infinitum. It is an exponential effect, rather than a linear, or additive, effect.

Money is not the only thing that compounds; ideas and relationships do as well. In tangible realms, compounding is always subject to physical limits and diminishing returns; intangibles can compound more freely.

Confidence Interval

Confidence intervals consist of a range of values (interval) that act as good estimates of the unknown population parameter; however, the interval computed from a particular sample does not necessarily include the true value of the parameter.

Confirmation Bias

The tendency to search for, interpret, favor, and recall information in a way that confirms one’s preexisting beliefs or hypotheses, while giving disproportionately less consideration to alternative possibilities.

Consequence vs Conviction

Where there is low consequence and you have very low confidence in your own opinion, you should absolutely delegate. And delegate completely, let people make mistakes and learn. On the other side, obviously where the consequences are dramatic and you have extremely high conviction that you are right, you actually can’t let your junior colleague make a mistake.

Consequentialism

Holding that the consequences of one’s conduct are the ultimate basis for any judgment about the rightness or wrongness of that conduct.

Conspicuous Consumption

The spending of money on and the acquiring of luxury goods and services to publicly display economic power.

Containment

A military strategy to stop the expansion of an enemy.

Content Farm

Large amounts of textual content which is specifically designed to satisfy algorithms for maximal retrieval by automated search engines.

Convergent Thinking

Follows a particular set of logical steps to arrive at one solution, which in some cases is a ‘correct’ solution.

Cooperation (Including Symbiosis)

Competition tends to describe most biological systems, but cooperation at various levels is just as important a dynamic. Without cooperation, no group survives, and the cooperation of groups gives rise to even more complex versions of organization. Cooperation and competition tend to coexist at multiple levels.

Coordination game 

Game in which the players benefit from working together. There’s no incentive for either party to cheat since it will result in a worse outcome than cooperating. Example: driving on the right side of the road.

Core Competency

A harmonized combination of multiple resources and skills that distinguish a firm in the marketplace.

Cost-benefit Analysis

A systematic approach to estimating the strengths and weaknesses of alternatives that satisfy transactions, activities or functional requirements for a business.

Counterinsurgency

Though asymmetric insurgent warfare can be extremely effective, over time competitors have also developed counterinsurgency strategies.

Tit-for-tat warfare or competition will often lead to a feedback loop that demands insurgency and counterinsurgency.

Creative Destruction

Process of industrial mutation that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

Coined by economist Joseph Schumpeter, the term “creative destruction” describes the capitalistic process at work in a functioning free-market system. Motivated by personal incentives (including but not limited to financial profit), entrepreneurs will push to best one another in a never-ending game of creative one-upmanship, in the process destroying old ideas and replacing them with newer technology. Beware getting left behind.

Critical Mass

The smallest amount of fissile material needed for a sustained nuclear chain reaction. In social dynamics, critical mass is a sufficient number of adopters of an innovation in a social system so that the rate of adoption becomes self-sustaining and creates further growth.

“Critical mass” refers to the mass needed to have the critical event occur, most commonly in a nuclear system.

Criticality

A system becomes critical when it is about to jump discretely from one phase to another. The marginal utility of the last unit before the phase change is wildly higher than any unit before it. A frequently cited example is water turning from a liquid to a vapor when heated to a specific temperature.

Crowdsourcing

The process of obtaining needed services, ideas, or content by soliciting contributions from a large group of people, especially an online community, rather than from employees or suppliers.

Cunningham’s Law

The best way to get the right answer on the internet is not to ask a question; it’s to post the wrong answer.

Curiosity Instinct

We like to call other species curious, but we are the most curious of all, an instinct which led us out of the savanna and led us to learn a great deal about the world around us, using that information to create the world in our collective minds. The curiosity instinct leads to unique human behavior and forms of organization like the scientific enterprise. Even before there were direct incentives to innovate, humans innovated out of curiosity.

D

Deadweight Loss

A loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.

Decision Trees

A decision support tool that uses a tree-like graph or model of decisions and their possible consequences, including chance event outcomes, resource costs, and utility.

Default Status

The USCB ecologist/economist Garrett Hardin once said that “The scientific mind is not closed: it is merely well-guarded by a conscientious and seldom sleeping gatekeeper.” The way it does that is with the concept of the default status: The “resting position” of common sense, whereby the burden of proof falls on assertions to the contrary.

Given the problem of opportunity costs and limited time and energy, a default status is nearly always necessary to avoid wasting time. Examples include the laws of thermodynamics, the law of natural selection, and the incentive-caused bias.

Deliberate Practice

How expert one becomes at a skill has more to do with how one practices than with merely performing a skill a large number of times.

Denial

Denying reality can be a coping mechanism, a survival mechanism, or a purposeful tactic.

Design Pattern

The re-usable form of a solution to a design problem.

Diffusion of responsibility

A sociopsychological phenomenon whereby a person is less likely to take responsibility for action or inaction when others are present.

Directly Responsible Individual

A management concept, originally championed by Apple, that good things come if someone is explicitly responsible for something.

Distributive Justice vs Procedural Justice

Procedural justice concerns the fairness and the transparency of the processes by which decisions are made, and may be contrasted with distributive justice (fairness in the distribution of rights or resources), and retributive justice (fairness in the punishment of wrongs).

Divergent Thinking

Thought process or method used to generate creative ideas by exploring many possible solutions.

Diversification

The process of allocating your resources in a way that reduces the exposure to any one particular risk.

Divide and Conquer

Recursively breaking down a problem into two or more sub-problems of the same or related type, until these become simple enough to be solved directly.

The solutions to the sub-problems are then combined to give a solution to the original problem.

Double-Entry Bookkeeping

One of the marvels of modern capitalism has been the bookkeeping system introduced in Genoa in the 14th century. The double-entry system requires that every entry, such as income, also be entered into another corresponding account. Correct double-entry bookkeeping acts as a check on potential accounting errors and allows for accurate records and thus, more accurate behavior by the owner of a firm.

Dunbar’s Number

The primatologist Robin Dunbar observed through study that the number of individuals a primate can get to know and trust closely is related to the size of its neocortex. Extrapolating from his study of primates, Dunbar theorized that the Dunbar number for a human being is somewhere in the 100–250 range, which is supported by certain studies of human behavior and social networks.

Dunning-Kruger Effect

Relatively unskilled persons suffer illusory superiority, mistakenly assessing their ability to be much higher than it really is…[and] highly skilled individuals may underestimate their relative competence and may erroneously assume that tasks which are easy for them are also easy for others.

Duverger’s Law

A principle which states that plurality-rule elections (such as first past the post) structured within single-member districts tend to favor a two-party system, and that ’the double ballot majority system and proportional representation tend to favor multipartism.

E

Economies of Scale

The cost advantages that enterprises obtain due to size, output, or scale of operation, with cost per unit of output generally decreasing with increasing scale as fixed costs are spread out over more units of output.

https://en.wikipedia.org/wiki/Economies_of_scale

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Ecosystems

An ecosystem describes any group of organisms coexisting with the natural world. Most ecosystems show diverse forms of life taking on different approaches to survival, with such pressures leading to varying behavior. Social systems can be seen in the same light as the physical ecosystems and many of the same conclusions can be made.

Effective Altruism

Encourages individuals to consider all causes and actions, and then act in the way that brings about the greatest positive impact, based on their values.

Economies of scale

The cost advantages that businesses obtain due to their scale of operation. The larger the scale, the smaller the cost per unit.

Efficient-market hypothesis

A theory that states that prices fully reflect all available information. The hypothesis implies that is should be impossible to consistently beat the market, since market prices should only react to new information.

Efficient market hypothesis

There are many people approximately as clever as you who value approximately the same things you do. It’s unlikely you’ll be walking down the street and stumble on $100 000 sitting on the ground which no one else has picked up. In the same way, it’s unlikely you’ll be able to choose a company on the stock market that will do 100 times better than the average company which no one else has already found and invested in (driving the cost of parts of the company (shares) up). This is the same reason why you might have a hard time finding a car park that is (i) free, (ii) right next to work, and (iii) somewhere you can park in all day. Even though such car parks do exist, over time word gets out, and they are occupied in the short term or monetised in the long term. Everything is a market. Thus, when taking the efficient market hypothesis into account, you should 1) look for the things you value in places that other people have systematically failed to look, and 2) think that if something looks too good to be true, it probably is.

Asset prices fully reflect all available information…Investors, including the likes of Warren Buffett, and researchers have disputed the efficient-market hypothesis both empirically and theoretically.

Eisenhower decision matrix

What is important is seldom urgent, and what is urgent is seldom important.

Emergence

Whereby larger entities, patterns, and regularities arise through interactions among smaller or simpler entities that themselves do not exhibit such properties.

Higher-level behavior tends to emerge from the interaction of lower-order components. The result is frequently not linear — not a matter of simple addition — but rather non-linear, or exponential. An important resulting property of emergent behavior is that it cannot be predicted from simply studying the component parts.

Empty Fort Strategy

Involves using reverse psychology (and luck) to deceive the enemy into thinking that an empty location is full of traps and ambushes, and therefore induce the enemy to retreat.

Evolution by Natural Selection

Evolution by natural selection was once called “the greatest idea anyone ever had.” In the 19th century, Charles Darwin and Alfred Russel Wallace simultaneous realized that species evolve through random mutation and differential survival rates. If we call human intervention in animal-breeding an example of “artificial selection,” we can call Mother Nature deciding the success or failure of a particular mutation “natural selection.” Those best suited for survival tend to be preserved. But of course, conditions change.

Exaptation

Introduced by the biologist Steven Jay Gould, an exaptation refers to a trait developed for one purpose that is later used for another purpose. This is one way to explain the development of complex biological features like an eyeball; in a more primitive form, it may have been used for something else. Once it was there, and once it developed further, 3D sight became possible.

Exit Strategy

A means of leaving one’s current situation, either after a predetermined objective has been achieved, or as a strategy to mitigate failure.

Expected value

The probability of each outcome multiplied by the value of each outcome. For example, a 50% chance of winning $100 is worth $50 to you, and you should be willing to invest up to $50 for a chance to win (but no more).

Applied example: If you have two mutually exclusive ways of helping people, should you take the 10% chance of helping 1 billion people, or the 90% chance at helping 1 million (an equal amount as the billion, and holding all else equal)? Without using expected value, this is a nearly impossible question to evaluate.

Externalities

An externality is the cost or benefit that affects a party who did not choose to incur that cost or benefit.

Extinction

The inability to survive can cause an extinction event, whereby an entire species ceases to compete and replicate effectively. Once its numbers have dwindled to a critically low level, an extinction can be unavoidable (and predictable) given the inability to effectively replicate in large enough numbers.

F

False Cause

Presuming that a real or perceived relationship between things means that one is the cause of the other.

False Positives and False Negatives

A false positive error, or in short false positive, commonly called a ‘false alarm’, is a result that indicates a given condition has been fulfilled, when it actually has not been fulfilled.

A false negative error, or in short false negative, is where a test result indicates that a condition failed, while it actually was successful, i.e. erroneously no effect has been assumed.

Falsification / Confirmation Bias

What a man wishes, he also believes.

Similarly, what we believe is what we choose to see. This is commonly referred to as the confirmation bias. It is a deeply ingrained mental habit, both energy- conserving and comfortable, to look for confirmations of long-held wisdom rather than violations. Yet the scientific process — including hypothesis generation, blind testing when needed, and objective statistical rigor — is designed to root out precisely the opposite, which is why it works so well when followed.

The modern scientific enterprise operates under the principle of falsification: A method is termed scientific if it can be stated in such a way that a certain defined result would cause it to be proved false. Pseudo-knowledge and pseudo-science operate and propagate by being unfalsifiable — as with astrology, we are unable to prove them either correct or incorrect because the conditions under which they would be shown false are never stated.

Fat-Tailed Processes (Extremistan)

A process can often look like a normal distribution but have a large “tail” — meaning that seemingly outlier events are far more likely than they are in an actual normal distribution. A strategy or process may be far more risky than a normal distribution is capable of describing if the fat tail is on the negative side, or far more profitable if the fat tail is on the positive side. Much of the human social world is said to be fat-tailed rather than normally distributed.

Fear of Missing Out (FOMO)

A pervasive apprehension that others might be having rewarding experiences from which one is absent.

Fear, Uncertainty, and Doubt (FUD)

A disinformation strategy used in sales, marketing, public relations, politics and propaganda. FUD is generally a strategy to influence perception by disseminating negative and dubious or false information and a manifestation of the appeal to fear.

Feedback Loops (and Homeostasis)

All complex systems are subject to positive and negative feedback loops whereby A causes B, which in turn influences A (and C), and so on — with higher-order effects frequently resulting from continual movement of the loop. In a homeostatic system, a change in A is often brought back into line by an opposite change in B to maintain the balance of the system, as with the temperature of the human body or the behavior of an organizational culture.

Automatic feedback loops maintain a “static” environment unless and until an outside force changes the loop. A “runaway feedback loop” describes a situation in which the output of a reaction becomes its own catalyst (auto- catalysis).

Fermi calculation

A.k.a ‘back of the envelope calculation’) involves using a few guesses or known numbers to come to an educated guess about some value of interest. To illustrate, one could approximately calculate the number of piano tuners in Chicago by plugging a few estimates like population, percentage of houses with a piano, and piano tuner productivity into a calculation.

Fermi’s paradox

Is the problem we confront when we run a Fermi calculation on the number of habitable planets in our galaxy and realise how weird it is that we seem to be alone. It leads to some interesting conclusions.

Fighting the Last War

Using strategies and tactics that worked successfully in the past, but are no longer as useful.

Filling a Vacuum

A vacuum is space void of matter. Filling a vacuum refers to the fact that if a vacuum is put next to something with pressure, it will be quickly filled by the gas producing that pressure.

Filter Bubble

In which a website algorithm selectively guesses what information a user would like to see based on information about the user (such as location, past click behavior and search history) and, as a result, users become separated from information that disagrees with their viewpoints, effectively isolating them in their own cultural or ideological bubbles.(related: echo chamber)

A term coined by Internet activist Eli Pariser — is a state of intellectual isolation[1] that allegedly can result from personalized searches when a website algorithm selectively guesses what information a user would like to see based on information about the user, such as location, past click-behavior and search history.

https://en.wikipedia.org/wiki/Filter_bubble

First-Conclusion Bias

As Charlie Munger famously pointed out, the mind works a bit like a sperm and egg: the first idea gets in and then the mind shuts. Like many other tendencies, this is probably an energy-saving device. Our tendency to settle on first conclusions leads us to accept many erroneous results and cease asking questions; it can be countered with some simple and useful mental routines.

First-mover advantage vs First-mover disadvantage

The advantage gained by the initial (first-moving) significant occupant of a market segment.

First principle

A first principle is a basic, foundational, self-evident proposition or assumption that cannot be deduced from any other proposition or assumption.

First order vs second order effects

First order effects directly follow from a cause, while second order effects follow from first order effects.

Flynn effect

IQ has increased by 3 points per decade since around the 1930s. It is hotly debated why this is happening, and whether the trend will continue.

Flywheel effect

The flywheel effect is the continuation of oscillations in an oscillator circuit after the control stimulus has been removed. This is usually caused by interacting inductive and capacitive elements in the oscillator. Circuits undergoing such oscillations are said to be flywheeling.

Flypaper Theory

The idea that it is desirable to draw enemies to a single area, where it is easier to kill them and they are far from one’s own vulnerabilities.

Focus on High-leverage Activities

Leverage should be the central, guiding metric that helps you determine where to focus your time.

Forcing Function

A forcing function is any task, activity or event that forces you to take action and produce a result.

Fragility — Robustness — Antifragility

Popularized by Nassim Taleb, the sliding scale of fragility, robustness, and antifragility refers to the responsiveness of a system to incremental negative variability. A fragile system or object is one in which additional negative variability has a disproportionately negative impact, as with a coffee cup shattering from a 6-foot fall, but receiving no damage at all (rather than 1/6th of the damage) from a 1-foot fall. A robust system or object tends to be neutral to the additional negativity variability, and of course, an antifragile system benefits: If there were a cup that got stronger when dropped from 6 feet than when dropped from 1 foot, it would be termed antifragile.

Framing

With the same information being used as a base, the ‘frame’ surrounding the issue can change the reader’s perception without having to alter the actual facts.

Freemium

A pricing strategy by which a product or service (typically a digital offering or application such as software, media, games or web services) is provided free of charge, but money (premium) is charged for proprietary features, functionality, or virtual goods.(related: If you’re not paying for it, you’re the product.; pay to play)

Fundamental attribution error

Attributing others’ actions to their personality, but your actions to your situation.

G

Gate’s Law

Most people overestimate what they can do in one year and underestimate what they can do in ten years.

Gell-Mann amnesia effect

He uses this term to describe the phenomenon of experts believing news articles on topics outside of their fields of expertise, even after acknowledging that articles written in the same publication that are within the experts’ fields of expertise are error-ridden and full of misunderstanding. He explains the irony of the term, saying it came about “because I once discussed it with Murray Gell-Mann, and by dropping a famous name I imply greater i mportance to myself, and to the effect, than it would otherwise have”.

Game theory

An umbrella term for the science of logical decision making in humans, animals, and computers.

Generalist vs Specialist

A generalist is a person with a wide array of knowledge, the opposite of which is a specialist.

Godwin’s Law

If an online discussion (regardless of topic or scope) goes on long enough, sooner or later someone will compare someone or something to Hitler or Nazism.

As an online discussion grows longer, the probability of a comparison involving Nazis or Hitler approaches 1. At this point, all hope of meaningful conversation is lost, and the discussion must stop.

Goodhart’s law/ Campbell’s law

What gets measured, gets managed (and then fails to be a good measure of what it was originally intended for). If we use GDP as a measure of prosperity of a nation, and there are incentives to show that prosperity is increasing, then nations could ‘hack’ this metric. In turn, this may raise GDP while failing to improve the living conditions in the country.

Gresham’s Law

Gresham’s Law, named for the financier Thomas Gresham, states that in a system of circulating currency, forged currency will tend to drive out real currency, as real currency is hoarded and forged currency is spent. We see a similar result in human systems, as with bad behavior driving out good behavior in a crumbling moral system, or bad practices driving out good practices in a crumbling economic system. Generally, regulation and oversight are required to prevent results that follow Gresham’s Law.

Grim Trigger 

Strategy employed in a repeated non-cooperative game where you start by cooperating and continue to cooperate as long as everyone has cooperated in the past. If someone has defected, then you defect forever.

Gross Domestic Product (GDP)

A monetary measure of the market value of all final goods and services produced in a period (quarterly or yearly).

Growth Mindset vs Fixed Mindset

Those with a ‘fixed mindset’ believe that abilities are mostly innate and interpret failure as the lack of necessary basic abilities, while those with a ‘growth mindset’ believe that they can acquire any given ability provided they invest effort or study.

Guerilla warfare

A form of irregular warfare in which a small group of combatants such as paramilitary personnel, armed civilians, or irregulars use military tactics including ambushes, sabotage, raids, petty warfare, hit-and-run tactics, and mobility to fight a larger and less-mobile traditional military.

H

Hail Mary Pass

A very long forward pass in American football, made in desperation with only a small chance of success… has become generalized to refer to any last-ditch effort with little chance of success.

Half-life

The time required for a quantity to reduce to half its initial value. The term is commonly used in nuclear physics to describe how quickly unstable atoms undergo, or how long stable atoms survive, radioactive decay.

Hanlon’s Razor

Hanlon’s Razor states that we should not attribute to malice that which is more easily explained by stupidity. In a complex world, this principle helps us avoid extreme paranoia and ideology, often very hard to escape from, by not generally assuming that bad results are the fault of a bad actor, although they can be. More likely, a mistake has been made.

Never attribute to malice that which is adequately explained by carelessness.(related: fundamental attribution error- the tendency for people to place an undue emphasis on internal characteristics of the agent (character or intention), rather than external factors, in explaining another person’s behavior in a given situation.)

Hawthorne effect

People react differently when they know they are being observed.

Hedgehog vs fox

A fox knows many things, but a hedgehog one important thing.

Heisenberg Uncertainty Principle

A fundamental limit to the precision with which certain pairs of physical properties of a particle, known as complementary variables, such as position x and momentum p, can be known.

Heuristics

We use rules of thumb to make decisions under conditions of uncertainty (which turns out to be almost every single decision we make). This is both a blessing and a curse. It’s quicker, useful when we don’t have much information we could deal with explicitly. But also by its nature requires us to make generalisations that might not turn out to be true. It pays to notice that we are using them because they can be wrong.

Hick’s Law

Increasing the number of choices will increase the decision time logarithmically.

Hierarchical and Other Organizing Instincts

Most complex biological organisms have an innate feel for how they should organize. While not all of them end up in hierarchical structures, many do, especially in the animal kingdom. Human beings like to think they are outside of this, but they feel the hierarchical instinct as strongly as any other organism.

High-context vs Low-context Culture

In a higher-context culture, many things are left unsaid, letting the culture explain. Words and word choice become very important in higher-context communication, since a few words can communicate a complex message very effectively to an in-group (but less effectively outside that group), while in a low-context culture, the communicator needs to be much more explicit and the value of a single word is less important.

Hindsight Bias

The inclination, after an event has occurred, to see the event as having been predictable, despite there having been little or no objective basis for predicting it.

Once we know the outcome, it’s nearly impossible to turn back the clock mentally. Our narrative instinct leads us to reason that we knew it all along (whatever “it” is), when in fact we are often simply reasoning post-hoc with information not available to us before the event. The hindsight bias explains why it’s wise to keep a journal of important decisions for an unaltered record and to re-examine our beliefs when we convince ourselves that we knew it all along.

Hofstadter’s Law

It always takes longer than you expect, even when you take into account Hofstadter’s Law.

Hunting Elephants vs Flies

Salespeople sometimes refer to ‘elephants’, ‘deers’ and ‘rabbits’ when they talk about the first three categories of customers. To extend the metaphor to the 4th and 5th type of customer, let’s call them ‘mice and flies’. So how can you hunt 1,000 elephants, 10,000 deers, 100,000 rabbits, 1,000,000 mice or 10,000,000 flies?

Hyperbolic discounting

A model which states that, given two similar rewards, people show a preference for one that arrives sooner rather than later.

I

Illusion of transparency

We tend to overestimate how much our mental state is known by others, a fact not helped by the ambiguity of the English language. “Elizabeth Newton created a simple test that she regarded as an illustration of the phenomenon. She would tap out a well-known song, such as “Happy Birthday” or the national anthem, with her finger and have the test subject guess the song. People usually estimate that the song will be guessed correctly in about 50 percent of the tests, but only 3 percent pick the correct song. The tapper can hear every note and the lyrics in his or her head; however, the observer, with no access to what the tapper is thinking, only hears a rhythmic tapping.”

Imposter Syndrome

High-achieving individuals marked by an inability to internalize their accomplishments and a persistent fear of being exposed as a ‘fraud’.

Incentives

Something that motivates an individual to perform an action.

All creatures respond to incentives to keep themselves alive. This is the basic insight of biology. Constant incentives will tend to cause a biological entity to have constant behavior, to an extent. Humans are included and are particularly great examples of the incentive-driven nature of biology; however, humans are complicated in that their incentives can be hidden or intangible. The rule of life is to repeat what works and has been rewarded.

What motivates the characters or the author? What are they seeking? What is their purpose? Here’s how Kurt Vonnegut described the importance of incentives in books: “When I used to teach creative writing, I would tell the students to make their characters want something right away — even if it’s only a glass of water. Characters paralyzed by the meaninglessness of modern life still have to drink water from time to time.”

Inertia

The resistance of any physical object to any change in its state of motion; this includes changes to its speed, direction or state of rest. It is the tendency of objects to keep moving in a straight line at constant velocity.

An object in motion with a certain vector wants to continue moving in that direction unless acted upon. This is a fundamental physical principle of motion; however, individuals, systems, and organizations display the same ffect. It allows them to minimize the use of energy, but can cause them to be destroyed or eroded.

Illusion of control

The tendency for people to overestimate their ability to control events.

Incentive

Something that motivates or encourages someone to do something.

Inversion principle

The process of looking at a problem backward. For example, instead of brainstorming forward ideas, imagine everything that could make your project go terribly wrong.

Inflation

A sustained increase in the general price level of goods and services in an economy over a period of time.

Inflection Point

A point on a curve at which the curve changes from being concave (concave downward) to convex (concave upward), or vice versa.

Influence of Authority

The equally famous Stanford Prison Experiment and Milgram Experiments demonstrated what humans had learned practically many years before: the human bias towards being influenced by authority. In a dominance hierarchy such as ours, we tend to look to the leader for guidance on behavior, especially in situations of stress or uncertainty. Thus, authority figures have a responsibility to act well, whether they like it or not.

Influence of Stress (Including Breaking Points)

Stress causes both mental and physiological responses and tends to amplify the other biases. Almost all human mental biases become worse in the face of stress as the body goes into a fight-or-flight response, relying purely on instinct without the emergency brake of Daniel Kahneman’s “System 2” type of reasoning. Stress causes hasty decisions, immediacy, and a fallback to habit, thus giving rise to the elite soldiers’ motto: “In the thick of battle, you will not rise to the level of your expectations, but fall to the level of your training.”

Information Asymmetry

The study of decisions in transactions where one party has more or better information than the other. (related: .; moral hazard-when one person takes more risks because someone else bears the cost of those risks.)

Insider Trading The trading of a public company’s stock or other securities

(such as bonds or stock options) by individuals with access to nonpublic information about the company.

Introversion vs Extraversion

Extraversion tends to be manifested in outgoing, talkative, energetic behavior, whereas introversion is manifested in more reserved and solitary behavior. Virtually all comprehensive models of personality include these concepts in various forms.

Intuition

Personal experience coded into your personal neural network, which means your intuition is dangerous outside the bounds of your personal experience. (related: thinking fast vs thinking slow-a dichotomy between two modes of thought: ‘System 1’ is fast, instinctive and emotional; ‘System 2’ is slower, more deliberative, and more logical.)

Inversion

Otherwise known as thinking through a situation in reverse or thinking “backwards,” inversion is a problem-solving technique. Often by considering what we want to avoid rather than what we want to get, we come up with better solutions. Inversion works not just in mathematics but in nearly every area of life. As the saying goes, “Just tell me where I’m going to die so I can never go there.”

Investing vs Speculation

Typically, high-risk trades that are almost akin to gambling fall under the umbrella of speculation, whereas lower-risk investments based on fundamentals and analysis fall into the category of investing.

IQ vs EQ

IQ is a total score derived from one of several standardized tests designed to assess human intelligence.

EQ is the capacity of individuals to recognize their own, and other people’s emotions, to discriminate between different feelings and label them appropriately, and to use emotional information to guide thinking and behavior.

Irreducibility

We find that in most systems there are irreducible quantitative properties, such as complexity, minimums, time, and length. Below the irreducible level, the desired result simply does not occur. One cannot get several women pregnant to reduce the amount of time needed to have one child, and one cannot reduce a successfully built automobile to a single part. These results are, to a defined point, irreducible.

J

Jobs To Be Done

Consumers usually don’t go about their shopping by conforming to particular segments. Rather, they take life as it comes. And when faced with a job that needs doing, they essentially ‘hire’ a product to do that job.

K

Keynesian Beauty Contest 

Analogy for investing that suggests that investors may guess what other investors are going to think as opposed to what they think themselves.

L

Language Instinct

The psychologist Steven Pinker calls our DNA-level instinct to learn grammatically constructed language the Language Instinct. The idea that grammatical language is not a simple cultural artifact was first popularized by the inguist Noam Chomsky. As we saw with the narrative instinct, we use these instincts to create shared stories, as well as to gossip, solve problems, and fight, among other things. Grammatically ordered language theoretically carries infinite varying meaning.

Law of Diminishing Returns

Related to scale, most important real-world results are subject to an eventual decrease of incremental value. A good example would be a poor family: Give them enough money to thrive, and they are no longer poor. But after a certain point, additional money will not improve their lot; there is a clear diminishing return of additional dollars at some roughly quantifiable point. Often, the law of diminishing returns veers into negative territory — i.e.receiving too much money could destroy the poor family.

Law of Large Numbers

One of the fundamental underlying assumptions of probability is that as more instances of an event occur, the actual results will converge on the expected ones. For example, if I know that the average man is 5 feet 10 inches tall, I am far more likely to get an average of 5′10″ by selecting 500 men at random than 5 men at random. The opposite of this model is the law of small numbers, which states that small samples can and should be looked at with great skepticism.

Law Of Diminishing Marginal Utility

The Law Of Diminishing Marginal Utility states that all else equal as consumption increases the marginal utility derived from each additional unit declines. Marginal utility is derived as the change in utility as an additional unit is consumed. Utility is an economic term used to represent satisfaction or happiness. Marginal utility is the incremental increase in utility that results from consumption of one additional unit.

https://www.investopedia.com/terms/l/lawofdiminishingutility.asp

Laws of Thermodynamics

The laws of thermodynamics describe energy in a closed system. The laws cannot be escaped and underlie the physical world. They describe a world in which useful energy is constantly being lost, and energy cannot be created or destroyed. Applying their lessons to the social world can be a profitable enterprise.

Le Chatelier’s principle

Also called Chatelier’s principle or “The Equilibrium Law”, can be used to predict the effect of a change in conditions on some chemical equilibria.

It can be stated as:

When any system at equilibrium for a long period of time is subjected to change in concentration, temperature, volume, or pressure, the system changes to a new equilibrium and this change partly counteracts the applied change.

or When a settled system is disturbed, it will adjust to diminish the change that has been made to it.

or Any change in status quo prompts an opposing reaction in the responding system.

The principle is named after Henry Louis Le Chatelier and sometimes Karl Ferdinand Braun who discovered it independently.

Leverage

The force amplification achieved by using a tool, mechanical device or machine system. (related: Theory of constraints-a management paradigm that views any manageable system as being limited in achieving more of its goals by a very small number of constraints.

Most of the engineering marvels of the world have been accomplished with applied leverage. As famously stated by Archimedes, “Give me a lever long enough and I shall move the world.” With a small amount of input force, we can make a great output force through leverage. Understanding where we can apply this model to the human world can be a source of great success.

Likely

Thinking that just because something is possible means that it is likely.

Lindy effect

The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.[1] Where the Lindy effect applies, mortality rate decreases with time. In contrast, living creatures and mechanical things follow a bathtub curve where, after “childhood”, the mortality rate increases with time. Because life expectancy is probabilistically derived, a thing may become extinct before its “expected” survival.

The Lindy Effect refers to the life expectancy of a non-perishable object or idea being related to its current lifespan. If an idea or object has lasted for X number of years, it would be expected (on average) to last another X years. Although a human being who is 90 and lives to 95 does not add 5 years to his or her life expectancy, non-perishables lengthen their life expectancy as they continually survive. A classic text is a prime example: if humanity has been reading Shakespeare’s plays for 500 years, it will be expected to read them for another 500.

The Lindy effect is a theory that the future life expectancy of some non-perishable things like a technology or an idea is proportional to their current age, so that every additional period of survival implies a longer remaining life expectancy.

Where the Lindy effect applies, mortality rate decreases with time.

Local vs Global Optimum

A local optimum of an optimization problem is a solution that is optimal (either maximal or minimal) within a neighboring set of candidate solutions. This is in contrast to a global optimum, which is the optimal solution among all possible solutions, not just those in a particular neighborhood of values.

Local/Global — Repeatedly ask whether you’re optimizing a cog in a machine instead of the machine itself. The higher the level you optimize at, typically the greater your ROI.

Loss Aversion

People’s tendency to strongly prefer avoiding losses to acquiring gains.

Loyalists vs Mercenaries

There are highly loyal teams that can withstand almost anything and remain steadfastly behind their leader. And there are teams that are entirely mercenary and will walk out without thinking twice about it.

http://avc.com/2015/06/loyalists-vs-mercenaries/

Luck Surface Area

When you do something you’re excited about you will naturally pull others into your orbit. And the more people with whom you share your passion, the more who will be pulled into your orbit.

http://www.codusoperandi.com/posts/increasing-your-luck-surface-area

Lump of labour fallacy

Is the idea that there is a fixed amount of work—a lump of labour—to be done within an economy which can be distributed to create more or fewer jobs.

M

Major vs Minor Factors

Major factors explains major portions of the results, while minor factors only explain minor portions.

Makers vs Manager’s Schedule When you’re operating on the maker’s schedule,

meetings are a disaster.

Margin of Safety

The difference between the intrinsic value of a stock and its market price.

Similarly, engineers have also developed the habit of adding a margin for error into all calculations. In an unknown world, driving a 9,500-pound bus over a bridge built to hold precisely 9,600 pounds is rarely seen as intelligent. Thus, on the whole, few modern bridges ever fail. In practical life outside of physical engineering, we can often profitably give ourselves margins as robust as the bridge system.

Marginal thinking

what are extra resources worth? If you have no bananas, and you get a banana, it’s probably worth more to you than if you already had one million bananas and you get an extra. This is an important concept because it might lead to the realisation that not all the bananas hold the same value to you. Slightly less trivially, what matters with your charitable donation is what happens with that donation, not the average of what the charity achieves. Extra donations to distribute bed nets could do more once there are already the distribution lines established, so it could achieve more. Conversely, it might be already distributing at capacity, and extra donations buy bed nets for $10 instead of $5. Fortunately, the Against Malaria Foundation will still be able to distribute bed nets at exceptional efficiencies, and is a great target for your festive givings.

Market Power

The ability of a firm to profitably raise the market price of a good or service over marginal cost.

Maslow’s Hierarchy of Needs

Maslow used the terms ‘physiological’, ‘safety’, ‘belongingness’ and ‘love’, ‘esteem’, ‘self-actualization’, and ‘self- transcendence’ to describe the pattern that human motivations generally move through… [though there is] little evidence for the ranking of needs that Maslow described or for the existence of a definite hierarchy at all.

Marchetti’s constant

Is the average time spent by a person for commuting each day, which is approximately one hour. The term is a misnomer, because Italian physicist Cesare Marchetti himself attributes the “one hour” finding to transportation analyst and engineer Yacov Zahavi. Marchetti posits that although forms of urban planning and transport may change, and although some live in villages and others in cities, people gradually adjust their lives to their conditions (including location of their homes relative to their workplace) such that the average travel time stays approximately constant. Ever since Neolithic times, people have kept the average time spent per day for travel the same, even though the distance may increase due to the advancements in the means of transportation.

Market pull technology policy

Where the government sets future standards beyond what the current market can deliver, and the market pulls that technology into existence.

Meme

The social equivalent of a gene, except instead of encoding proteins, they represent rituals, behaviours, and ideas. They self-replicate (when they’re passed from one person to another), mutate, and some are selected for in a population

Margin of safety

In a business, how much sales level can fall before a company reaches its break-even point.

Maslow’s hierarchy of needs

A five-tier model of human needs, often depicted as a pyramid, in which needs lower down in the hierarchy must be satisfied before people can attend to needs higher up. In order, the needs are physiological needs, safety needs, love and belonging, esteem, and self-actualisation.

Mechanical advantage

Also called the law of the lever, it’s a measure of how much your strength is amplified by using a tool or mechanical device.

Mere-exposure effect

A psychological phenomenon by which people tend to develop a preference for things merely because they are familiar with them.

Metcalfe’s Law

The value of a telecommunications network is proportional to the square of the number of connected users of the system…Within the context of social networks, many, including Metcalfe himself, have proposed modified models using (n × log n) proportionality rather than n^2 proportionality.

Micropayment

A financial transaction involving a very small sum of money and usually one that occurs online.

Minimum Viable Product (MVP)

A product with just enough features to gather validated learning about the product and its continued development.

Moore’s Law

The observation that the number of transistors in a dense integrated circuit doubles approximately every two years.

Moral licensing doing less good after you feel like you’ve done some good.

After donating to charity in the morning, we’re less likely to hold the door open for someone in the afternoon. 198Mr. MarketMr. Market was introduced by the investor Benjamin Graham in his seminal book The Intelligent Investor to represent the vicissitudes of the financial markets. As Graham explains, the markets are a bit like a moody neighbor, sometimes waking up happy and sometimes waking up sad — your job as an investor is to take advantage of him in his bad moods and sell to him in his good moods. This attitude is contrasted to an efficient-market hypothesis in which Mr. Market always wakes up in the middle of the bed, never feeling overly strong in either direction.

Multiplying by Zero

Any reasonably educated person knows that any number multiplied by zero, no matter how large the number, is still zero. This is true in human systems as well as mathematical ones. In some systems, a failure in one area can negate great effort in all other areas. As simple multiplication would show, fixing the “zero” often has a much greater effect than does trying to enlarge the other areas.

Murphy’s Law

Anything that can go wrong, will.

Mutually Assured Destruction

In which a full-scale use of nuclear weapons by two or more opposing sides would cause the complete annihilation of both the attacker and the defender. It is based on the theory of deterrence, which holds that the threat of using strong weapons against the enemy prevents. (related: Mexican standoff, Zugzwang)

Somewhat paradoxically, the stronger two opponents become, the less likely they may be to destroy one another. This process of mutually assured destruction occurs not just in warfare, as with the development of global nuclear warheads, but also in business, as with the avoidance of destructive price wars between competitors. However, in a fat-tailed world, it is also possible that mutually assured destruction scenarios simply make destruction more severe in the event of a mistake (pushing destruction into the “tails” of the distribution).

N

Narrative Instinct

Human beings have been appropriately called “the storytelling animal” because of our instinct to construct and seek meaning in narrative. It’s likely that long before we developed the ability to write or to create objects, we were telling stories and thinking in stories. Nearly all social organizations, from religious institutions to corporations to nation- states, run on constructions of the narrative instinct.

Is the author distorting real events to form a coherent narrative? This is common in biographies, memoirs, and historical texts. In The Value of Narrativity in the Representation of Reality, Hayden White explains our tendency to meld history into a narrative: “So natural is the impulse to narrate, so inevitable is the form of narrative for any report of the way things really happened, that narrativity could appear problematical only in a culture in hich it was absent… narrative is a metacode, a human universal… Narrative becomes a problem only when we wish to give to real events the form of story… This value attached to narrativity in the representation of real events arises out of a desire to have real events display the coherence, integrity, fullness, and closure of an image of life that is and can only be imaginary. The notion that sequences of real events possess the formal attributes of the stories we tell about imaginary events could only have its origin in wishes, daydreams, reveries. Does the world really present itself to perception in the form of well-made stories, with central subjects, proper beginnings, middles, and ends, and a coherence that permits us to see “the end” in every beginning? Or does it present itself more in the forms that the annals and chronicle suggest, either as mere sequence without beginning or end or as sequences of beginnings that only terminate and never conclude? And does the world, even the social world, ever really come to us as already narrativized, already “speaking itself” from beyond the horizon of our capacity to make scientific sense of it? Or is the fiction of such a world, a world capable of speaking itself and of displaying itself as a form of a story, necessary for the establishment of that moral authority without which the notion of a specifically social reality would be unthinkable?”

Natural Selection

The differential survival and reproduction of individuals due to differences in phenotype. It is a key mechanism of evolution, the change in heritable traits of a population over time.

Nature vs Nurture

The relative importance of an individual’s innate qualities as compared to an individual’s personal experiences in causing individual differences, especially in behavioral traits.

Nash Equilibrium 

Optimal outcome where no player has an incentive to deviate from his chosen strategy after considering an opponent’s choice.

Net present value

A measurement of the profitability of an undertaking that is calculated by subtracting the present values of cash outflows (including initial cost) from the present values of cash inflows over a period of time.

Network Effect

The effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it. A network tends to become more valuable as nodes are added to the network: this is known as the network effect. An easy example is contrasting the development of the electricity system and the telephone system. If only one house has electricity, its inhabitants have gained immense value, but if only one house has a telephone, its inhabitants have gained nothing of use. Only with additional telephones does the phone network gain value. This network effect is widespread in the modern world and creates immense value for organizations and customers alike.

Niches

Most organisms find a niche: a method of competing and behaving for survival. Usually, a species will select a niche for which it is best adapted. The danger arises when multiple species begin competing for the same niche, which can cause an extinction — there can be only so many species doing the same thing before limited resources give out.

Normal Distribution

A very common continuous probability distribution…Physical quantities that are expected to be the sum of many independent processes (such as measurement errors) often have distributions that are nearly normal.

No true Scotsman No true Scotsman, or appeal to purity,

An informal fallacy in which one attempts to protect a universal generalization from counterexamples by changing the definition in an ad hoc fashion to exclude the counterexample. Rather than denying the counterexample or rejecting the original claim, this fallacy modifies the subject of the assertion to exclude the specific case or others like it by rhetoric, without reference to any specific objective rule (“no true Scotsman would do such a thing”; i.e., those who perform that action are not part of our group and thus criticism of that action is not criticism of the group).

Norm of reciprocity

The expectation that we repay in kind what another has done for us.

Normal distribution

Theory which states that averages of samples of observations of random variables become normally distributed when the number of observations is sufficiently large.

Nuclear option

A parliamentary procedure that allows the U.S. Senate to override a rule or precedent by a simple majority of 51 votes, instead of by a supermajority of 60 votes…The name is an analogy to nuclear weapons being the most extreme option in warfare.

https://en.wikipedia.org/wiki/Nuclear_option

Nudge

The manner in which choices are presented to a target audience can have dramatic effects on their chosen action

O

Observer Effect

Changes that the act of observation will make on a phenomenon being observed.

Occam’s Razor

Among competing hypotheses, the one with the fewest assumptions should be selected.

Open Platform vs Closed Platform

A closed platform, walled garden or closed ecosystem is a software system where the carrier or service provider has control over applications, content, and media, and restricts convenient access to non-approved applications or content. This is in contrast to an open platform, where consumers generally have unrestricted access to applications, content, and much more.

Operant conditioning

A learning process where the strength of a behaviour is modified by reinforcement or punishment.

Opportunity cost

The value of the best alternative forgone where, given limited resources, a choice needs to be made between several mutually exclusive alternatives. Assuming the best choice is made, it is the ‘cost’ incurred by not enjoying the benefit that would have been had by taking the second best available choice.

When we choose to take one option, we are implicitly not taking another. If you only have enough room for one meal and your favourite is the Pad Thai, you choose it. But this means you can’t also get the Massaman curry (your second favourite). Economists call this your opportunity cost — your choice minus the benefits of the next best alternative. Opportunity costs are everywhere and form a critical part of decision making. If you’re not donating to the very best charity, you’re not helping others as much as possible. Furthermore, if you don’t spend your time in the best way possible, that is coming at a cost.

Doing one thing means not being able to do another. We live in a world of trade-offs, and the concept of opportunity cost rules all. Most aptly summarized as “there is no such thing as a free lunch.

Order of Magnitude

An order-of-magnitude estimate of a variable whose precise value is unknown is an estimate rounded to the nearest power of ten.

In many, perhaps most, systems, quantitative description down to a precise figure is either impossible or useless (or both). For example, estimating the distance between our galaxy and the next one over is a matter of knowing not the precise number of miles, but how many zeroes are after the 1. Is the distance about 1 million miles or about 1 billion? This thought habit can help us escape useless precision.

Organizational Debt

All the people/culture compromises made to ‘just get it done’ in the early stages of a startup.

P

Paradigm shift

A fundamental change in the basic concepts and experimental practices of a scientific discipline.

Paradox of Choice

Eliminating consumer choices can greatly reduce anxiety for shoppers.(related: )

Pareto Efficiency

A state of allocation of resources in which it is impossible to make any one individual better off without making at least one individual worse off…A Pareto improvement is defined to be a change to a different allocation that makes at least one individual better off without making any other individual worse off, given a certain initial allocation of goods among a set of individuals.

Pareto improvement

A change that makes at least one person better off, without making anyone worse off.

Pareto Principle

Named for Italian polymath Vilfredo Pareto, who noticed that 80% of Italy’s land was owned by about 20% of its population, the Pareto Principle states that a small amount of some phenomenon causes a disproportionately large effect. The Pareto Principle is an example of a power- law type of statistical distribution — as distinguished from a traditional bell curve — and is demonstrated in various phenomena ranging from wealth to city populations to important human habits.

Which parts of this book are most important and contain the most information? If I had to cut 99% of the words in this book, what would I leave? Many authors have to reach a certain word or page count, resulting in pages (or even entire chapters) containing fluff and padding. Even the best non-fiction books are often longer than is imperative to convey their ideas.

Parkinson’s Law

Work expands so as to fill the time available for its completion.

Pavlovian Mere Association

Ivan Pavlov very effectively demonstrated that animals can respond not just to direct incentives but also to associated objects; remember the famous dogs salivating at the ring of a bell. Human beings are much the same and can feel positive and negative emotion towards intangible objects, with the emotion coming from past associations rather than direct effects.

Peak Oil

The point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline.

Peltzman effect

Taking more risks when you feel more safe. When seat belts were first introduced, motorists actually drove faster and closer to the car in front of them.

Permutations and Combinations

The mathematics of permutations and combinations leads us to understand the practical probabilities of the world around us, how things can be ordered, and how we should think about things.

Peter Principle

The selection of a candidate for a position is based on the candidate’s performance in their current role, rather than on abilities relevant to the intended role. Thus, employees only stop being promoted once they can no longer perform effectively, and ’managers rise to the level of their incompetence.

The Peter principle is a concept in management developed by Laurence J. Peter, which observes that people in a hierarchy tend to rise to their “level of incompetence”. In other words, an employee is promoted based on their success in previous jobs until they reach a level at which they are no longer competent, as skills in one job do not necessarily translate to another.

The Peter principle states that a person who is competent at their job will earn promotion to a more senior position which requires different skills. If the promoted person lacks the skills required for their new role, then they will be incompetent at their new level, and so they will not be promoted again. But if they are competent at their new role, then they will be promoted again, and they will continue to be promoted until they eventually reach a level at which they are incompetent. Being incompetent, they do not qualify to be promoted again, and so remain stuck at that final level for the rest of their career (termed “Final Placement” or “Peter’s Plateau”). This outcome is inevitable, given enough time and assuming that there are enough positions in the hierarchy to which competent employees may be promoted.[2] The “Peter Principle” is therefore expressed as: “In a hierarchy every employee tends to rise to his level of incompetence.”[3] This leads to Peter’s Corollary: “In time, every post tends to be occupied by an employee who is incompetent to carry out its duties.”[4] Hull calls the study of how hierarchies work “hierarchiology.”

Pivot

Structured course correction designed to test a new fundamental hypothesis about the product, strategy, and engine of growth.

Plausible

Thinking that just because something is plausible means that it is true.

Poison Pill

A type of defensive tactic used by a corporation’s board of directors against a takeover. Typically, such a plan gives shareholders the right to buy more shares at a discount if one shareholder buys a certain percentage or more of the company’s shares.

Pollyanna principle

Tendency for people to remember pleasant items more accurately than unpleasant ones.

Potemkin village

Any construction (literal or figurative) built solely to deceive others into thinking that a situation is better than it really is.; vaporware-a product, typically computer hardware or software, that is announced to the general public but is never actually manufactured nor officially cancelled.

Power Laws

One of the most common processes that does not fit the normal distribution is that of a power law, whereby one quantity varies with another’s exponent rather than linearly. For example, the Richter scale describes the power of earthquakes on a power-law distribution scale: an 8 is 10x more destructive than a 7, and a 9 is 10x more destructive than an 8. The central limit theorem does not apply and there is thus no “average” earthquake. This is true of all power-law distributions.

A functional relationship between two quantities, where a relative change in one quantity results in a proportional relative change in the other quantity, independent of the initial size of those quantities: one quantity varies as a power of another. (related: Pareto distribution; Pareto principle-for many events, roughly 80% of the effects come from 20% of the causes., diminishing returns, premature optimization, heavy- tailed distribution, fat-tailed distribution; long tail-the portion of the distribution having a large number of occurrences far from the head or central part of the distribution.; black swan theory-a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.)

Precautionary Principle

If an action or policy has a suspected risk of causing harm to the public, or to the environment, in the absence of scientific consensus (that the action or policy is not harmful), the burden of proof that it is not harmful falls on those taking an action that may or may not be a risk.

Preferential Attachment (Cumulative Advantage)

A preferential attachment situation occurs when the current leader is given more of the reward than the laggards, thereby tending to preserve or enhance the status of the leader. A strong network effect is a good example of preferential attachment; a market with 10x more buyers and sellers than the next largest market will tend to have a preferential attachment dynamic.

Preferred Stock vs Common Stock

Preferred stock is a type of stock which may have any combination of features not possessed by common stock including properties of both an equity and a debt instrument, and is generally considered a hybrid instrument.

Preserving Optionality

A strategy of keeping options open and fluid, fighting the urge to make choices too soon, before all of the uncertainties have been resolved. (related: tyranny of small decisions-a situation where a series of small, individually rational decisions can negatively change the context of subsequent choices, even to the point where desired alternatives are irreversibly destroyed.; boiling frog-an anecdote describing a frog slowly being boiled alive.; path dependence; Everybody has a plan until they get punched in the mouth.; fog of war; OODA loop)

Price Elasticity

The measurement of how responsive an economic variable is to a change in another. It gives answers to questions such as ‘If I lower the price of a product, how much more will sell?’(related: Giffen good-a product that people consume more of as the price rises and vice versa.)

Principal-Agent Problem  

When one person (the agent) is allowed to make decisions on behalf of another person (the principal). In this situation, the agent will not prioritize the best interest of the principal, but will instead pursue his own goals. Ex: politics

Prisoner’s Dilemma

A standard example of a game analyzed in game theory that shows why two completely ‘rational’ individuals might not cooperate, even if it appears that it is in their best interests to do so. (related: Nash equilibrium, evolutionarily stable strategy)

The Prisoner’s Dilemma is a famous application of game theory in which two prisoners are both better off cooperating with each other, but if one of them cheats, the other is better off cheating. Thus the dilemma. This model shows up in economic life, in war, and in many other areas of practical human life. Though the prisoner’s dilemma theoretically leads to a poor result, in the real world, cooperation is nearly always possible and must be explored.

A problem in game theory that explains a lot of real world problems. In this situation, there are two players choosing between cooperating and not cooperating. You both do well if you both cooperate. But if you don’t cooperate while the other player tries to cooperate, you do even better. If both of you don’t cooperate then neither of you do well. But if you’re the chump who tries to cooperate while the other player doesn’t, you get screwed worst of all. Examples of this include countries individually benefitting economically from not limiting their carbon emissions, to everyone’s detriment;

Refers to a situation where two completely rational individuals might not cooperate, even if it appears that it’s in their best interests to do so. Classic choice between self-interest and mutual interest.

Probabilistic Thinking

The unknowable human world is dominated by probabilistic outcomes, as distinguished from deterministic ones. Although we cannot predict the future with great certainty, we are wise to ascribe odds to more and less probable events. We do this every day unconsciously as we cross the street and ascribe low, yet not negligible, odds of being hit by a car.

Product/Market

Fit the degree to which a product satisfies a strong market demand.

Proximate vs Root Cause

A proximate cause is an event which is closest to, or immediately responsible for causing, some observed result. This exists in contrast to a higher-level ultimate cause (or distal cause) which is usually thought of as the ‘real’ reason something occurred.(related: 5 whys-to determine the root cause of a defect or problem by repeating the question ‘Why?’)

Proxy

A variable that is not in itself directly relevant, but that serves in place of an unobservable or immeasurable variable. In order for a variable to be a good proxy, it must have a close correlation, not necessarily linear, with the variable of interest.

Proxy War

A conflict between two nations where neither country directly engages the other.

Purchasing Power Parity

Allows one to estimate what the exchange rate between two currencies would have to be in order for the exchange to be at par with the purchasing power of the two countries’ currencies.

Pygmalion Effect

The phenomenon whereby higher expectations lead to an increase in performance.

R

Randomness

Though the human brain has trouble comprehending it, much of the world is composed of random, non-sequential, non-ordered events. We are “fooled” by random effects when we attribute causality to things that are actually outside of our control. If we don’t course-correct for this fooled-by-randomness effect — our faulty sense of pattern-seeking — we will tend to see things as being more predictable than they are and act accordingly.

Reciprocity

If I push on a wall, physics tells me that the wall pushes back with equivalent force. In a biological system, if one individual acts on another, the action will tend to be reciprocated in kind. And of course, human beings act with intense reciprocity demonstrated as well.

Redundancy

The duplication of critical components of a system with the intention of increasing its reliability. For example, a backup or a fail-safe.

Red Queen hypothesis

Organisms need to be constantly evolving to keep up with the offenses and defenses of their predators and prey, respectively.

The Red Queen Effect (Co-evolutionary Arms Race)

The evolution-by-natural- selection model leads to something of an arms race among species competing for limited resources. When one species evolves an advantageous adaptation, a competing species must respond in kind or fail as a species. Standing pat can mean falling behind. This arms race is called the Red Queen Effect for the character in Alice in Wonderland who said, “Now, here, you see, it takes all the running you can do, to keep in the same place.”

Regression to the Mean

The phenomenon that if a variable is extreme on its first measurement, it will tend to be closer to the average on its second measurement. (related: Pendulum swing; variance; Gambler’s fallacy)

In a normally distributed system, long deviations from the average will tend to return to that average with an increasing number of observations: the so-called Law of Large Numbers. We are often fooled by regression to the mean, as with a sick patient improving spontaneously around the same time they begin taking an herbal remedy, or a poorly performing sports team going on a winning streak. We must be careful not to confuse statistically likely events with causal ones.

Regression toward the mean if you get an extreme result (in a normal distribution) once, additional results are likely to be closer to the average selection. If one trial suggests that health supplement x is amazingly better than all the others, you shouldn’t put all your faith in that result.

Regret Minimization

To maximize your long-term happiness, prioritize the projects you’d most regret not having pursued by the time you’re old and looking back at your life.

Regulatory Capture

When a regulatory agency, created to act in the public interest, instead advances the commercial or political concerns of special interest groups that dominate the industry or sector it is charged with regulating.

(related: )

Relative Satisfaction/Misery Tendencies

The envy tendency is probably the most obvious manifestation of the relative satisfaction tendency, but nearly all studies of human happiness show that it is related to the state of the person relative to either their past or their peers, not absolute. These relative tendencies cause us great misery or happiness in a very wide variety of objectively different situations and make us poor predictors of our own behavior and feelings.

Relativity

Relativity has been used in several contexts in the world of physics, but the important aspect to study is the idea that an observer cannot truly understand a system of which he himself is a part. For example, a man inside an airplane does not feel like he is experiencing movement, but an outside observer can see that movement is occurring. This form of relativity tends to affect social systems in a similar way.

Renormalization Group

The renormalization group technique allows us to think about physical and social systems at different scales. An idea from physics, and a complicated one at that, the application of a renormalization group to social systems allows us to understand why a small number of stubborn individuals can have a disproportionate impact if those around them follow suit on increasingly large scales.

Replication

A fundamental building block of diverse biological life is high-fidelity replication. The fundamental unit of replication seems to be the DNA molecule, which provides a blueprint for the offspring to be built from physical building blocks. There are a variety of replication methods, but most can be lumped into sexual and asexual.

Response Bias

A wide range of cognitive biases that influence the responses of participants away from an accurate or truthful response.

Revealed preferences

talk is cheap, and our actions reveal more about our preferences than we’d like to believe. For instance, although I might say that Marmite is my favourite spread to put on toast, I actually buy Vegemite (#justaustralianthings). As such, my actions reveal what I really prefer.

Reversible vs Irreversible Decisions

For reversible decisions: If the decision was a bad call you can unwind it in a reasonable period of time. An irreversible decision is firing an employee, launching your product, a five-year lease for an expensive new building, etc. These are usually difficult or impossible to reverse.

Rohe’s theorem

Designers of systems tend to design ways to bypass the systems they design.

Rollup

A technique used by investors (commonly private equity firms) where multiple small companies in the same market are acquired and merged., P/E-driven acquisitions, auction

Rumsfeld’s Rule

You go to war with the Army you have. They’re not the Army you might want or wish to have at a later time. (related: Joy’s law-no matter who you are, most of the smartest people work for someone else.; Effectuation)

S

Scale

One of the most important principles of systems is that they are sensitive to scale. Properties (or behaviors) tend to change when you scale them up or down. In studying complex systems, we must always be roughly quantifying — in orders of magnitude, at least — the scale at which we are observing, analyzing, or predicting the system.

Scarcity

Game theory describes situations of conflict, limited resources, and competition. Given a certain situation and a limited amount of resources and time, what decisions are competitors likely to make, and which should they make? One important note is that traditional game theory may describe humans as more rational than they really are. Game theory is theory, after all.

The limited availability of a commodity, which may be in demand in the market. Basically, when something is in short supply.

Signalling theory

The science of determining whether people with conflicting interests should be expected to provide honest signals rather than cheating.

Status quo bias

A preference for the current state of affairs, where the current baseline is taken as a reference point, and any change from that baseline is perceived as a loss.

Scenario Analysis

A process of analyzing possible future events by considering alternative possible outcomes.

Schelling point

A natural point that people will converge upon independently. For instance, if you and I have to meet in Sydney on a particular day, and we don’t know when or where, we might go to where we normally meet, or fall back on meeting at the Opera House at 12PM. This is an important effect in situations where coordination is essential but explicit discussion is difficult.

Schelling’s segregation

Even when groups only have a mild preference to be around others with a similar characteristic

Scientific Method

Systematic observation, measurement, and experiment, and the formulation, testing, and modification of hypotheses.

Second-Order Thinking

In all human systems and most complex systems, the second layer of effects often dwarfs the first layer, yet often goes unconsidered. In other words, we must consider that effects have effects.

Second-order thinking is best illustrated by the idea of standing on your tiptoes at a parade: Once one person does it, everyone will do it in order to see, thus negating the first tiptoer. Now, however, the whole parade audience suffers on their toes rather than standing firmly on their whole feet.

Secrets

Every one of today’s most famous and familiar ideas was once unknown and unsuspected…There are many more secrets left to find, but they will yield only to relentless searchers.

Seeing the Front

One of the most valuable military tactics is the habit of “personally seeing the front” before making decisions — not always relying on advisors, maps, and reports, all of which can be either faulty or biased. The Map/Territory model illustrates the problem with not seeing the front, as does the incentive model. Leaders of any organization can generally benefit from seeing the front, as not only does it provide firsthand information, but it also tends to improve the quality of secondhand information.

Seizing the Middle

In chess, the winning strategy is usually to seize control of the middle of the board, so as to maximize the potential moves that can be made and control the movement of the maximal number of pieces. The same strategy works profitably in business, as can be demonstrated by John D. Rockefeller’s control of the refinery business in the early days of the oil trade and Microsoft’s control of the operating system in the early days of the software trade.

Selection Bias

The selection of individuals, groups or data for analysis in such a way that proper randomization is not achieved, thereby ensuring that the sample obtained is not representative of the population intended to be analyzed.

Self-Preservation

Instincts Without a strong self-preservation instinct in an organism’s DNA, it would tend to disappear over time, thus eliminating that DNA. While cooperation is another important model, the self-preservation instinct is strong in all organisms and can cause violent, erratic, and/or destructive behavior for those around them.

Semmelweis reflex

Not evaluating evidence on the basis of its merits and instead rejecting it because it contradicts existing norms, beliefs and paradigms.Similar to the status quo bias (which one might choose to combat with the reversal test).

Sensitivity Analysis

The study of how the uncertainty in the output of a mathematical model or system (numerical or otherwise) can be apportioned to different sources of uncertainty in its inputs.

Sensitivity to Fairness

Justice runs deep in our veins. In another illustration of our relative sense of well-being, we are careful arbiters of what is fair. Violations of fairness can be considered grounds for reciprocal action, or at least distrust. Yet fairness itself seems to be a moving target. What is seen as fair and just in one time and place may not be in another. Consider that slavery has been seen as perfectly natural and perfectly unnatural in alternating phases of human existence.

Schelling Points

Solution that people will tend to use in the absence of communication, because it seems natural, special, or relevant to them. Example: meeting at noon at Grand Central

Shirky principle

Institutions will try to preserve the problem to which they are the solution.

Short-termism

Short-termism refers to an excessive focus on short-term results at the expense of long-term interests. http://lexicon.ft.com/Term?term=short_termism

Signalling/ countersignalling

The idea that an action conveys information to someone about the actor. Buying an expensive wedding ring conveys that you don’t think you’re about to run off immediately after the wedding (lest you lose three months of your salary). Countersignalling is when the information you’re trying to signal is so obvious that you need not have signalled in the first place. For instance, Warren Buffett doesn’t need to drive around in a Ferrari to signal how rich he is.

Simple Physiological Reward-Seeking

All organisms feel pleasure and pain from simple chemical processes in their bodies which respond predictably to the outside world. Reward-seeking is an effective survival-promoting technique on average. However, those same pleasure receptors can be co-opted to cause destructive behavior, as with drug abuse.

Simpson’s Paradox

A paradox in probability and statistics, in which a trend appears in different groups of data but disappears or reverses when these groups are combined.

Simulation

The imitation of the operation of a real-world process or system over time.

Slippery Slope

Asserting that if we allow A to happen, then Z will eventually happen too, therefore A should not happen.

Social intuitionism

Moral judgements are made predominantly on the basis of intuition, which is followed by rationalisation. For example, slavery was previously a social norm and thought to be acceptable. When asked a question (“is slavery good?”), proponents of slavery introspected an answer (“yes”), and confabulated a reason (“because they’re not actually human” or similar atrocious falsehoods). As this example shows, blind faith in our intuitions can be harmful and counterproductive, because they can be easily corrupted by immoral social norms. It wasn’t just that proponents of slavery got the wrong answer: they had — and we still have — the wrong process.

Social vs Market Norms

People are happy to do things occasionally when they are not paid for them. In fact there are some situations in which work output is negatively affected by payment of small amounts of money.

Social proof

How is social proof — the number of copies sold, bestseller status, the opinions of others — affecting my perception of this book? Is the uthor using social proof to manipulate readers? It is not unusual for authors to buy their way onto bestseller lists, providing social proof which then leads to substantial sales. As a result, mediocre books can end up becoming popular.

It’s a classic case of the emperor having no clothes, which smart readers know to look out for.

Safety in Numbers) Human beings are one of many social species, along with bees, ants, and chimps, among many more. We have a DNA-level instinct to seek safety in numbers and will look for social guidance of our behavior. This instinct creates a cohesive sense of cooperation and culture which would not otherwise be possible, but also leads us to do foolish things if our group is doing them as well.

Spacing Effect

The phenomenon whereby learning is greater when studying is spread out over time, as opposed to studying the same amount of time in a single session.

Spamming

The use of electronic messaging systems to send unsolicited messages (spam), especially advertising, as well as sending messages repeatedly on the same site. (related: phishing-the attempt to acquire sensitive information such as usernames, passwords, and credit card details (and sometimes, indirectly, money), often for malicious reasons, by masquerading as a trustworthy entity in an electronic communication., clickjacking, social engineering)

Specialization

Another Scottish economist, Adam Smith, highlighted the advantages gained in a free-market system by specialization. Rather than having a group of workers each producing an entire item from start to finish, Smith explained that it’s usually far more productive to have each of them specialize in one aspect of production. He also cautioned, however, that each worker might not enjoy such a life; this is a trade-off of the specialization model.

Sphere of Influence

A spatial region or concept division over which a state or organization has a level of cultural, economic, military, or political exclusivity, accommodating to the interests of powers outside the borders of the state that controls it.

Spontaneous order

Spotlight Effect

People tend to believe that more people take notice of their actions and appearance than is actually the case. There’s no need to be obsessed with what others think of us. The reality is that everyone has greater concerns — themselves.

Spring-loading

A system is spring-loaded if it is coiled in a certain direction, positive or negative. Positively spring-loading systems and relationships is important in a fundamentally unpredictable world to help protect us against negative events. The reverse can be very destructive.

Spray tan fallacy

Just because bodybuilders get spray tans, doesn’t mean that getting a spray tan will make you look more like a bodybuilder.

Steel man

The opposite of “straw man”: representing an argument as strongly as possible.

Stochastic Processes

A stochastic process is a random statistical process and encompasses a wide variety of processes in which the movement of an individual variable can be impossible to predict but can be thought through probabilistically. The wide variety of stochastic methods helps us describe systems of variables through probabilities without necessarily being able to determine the position of any individual variable over time. For example, it’s not possible to predict stock prices on a day-to-day basis, but we can describe the probability of various distributions of their movements over time. Obviously, it is much more likely that the stock market (a stochastic process) will be up or down 1% in a day than up or down 10%, even though we can’t predict what tomorrow will bring.

Strategic Acquisition vs Financial Acquisition vs Aquihire

Different motivations for an acquiring company typically have significantly different valuation models.

Strategy vs Tactics

Sun Tzu: Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.

Strategy tax

Sometimes products developed inside a company…have to accept constraints that go against competitiveness, or might displease users, in order to further the cause of another product.

Straw Man

Giving the impression of refuting an opponent’s argument, while actually refuting an argument that was not advanced by that opponent.

A straw man is a form of argument and an informal fallacy based on giving the impression of refuting an opponent’s argument, while actually refuting an argument that was not presented by that opponent.[1] One who engages in this fallacy is said to be “attacking a straw man”.

The typical straw man argument creates the illusion of having completely refuted or defeated an opponent’s proposition through the covert replacement of it with a different proposition (i.e., “stand up a straw man”) and the subsequent refutation of that false argument (“knock down a straw man”) instead of the opponent’s proposition.[2][3] Straw man arguments have been used throughout history in polemical debate, particularly regarding highly charged emotional subjects.

A logic fallacy involving the purposeful misrepresentation of an argument in order to strike it down.

Streisand Effect

The phenomenon whereby an attempt to hide, remove, or censor a piece of information has the unintended consequence of publicizing the information more widely, usually facilitated by the Internet; cobra effect-when an attempted solution to a problem actually makes the problem worse.

Sunk Cost

A cost that has already been incurred and cannot be recovered. (related: throwing good money after bad, in for a penny, in for a pound)

Surfing

The business principle of “riding the wave” of a new technology, product, or trend.

Supply and Demand

An economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good, or other traded item such as labor or liquid financial assets, will vary until it settles at a point where the quantity demanded (at the current price) will equal the quantity supplied (at the current price), resulting in an economic equilibrium for price and quantity transacted.

The basic equation of biological and economic life is one of limited supply of necessary goods and competition for those goods. Just as biological entities compete for limited usable energy, so too do economic entities compete for limited customer wealth and limited demand for their products. The point at which supply and demand for a given good are equal is called an equilibrium; however, in practical life, equilibrium points tend to be dynamic and changing, never static.

Survivorship Bias

The logical error of concentrating on the people or things that ‘survived’ some process and inadvertently overlooking those that did not because of their lack of visibility.

A major problem with historiography — our interpretation of the past — is that history is famously written by the victors. We do not see what Nassim Taleb calls the “silent grave” — the lottery ticket holders who did not win. Thus, we over-attribute success to things done by the successful agent rather than to randomness or luck, and we often learn false lessons by exclusively studying victors without seeing all of the accompanying losers who acted in the same way but were not lucky enough to succeed.

Is this (non-fiction) book a representation of reality or is the author failing to account for base rates? Survivorship bias is abundant in business, self-help, and biographical books. A particular case of a successful individual or business might be held as the rule, rather than the exception.

LA PARCIALIDAD DEL SUPERVIVIENTE Es el fenómeno por el cual involuntariamente analizamos los datos de forma parcial sin tener en cuenta aquellas entidades que han desaparecido. Al analizar un histórico de datos, estudiamos únicamente aquellos datos de las entidades que siguen en pie sin considerar las que han desaparecido. Ejemplo militar Ejemplo análisis de empresas.

Sustainability

The endurance of systems and processes.

Sustainable Competitive Advantage

Structural factors that allow a firm to outcompete its rivals for many years.

Switching Costs

The costs associated with switching suppliers.

System & System thinking

When we’re making decisions, we use two different systems. System 1 is fast and subconscious, often described as our ‘gut feeling’. It has an edge in social situations or when time is a limiting factor. System 2 is slower and more methodical, better with models and numbers, and deliberate.

Systems Thinking By taking the overall system as well as its parts into

account systems thinking is designed to avoid potentially contributing to further development of unintended consequences.

T

Tallest Pygmy Effect

Is when you benefit not from absolute skill or value at a thing, but by being better at it than anyone else.

Technical Debt

A concept in programming that reflects the extra development work that arises when code that is easy to implement in the short run is used instead of applying the best overall solution.

Technology Adoption Lifecycle

Describes the adoption or acceptance of a new product or innovation, according to the demographic and psychological characteristics of defined adopter groups. The process of adoption over time is typically illustrated as a classical normal distribution or bell curve. The model indicates that the first group of people to use a new product is called ‘innovators’, followed by ‘early adopters’. Next come the early majority and late majority, and the last group to eventually adopt a product are called ‘laggards’. (related: S-curve, Crossing the Chasm, Installation Period vs Deployment Period)

Tendency to Distort Due to Liking/Loving or Disliking/Hating

Based on past association, stereotyping, ideology, genetic influence, or direct experience, humans have a tendency to distort their thinking in favor of people or things that they like and against people or things they dislike. This tendency leads to overrating the things we like and underrating or broadly categorizing things we dislike, often missing crucial nuances in the process.

Tendency to Feel Envy & Jealousy

Humans have a tendency to feel envious of those receiving more than they are, and a desire “get what is theirs” in due course. The tendency towards envy is strong enough to drive otherwise irrational behavior, but is as old as humanity itself. Any system ignorant of envy effects will tend to self-immolate over time.

Tendency to Minimize Energy Output (Mental & Physical)

In a physical world governed by thermodynamics and competition for limited energy and resources, any biological organism that was wasteful with energy would be at a severe disadvantage for survival. Thus, we see in most instances that behavior is governed by a tendency to minimize energy usage when at all possible.

Tendency to Overestimate Consistency of Behavior (Fundamental Attribution Error )

We tend to over-ascribe the behavior of others to their innate traits rather than to situational factors, leading us to overestimate how consistent that behavior will be in the future. In such a situation, predicting behavior seems not very difficult. Of course, in practice this assumption is consistently demonstrated to be wrong, and we are consequently surprised when others do not act in accordance with the “innate” traits we’ve endowed them with.

Tendency to Overgeneralize from Small Samples

It’s important for human beings to generalize; we need not see every instance to understand the general rule, and this works to our advantage. With generalizing, however, comes a subset of errors when we forget about the Law of Large Numbers and act as if it does not exist. We take a small number of instances and create a general category, even if we have no statistically sound basis for the conclusion.

Tendency to Stereotype

The tendency to broadly generalize and categorize rather than look for specific nuance. Like availability, this is generally a necessary trait for energy-saving in the brain.c. Failure to See False Conjunctions Most famously demonstrated by the Linda Test, the same two psychologists showed that students chose more vividly described individuals as more likely to fit into a predefined category than individuals with broader, more inclusive, but less vivid descriptions, even if the vivid example was a mere subset of the more inclusive set. These specific examples are seen as more representative of the category than those with the broader but vaguer descriptions, in violation of logic and probability.

Tendency to Want to Do Something (Fight/Flight, Intervention, Demonstration of Value, etc.)

We might term this Boredom Syndrome: Most humans have the tendency to need to act, even when their actions are not needed. We also tend to offer solutions even when we do not enough knowledge to solve the problem.

The Map Is Not the Territory

The map of reality is not reality itself. If any map were to represent its actual territory with perfect fidelity, it would be the size of the territory itself. Thus, no need for a map! This model tells us that there will always be an imperfect relationship between reality and the models we use to represent and understand it. This imperfection is a necessity in order to simplify. It is all we can do to accept this and act accordingly.

The Principle of Parsimony (Occam’s Razor)

Named after the friar William of Ockham, Occam’s Razor is a heuristic by which we select among competing explanations. Ockham stated that we should prefer the simplest explanation with the least moving parts: it is easier to falsify (see: Falsification), easier to understand, and more likely, on average, to be correct. This principle is not an iron law but a tendency and a mindset: If all else is equal, it’s more likely that the simple solution suffices. Of course, we also keep in mind Einstein’s famous idea (even if apocryphal) that “an idea should be made as simple as possible, but no simpler.”

The Structure of Scientific Revolutions

An episodic model in which periods of such conceptual continuity in normal science were interrupted by periods of revolutionary science

The Third Story

The Third Story is one an impartial observer, such as a mediator, would tell; it’s a version of events both sides can agree on.

The value of your time

You could use your time to earn more money, or do something else that you value.

Theory of Constraints

At any time, just one of a system’s inputs is constraining its other inputs from achieving a greater total output. Therefore, to continuously increase a system’s output, iteratively identify and address the current constraint.

Thought Experiment

Considers some hypothesis, theory, or principle for the purpose of thinking through its consequences. A technique popularized by Einstein, the thought experiment is a way to logically carry out a test in one’s own head that would be very difficult or impossible to perform in real life. With the thought experiment as a tool, we can solve problems with intuition and logic that could not be demonstrated physically, as with Einstein imagining himself traveling on a beam of light in order to solve the problem of relativity.

Time value of money

We’d prefer to have $100 today than tomorrow, or in a year’s time. In a real sense, this implies that money today is worth more than money in the future. This preference comes from the opportunities we have to invest it at (say) 5% interest and gain $5 in that year. How much less you’d be willing to receive now than in a year, is the discount rate (which is 5% in this example).

Trade-offs

A situation that involves losing one quality or aspect of something in return for gaining another quality or aspect.

Trademarks, Patents, and Copyrights

These three concepts, along with other related ones, protect the creative work produced by enterprising individuals, thus creating additional incentives for creativity and promoting the creative-destruction model of capitalism. Without these protections, information and creative workers have no defense against their work being freely distributed.

Tragedy of the Commons

A concept introduced by the economist and ecologist Garrett Hardin, the Tragedy of the Commons states that in a system where a common resource is shared, with no individual responsible for the wellbeing of the resource, it will tend to be depleted over time. The Tragedy is reducible to incentives: Unless people collaborate, each individual derives more personal benefit than the cost that he or she incurs, and therefore depletes the resource for fear of missing out.

Free Rider Problem (Tragedy of the Commons) — problem in which every individual tries to reap the greatest benefit from a given resource, which harms others who can no longer enjoy the benefits. Examples: pollution, over-fishing, and ocean garbage.

Tragedy of the commons: A situation within a shared-resource system where individual users acting independently according to their own self-interest behave contrary to the common good of all users by depleting that resource through their collective action; free rider problem-when those who benefit from resources, goods, or services do not pay for them, which results in an under-provision of those goods or services.;

Tribalism

A way of thinking in which people are loyal to their social group above all else.

Trojan Horse

After a fruitless 10-year siege, the Greeks constructed a huge wooden horse, and hid a select force of men inside. The Greeks pretended to sail away, and the Trojans pulled the horse into their city as a victory trophy. That night the Greek force crept out of the horse and opened the gates for the rest of the Greek army, which had sailed back under cover of night. The Greeks entered and destroyed. https://en.wikipedia.org/wiki/Trojan_War

Trust

Fundamentally, the modern world operates on trust. Familial trust is generally a given (otherwise we’d have a hell of a time surviving), but we also choose to trust chefs, clerks, drivers, factory workers, executives, and many others. A trusting system is one that tends to work most efficiently; the rewards of trust are extremely high.

Two-sided Market

Economic platforms having two distinct user groups that provide each other with network benefits.

Typical mind fallacy

The mistaken belief that others are having the same mental experiences that we are. As the links show, the differences go surprisingly far. Detailed questionnaires have shown that when some people ‘see’ a zebra in their mind’s eye, they’re simply recalling the idea of a zebra, whilst others can count the stripes!

U

Unforced Error

In tennis, an error in a service or return shot that cannot be attributed to any factor other than poor judgement and execution by the player; contrasted with a forced error, an error caused by an opponent’s good play.

Unintended Consequences

Outcomes that are not the ones foreseen and intended by a purposeful action.(related: , Goodhart’s law-When a measure becomes a target, it ceases to be a good measure; Campbell’s law; ; Kick a hornet’s nest.)

Unknown Unknowns Known unknowns

Refers to ‘risks you are aware of, such as cancelled flights….’ Unknown unknowns are risks that ‘come from situations that are so out of this world that they never occur to you.’

Utilitarianism

Holding that the best moral action is the one that maximizes utility.

Utility (Marginal, Diminishing, Increasing)

The usefulness of additional units of any good tends to vary with scale. Marginal utility allows us to understand the value of one additional unit, and in most practical areas of life, that utility diminishes at some point. On the other hand, in some cases, additional units are subject to a “critical point” where the utility function jumps discretely up or down. As an example, giving water to a thirsty man has diminishing marginal utility with each additional unit, and can eventually kill him with enough units.

V

Veil of Ignorance

A method of determining the morality of a certain issue (e.g., slavery) based upon the following thought experiment: parties to the original position know nothing about the particular abilities, tastes, and positions individuals will have within a social order. When such parties are selecting the principles for distribution of rights, positions, and resources in the society in which they will live, the veil of ignorance prevents them from knowing who will receive a given distribution of rights, positions, and resources in that society.

The “veil of ignorance” is a method of determining the morality of issues. It amounts to imagine what a decision-maker would choose if they had enough information to know the consequences of his or her possible decisions for everyone but would not know, or would not take into account, which person he or she is. The idea is standard in moral philosophy at least since the eighteenth century.

Spencer J. Maxcy outlines the concept as follows:

Imagine that you have set for yourself the task of developing a totally new social contract for today’s society. How could you do so fairly? Although you could never actually eliminate all of your personal biases and prejudices, you would need to take steps at least to minimize them. Rawls suggests that you imagine yourself in an original position behind a veil of ignorance. Behind this veil, you know nothing of yourself and your natural abilities, or your position in society. You know nothing of your sex, race, nationality, or individual tastes. Behind such a veil of ignorance all individuals are simply specified as rational, free, and morally equal beings. You do know that in the “real world”, however, there will be a wide variety in the natural distribution of natural assets and abilities, and that there will be differences of sex, race, and culture that will distinguish groups of people from each other.

Veblen goods

Types of luxury goods, such as expensive wines, jewelry, fashion-designer handbags, and luxury cars, which are in demand because of the high prices asked for them.

Via Negativa

Omission/Removal/Avoidance of Harm In many systems, improvement is at best, or at times only, a result of removing bad elements rather than of adding good elements. This is a credo built into the modern medical profession: First, do no harm. Similarly, if one has a group of children behaving badly, removal of the instigator is often much more effective than any form of punishment meted out to the whole group.

W

Win-win

A win–win strategy is a conflict resolution process that aims to accommodate all disputants.

Winner Take All Market

A market that tends towards one dominant player.

Winner’s Curse

The winner’s curse is a tendency for the winning bid in an auction to exceed the intrinsic value or true worth of an item. The gap in auctioned vs. intrinsic value can typically be attributed to incomplete information, bidders, emotions, or a variety of other subjective factors that can influence bidders.

Winning a Battle but Losing the War

Poor strategy that wins a lesser (or sub-) objective but overlooks and loses the true intended objective.(related:sacrifice play)

Winning Hearts and Minds

In which one side seeks to prevail not by the use of superior force, but by making emotional or intellectual appeals to sway supporters of the other side.

Wisdom of the crowd

A large group’s aggregated answers to questions involving quantity estimation, general world knowledge, and spatial reasoning has generally been found to be as good as, and often better than, the answer given by any of the individuals within the group.

Z

Zero Tolerance

Strict punishment for infractions of a stated rule, with the intention of eliminating undesirable conduct.

Zero-sum vs Non-zero-sum

A zero-sum game is a mathematical representation of a situation in which each participant’s gain (or loss) of utility is exactly balanced by the losses (or gains) of the utility of the other participant(s)…In contrast, non-zero-sum describes a situation in which the interacting parties’ aggregate gains and losses can be less than or more than zero.()

Situation in which one person or group can win something only by causing another person or group to lose it.

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