Mental Models

Incentives Matter

September 11, 2017 By Nagesh Belludi 2 Comments

Incentives are Powerful Extrinsic Motivators

The bedrock premise of economics is that incentives matter. This is a powerful device because it applies to almost everything that humans do.

Changes in incentives—monetary and nonmonetary—can sway human behavior in foreseeable ways.

For instance, if a resource becomes more expensive or scarce, people will be less likely to choose it. Higher prices will reduce the quantity of goods sold. Fewer people visit outdoor recreational areas on chilly and rainy days. Whenever fuel prices soar through the roof over a prolonged period, consumers buy less gasoline—they eliminate less important trips, carpool more, and purchase fuel-efficient cars.

Incentives Shape Behavior

If the payback from a specific choice increases, people are more likely to choose it. Students focus in classes when their professors declare what course material will be on the examinations. Pedestrians are more prone to leaning down and picking up a quarter than they would a penny. Traditional incentive systems for executives give rise to corporate “short-termism”—executives’ annual bonuses are often awarded for achieving targets that are insubstantially linked to long-term value creation.

Incentives shape behavior. The economics of wrongdoing and crime suggest that fines be increased to offset the rewards from lawbreaking—for example, traffic fines for speeding are typically doubled in construction zones. Ryanair, Ireland’s pioneering discount airline, purposefully uses exasperating fees for checked bags, airport check-ins, and printing boarding passes to “reshape passenger behavior” and focus on getting passengers punctually to their destinations with the least overhead costs.

Incentives Can Backfire Even If Launched with the Best of Intentions

The “incentives matter” framework of economics explains why bad behavior happens whenever the payoff for such behavior is high and the odds of getting caught and reprimanded are low.

People will scheme—even perpetrate fraud—to achieve the incentives they’re offered. If targets are impracticable and employees realize that they can achieve those targets by cheating, then they will cheat.

Incentive structures are partially to blame for the recent Wells Fargo accounts scandal. Even if Wells Fargo established incentive arrangements with the best of intentions, it tied a substantial percentage of employee compensation to immoderate sales targets. This compelled employees to open millions of sham bank accounts and credit cards in customers’ names, infringing on their trust, and costing them millions of dollars in fees for services they did not willingly sign-up for. As this case makes obvious, incentives intended to stimulate people to do their best can sometimes push them to do their worst.

Idea for Impact: A Little Incentive Goes a Long Way

Incentives matter. They influence choices that humans make. Changes in incentives influence their choices. However, designing effective incentives is a painstakingly difficult problem. Do not underestimate or ignore potential undesired results—increase in dishonest behavior, over-focus on one area while overlooking other parts of the business, imprudent risk-taking, deterioration of organizational culture, and diminished intrinsic motivation.

Smart Folks are Most Susceptible to Overanalyzing and Overthinking

August 30, 2017 By Nagesh Belludi 8 Comments

Many High-IQ People Tend to Be Overthinkers: They Incessantly Overanalyze Everything

There’s this old Zen parable that relates how over-analysis is a common attribute of intelligent people.

A Zen master was resting with his quick-witted disciple. At one point, the master took a melon out of his bag and cut it in half for the two of them to eat.

In the middle of the meal, the enthusiastic disciple said, “My wise teacher, I know everything you do has a meaning. Sharing this melon with me may be a sign that you have something to teach me.”

The master continued eating in silence.

“I understand the mysterious question in your silence,” insisted the student. “I think it is this: the excellent taste of this melon that I am experiencing … is the taste on the melon or on my tongue …”

The master still said nothing. The disciple got a bit frustrated at his master’s apparent indifference.

The disciple continued, ” … and like everything in life, this too has meaning. I think I’m closer to the answer; the pleasure of the taste is an act of love and interdependence between the two, because without the melon there wouldn’t be an object of pleasure and without pleasure …”

“Enough!” exclaimed the master. “The biggest fools are those who consider themselves the most intelligent and seek an interpretation for everything! The melon is good; please let this be enough. Let me eat it in peace!”

Intelligence Can Sometimes Be a Curse

The tendency to reason and analyze is a part of human nature. It is a useful trait for discerning the many complexities of life. It’s only natural that you could go overboard some times and over-analyze a point or an issue to such a degree that the objective becomes all but moot.

Don’t get me wrong. Intelligence is indeed a gift. But intelligence can trick you into thinking you should be overthinking and calculating everything you do. The more intelligent you are, the more investigative you will be. The more your brain analyzes people and events, the more time it will spend on finding flaws in everything.

Intelligent People Overanalyze Everything, Even When it Doesn’t Matter

Many intelligent people tend to be perfectionists. Their overanalysis often cripples their productivity, especially by leading them to undesirable, frustrating, and low-probability conclusions that can limit their ability to understand reality and take meaningful risks.

Intelligent people are too hard on themselves and others—family, friends, and co-workers. They can’t settle for anything less than perfect. They tend to be less satisfied with their achievements, their relationships, and practically everything that has a place in their life. What is more, many people with speculative minds hold idealistic views of the world and lack a sound acumen about coping with the practical world.

Idea for Impact: Don’t Make Everything Seem Worse Than it Actually is!

Thinking too much about things isn’t just a nuisance for you and others around you; it can take a toll on your well-being and on your relationships.

Check your tendency to overthink and overanalyze everything. Don’t twist and turn every issue in your head until you’ve envisaged the issue from all perspectives.

Sometimes it does help to overthink and be cautious about potential risks and downfalls. But most times, it’s unnecessary to ruminate excessively. Don’t make everything seem worse than it actually is. Set limits and prioritize. Learn to let go and manage your expectations.

To avoid overthinking, use my 5-5-5 technique. Ask yourself if your decision will matter 5 weeks, 5 months, and 5 years in the future. If your answer is ‘no,’stop stressing yourself out!

The Fermi Rule: Better be Approximately Right than Precisely Wrong

August 28, 2017 By Nagesh Belludi 1 Comment

What’s the size of the market for razors in China? How many golf balls does it take to fill a Boeing 747 aircraft? How many piano tuners are there in the world?

Non-standard problems such as these are called “Fermi problems” after the distinguished Italian-American nuclear physicist Enrico Fermi (1901–54.) Fermi delighted not only in creating and solving them, but also in challenging his fellow scientists with similar problems.

Physicist Enrico Fermi Was a Master of Guesstimation

Fermi was celebrated for his ability to make fast, excellent approximate calculations with little or no concrete data. In one well-known example, when the first atomic bomb was detonated during the Manhattan Project, Fermi dropped a few scraps of paper as the shock wave from the detonation passed. After some coarse calculation, Fermi estimated the power of the blast from the motion of the scraps as they fell. Fermi’s guesstimate of 10 kilotons of TNT was remarkably close to the now-established value of 20 kilotons. Even though Fermi’s estimate appears 50% off, it was a reasonable order-of-magnitude estimate.

Fermi believed that the ability to guesstimate was an essential skill for physicists. A good way to solve physics problems—and complex problems in any line of work—is by coming up with simple shortcuts to make approximate, but meaningful, calculations.

Teaching Physics Students the Fermi Way of Contemplating Open, Non-Standard Problems

Based on Fermi’s technique, at the beginning of many physics courses, professors pose problems such as “how many piano tuners are there in Chicago?” Such questions require students to employ quick reasoning and unsophisticated numerical methods to attack problems without the knowledge of any core physics concepts.

The historical emphasis on the order-of-magnitude calculation was propelled by the lack of computing power available to solve complex problems. Such approximate calculations were considered necessary to decide if an onerous and lengthy full-blown calculation was required.

Classic Fermi Problem: Number of Piano Tuners in the City of Chicago

Fermi problems are typically restructured by breaking them up into smaller problems that are easier for the students to approach than the original problem.

The challenge of estimating the number of piano tuners in the city of Chicago is the classical example of a Fermi Problem. A problem-solver guesstimates the total population of Chicago, then the fraction of families in Chicago that may own a piano, and the frequency of piano-tuning, the time it takes to tune a piano, and so on. This sequence of thinking, accompanied by a few conversion factors, can lead to an adequate assessment of the number of piano tuners in Chicago.

Back-of-Envelope Calculations for Fermi Problems

The Fermi technique is so popular that math buffs organize competitions in Fermi’s honor. Contestants are asked to estimate unusual assessments (the fraction of the surface area of the United States that’s covered by automobiles, the number of cells in the human body, the number of pizzas ordered this year in the state of California, for example) as closely as they can.

One distinctive feature of Fermi problems is that precision is impossible to achieve quickly, but it’s easier to arrive at a fast estimate of the range for the right answer. Before investing a big effort to measure something with precision, problem-solvers can estimate the answer approximately—and only then determine if it’s sensible to do the extra steps to calculate the accurate answers.

The Ability to Guesstimate: A Key Problem-Solving Aptitude

The ability to reach first-order estimations is an important skill in daily life. In a world where we are continuously bombarded with qualitative and quantitative information (and disinformation,) acquiring a solid grounding in numeric literacy has almost become an important intellectual obligation.

Many problems are too complicated for you to come up with an accurate answer immediate. In analyzing such problems, precision may be impossible, but you can quickly estimate a range for the right answer. Guesstimation enables anyone with basic math and science skills to estimate virtually anything quickly using realistic assumptions and elementary mathematics.

Microsoft, McKinsey Consulting, Google, Goldman Sachs, and many leading businesses use guesstimate questions in job interviews to judge the ability of the applicants’ intelligence, their flexibility to think on their feet, and to apply their numerical skills to real-world problems.

Idea for Impact: Use Effective Guesstimation Techniques Before Undertaking a More Complete and Formal Investigation

Learn to do a first approximation of value and then, if the problem merits, refine your estimate further for much nuanced decision-making. Before putting much effort into calculating anything with precision, make a rough estimate of the answer, then decide whether it’s worth investigating further.

In my line of work as an investor, for example, I use fund manager Eddy Elfenbein’s “simple stock valuation measure”:

Growth Rate/2 + 8 = PE Ratio

Let me emphasize that this is simply a quick-and-dirty valuation tool and it shouldn’t be used as a precise measure of a stock’s value. But when I’m first looking at a stock and want to see roughly how it’s priced, this is what I’ll use.

For example, let’s look at Pfizer ($PFE). Wall Street expects the company to earn $2.34 per share next year. They also see the company’s 5-year growth rate at 2.79%. If we take half the growth rate and add 8, that gives us a fair value P/E Ratio of 9.40. Multiplying that by the $2.34 estimate gives us a fair price for Pfizer of $21.98. The current price for Pfizer is $22.98, so it’s about fairly priced.

Let’s look at IBM ($IBM) which has a higher growth rate. Wall Street sees IBM earning $16.61 next year. They peg the five-year growth rate at 10.58%. Our formula gives us a fair value multiple of 13.29, and that multiplied by $16.61 works out to a value of $220.75. IBM is currently at $201.71.

Recommended Resources for Guesstimation

If you’re interviewing with one of those companies that use guesstimate questions in job interviews, or if you’re interested in developing your ability to make rough, common-sense estimates starting from just a few basic facts, I recommend the following learning resources:

Guesstimation: Solving the World’s Problems on the Back of a Cocktail Napkin by Lawrence Weinstein and John A. Adam is a fun introduction to guesstimation.
Sanjoy Mahajan teaches a course on “down-and-dirty, opportunistic problem solving” at MIT. His Art of Approximation in Science and Engineering course is accessible free of charge on OpenCourseWare. Mahajan has also written the resourceful textbook Street-Fighting Mathematics: The Art of Educated Guessing and Opportunistic Problem Solving.

Anger is the Hardest of the Negative Emotions to Subdue

August 18, 2017 By Nagesh Belludi Leave a Comment

The Lekha Sutta, an aphorism of the historical Buddha that has been preserved orally by his followers, identifies three distinct ways that anger manifests in individuals:

Firstly, the Buddha refers to the individual who is like an inscription on a rock. His anger stays with him for a long time; it does not war away by wind or water.
Secondly, the Buddha relates an individual who is habitually angered, but whose anger does not stay with him for a elongated time, to an inscription in soil that rubs away by wind or water.
Finally, the Buddha identifies an individual who is like water. When he is spoken to or treated rudely, he stays impervious, pleasant, and courteous—in the vein of an inscription in water that disappears right away.

Here’s a translation of the Lekha Sutta from the Pali by the eminent American Buddhist monk and prolific author Thanissaro Bhikkhu:

Monks, there are these three types of individuals to be found existing in the world. Which three? An individual like an inscription in rock, an individual like an inscription in soil, and an individual like an inscription in water.

And how is an individual like an inscription in rock? There is the case where a certain individual is often angered, and his anger stays with him a long time. Just as an inscription in rock is not quickly effaced by wind or water and lasts a long time, in the same way a certain individual is often angered, and his anger stays with him a long time. This is called an individual like an inscription in rock.

And how is an individual like an inscription in soil? There is the case where a certain individual is often angered, but his anger doesn’t stay with him a long time. Just as an inscription in soil is quickly effaced by wind or water and doesn’t last a long time, in the same way a certain individual is often angered, but his anger doesn’t stay with him a long time. This is called an individual like an inscription in soil.

And how is an individual like an inscription in water? There is the case where a certain individual—when spoken to roughly, spoken to harshly, spoken to in an unpleasing way—is nevertheless congenial, companionable, & courteous. Just as an inscription in water immediately disappears and doesn’t last a long time, in the same way a certain individual—when spoken to roughly, spoken to harshly, spoken to in an unpleasing way—is nevertheless congenial, companionable, & courteous. This is called an individual like an inscription in water.

These are the three types of individuals to be found existing in the world.

Idea for Impact: Learn to Corral Your Anger and Manage Your Emotions

Like everything else in the world, anger surfaces and passes away, restoring your previous sense of calm and stillness. Not identifying the nature of anger and allowing it to take over your state of being can lead to disastrous outcomes. Verse 222 of the Dhammapada (tr. Thanissaro Bhikkhu) states,

When anger arises,
whoever keeps firm control
as if with a racing chariot:
him
I call a master charioteer.
Anyone else,
a rein-holder—
that’s all.

Anger destroys careers. It destroys relationships. As long as you lack the capacity to withstand negative emotions such as anger, you will be at a marked disadvantage in life.

Group Polarization: Like-Mindedness is Dangerous, Especially with Social Media

August 15, 2017 By Nagesh Belludi Leave a Comment

Group Polarization Strengthens of the Opinions of Each Person in the Group

When people who share opinions and beliefs get together in groups, they tend to be even more persuaded in their beliefs—they become extreme in their views. In other words, a group of likeminded people will reinforce one another’s viewpoints. This phenomenon is called group polarization.

Social psychologists reason that people use the choices and persuasions of others as heuristics to steer their lives in this complex world. As the English philosopher and mathematician Alfred North Whitehead once said, “Civilization advances by extending the number of operations we can perform without thinking about them.”

Social Media and Group Polarization

As people converge to likeminded people in virtual neighborhoods, they tend to operate in intellectual bubbles. Given that social media allows participants to curate their sources of information, it is easier than ever before for people to cruise through their day-to-day lives without meeting anyone who disagrees with them. Studies have shown that hanging around a group of likeminded folks makes people more scornful of differing viewpoints, than they are as individuals.

Group polarization explains partly the proliferation of fake news on social media—people accept dubious claims that support their own viewpoint while disregarding facts that conflict with their views. In the confusing times we live in, people get lost in the unstructured, unattributed noise of headlines and repeat the loudest declarations as facts without checking their soundness.

In 1996, MIT scholars Marshall Van Alstyne and Erik Brynjolfsson forewarned of an impending dark side to the newly interconnected world:

Individuals empowered to screen out material that does not conform to their existing preferences may form virtual cliques, insulate themselves from opposing points of view, and reinforce their biases. Internet users can seek out interactions with like-minded individuals who have similar values, and thus become less likely to trust important decisions to people whose values differ from their own.

The Persuasive Ability of Social Proof in Consumer Behavior

In the bestselling Influence: The Psychology of Persuasion, psychologist Robert Cialdini observes that advertisers tend to describe their products as “fastest-growing,” “#1 in the market,” or “best-selling.” Advertisers believe that consumers need to hear not only that a product is good, but also that others think so.

As per group polarization, when people are considering what to do or buy, they often look to what others are doing or have done, and take their cue from others. When a product, service, or an idea strikes out as particularly admired or prevailing, consumers intuitively take social proof that this is the right—and acceptable—choice.

Idea for Impact: Hanging Around with Like-Minded People is a Dangerous Intellectual Trap

The French entomologist Jean-Henri Fabre once wrote, “Seek those who find your road agreeable, your personality and mind stimulating, your philosophy acceptable, and your experiences helpful. Let those who do not, seek their own kind.”

Look for people who respect your worldview—even if drastically different from theirs—but can present alternative perspectives.

Regular exposure to differing views serves to sharpen your thinking and reasoning abilities—and may perhaps even reexamine your positions. As I’ve said before, wisdom comes from facing counter-arguments. The only test of a well-constructed opinion is that it can defend itself.

This is Yoga for the Brain: Multidisciplinary Learning

August 11, 2017 By Nagesh Belludi 1 Comment

You need a broad-based understanding to succeed in today’s increasingly complex world.

Modern scientific and technological advances are increasingly born at the frontiers of more than one science disciplines.

It’s impossible to know everything. However, if you work to understand the basics of the biggest, most important paradigms in the fields of science, humanities, and social sciences, you can progressively expand your decision-making process.

A multidisciplinary methodology entails drawing suitably from multiple disciplines to examine problems outside of their normal boundaries and reach solutions based on an understanding of complex situations.

Multidisciplinarity Leads to Better Internalization of Knowledge

Multidisciplinarity allows you can transform a perspective in one discipline to expand your thought-frameworks in other disciplines. The renowned venture capitalist Paul Graham, author of the bestselling Hackers & Painters: Big Ideas from the Computer Age, said this best when he once wrote,

Studying things from unrelated subjects (multidisciplinary learning) is a lot like yoga for brain. You don’t actually get anywhere when you do yoga. You stand in one place and bend yourself in various shapes. But it makes you more flexible, so when you go out and do walk around, you can walk better.

“Cross-Training for the Mind” à la Charlie Munger

The great investor Charlie Munger, Vice-Chairman of Berkshire Hathaway, is a big proponent of multidisciplinary thinking. This distinguished beacon of rationality and wisdom coined the term “latticework of mental models” to enable the “cross-training for the mind.” Rather than silo your mind just in the narrow areas you tend to concentrate on at college and work, Munger advocates developing a broad, functional set of interdisciplinary knowledge about the world, which can serve you in all parts of life. According to the anthology Poor Charlie’s Almanack, Munger said at a 1998 talk at the Harvard Law School,

If A is a narrow professional, B consists of the big, extra-useful concepts from other disciplines, then, clearly, the professional possessing A plus B will usually be better off than the poor possessor of A alone. How could it be otherwise? And thus, the only rational excuse for not acquiring B is that it is not practical to do so, given the man’s need to A and the other urgent demands in his life. I will later try to demonstrate that this excuse for unidisciplinarity, at least for our most gifted people, is usually unsound.

Many of the world’s leading companies in science and technology are employing multidisciplinary people for managerial positions. These people understand a range of science principles and methods and can synthesize the works of domain-specific experts to invent creative solutions to problems.

Idea for Impact: Pursue Multidisciplinary Thinking

People who think very broadly and comprehend many different models from many different disciplines make better decisions.

Pursue multidisciplinary thinking. Open your mind to new ideas and new experiences. Make new friends, travel afar, read more, and discover new stories.

Interact with people who work in different disciplines and dabble with the arts and the media. Let the new sights, sounds, smells, languages, tastes, sensations, stories, and perspectives spark your creativity.

Everything in Life Has an Opportunity Cost

August 8, 2017 By Nagesh Belludi 1 Comment

“Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way the hell better than the other, you do not have to spend much time with the other. And that’s the way we filter out buying opportunities.”
—Charlie Munger, Investor

Doing One Thing Makes You Sacrifice the Opportunity to Do Something Else of Value

In economics, opportunity cost is the cost of not choosing the next best alternative for your money, time, or some other resource.

One of the foundational principles in economics is affirmed by the popular American aphorism, “There ain’t no such thing as a free lunch.” Resources are scarce. When resources (time, money, mindshare, autonomy, and all that) are scarce, selecting one opportunity necessitates forgoing other opportunities.

Life is all about values and priorities. You face trade-offs. Life requires of you to make choices among mutually exclusive alternatives. Every time you select something, you forfeit other alternatives and the concomitant benefits. The cost of something is what you will give up to get it. This is opportunity cost.

You Can Do Anything but Not Everything … What Will You Sacrifice When You Choose One Option Over the Others?

When mulling over multiple choices, the quality of any option cannot be assessed in isolation from its alternatives. The price you pay (or the sacrifice you make, or the benefits you give up) for doing what you’ve chosen to do instead of doing something else is the opportunity cost.

In sum, an opportunity cost is the cost of passing up the opportunities that a different option would have afforded.

Many costs are calculated in terms of money. However, just because you don’t have to spend money to do something does not imply that the options you face are without their costs. For example, you don’t have to spend money to go for a hike or watch a sunset, but there is an opportunity cost there too. You could have used that time to do something else you value—visiting a friend or reading a book, perhaps.

If you decide to invest two years and some $100,000 getting an MBA at a brand-name business school, there’s an opportunity cost; it costs you lost wages and all the things you could have pursued during that time and with that money. But you anticipate that getting your MBA will pay off by way of a better job in a better company with a better salary.
If you spend your weeklong vacation taking your parents to a beach destination in Florida, there’s the opportunity cost of not going to Paris with your spouse.
If you decide to wake up twenty minutes earlier in the mornings to leave home sooner to work and beat the horrendous traffic, there’s the opportunity cost of twenty minutes of extra snoozing.
When the refrigerator at home breaks down and needs replacement, you will have to give up buying that latest big-screen TV you’ve been coveting.
There’s an opportunity cost to even reading this article at this moment. You could have been watching TV, taking a nap, calling up a friend, or moving on to another article in the time you’re devoting to reading this article.

In a nutshell, even decisions that appear to be no-brainers carry the hidden costs of the options you will decline. Thinking about opportunity costs may not change the decision you make, but it will give you a more rational assessment of the full implications of your decision.

Opportunity Costs Apply to All Your Choices—Big and Small

Opportunity cost is a concept of great magnitude. It is one of those apparently simple concepts in social sciences that are difficult to master and tough to put into consistent practice. Tim Harford, the British author of The Undercover Economist offers a particularly instructive example of appreciating opportunity costs in his Financial Times column:

Consider the following puzzle, a variant of which was set by Paul J Ferraro and Laura O Taylor to economists at a major academic conference back in 2005. Imagine that you have a free ticket (which you cannot resell) to see Radiohead performing. But, by a staggering coincidence, you could also go to see Lady Gaga—there are tickets on sale for £40. You’d be willing to pay £50 to see Lady Gaga on any given night, and her concert is the best alternative to seeing Radiohead. Assume there are no other costs of seeing either gig. What is the opportunity cost of seeing Radiohead? (a) £0, (b) £10, (c) £40 or (d) £50.

…

Answer: Going to see Lady Gaga would cost £40 but you’re willing to pay £50 any time to see her; therefore the net benefit of seeing Gaga is £10. If you use your free Radiohead ticket instead, you’re giving up that benefit, so the opportunity cost of seeing Radiohead is £10.

Charlie Munger’s Wisdom on Opportunity Cost

On the subject of making choices in life based on opportunity costs, Munger stated at a 2010 lecture at Harvard-Westlake preparatory school, “The right way to make decisions in practical life is based on your opportunity cost. When you get married, you have to choose the best spouse you can find that will have you. The rest of life is the same damn way.”
Explaining how Warren Buffett and Berkshire Hathaway use opportunity costs to make investment decisions, Munger detailed stated at the aforementioned Harvard-Westlake lecture, “Berkshire Hathaway is constantly kicking off ideas in about two seconds flat. We know we’ve got opportunity X, which is better than the new opportunity. Why do we want to waste two seconds thinking about the new opportunity? Many of you come from places that don’t do that. You’ve got to have one horse, one rabbit, one something or rather, and that rabbit is going to be thinking about something which would be ruled out immediately by an opportunity cost available generally to the place—but, it’s a different department. You have to be diversified and so on and so on. It’s easy to drift into this idea that opportunities don’t matter, you’ve got so many different ways of doing things that are better. It isn’t better.”
Putting the concept of opportunity cost into operation requires benchmarking any prospective decision to other available alternatives. At the 2006 Berkshire Hathaway annual meeting, Munger advised, “In the real world, you have to find something that you can understand that’s the best you have available. And once you’ve found the best thing, then you measure everything against that because it’s your opportunity cost. That’s the way small sums of money should be invested. And the trick, of course, is getting enough expertise that your opportunity cost—meaning your default option, which is still pretty good—is very high…. Most people aren’t going to find thousands of things that are equally good; they’re going to find a few things where one or two of them are way better than anything else they know. And the right way to think about investing is to act thinking about your best opportunity cost.”

Learn to Evaluate Life Choices Via the Lens of Opportunity Costs—The Stakes Become Clearer

You live in a world of scarcity and must therefore make choices. You cannot avoid regret since there are opportunity costs for every choice you will make.

Everything in life is about opportunity costs. Every time you say “yes” to a choice, you are also saying “no” to everything else you may have accomplished with your time, money, and resources.

Opportunity cost is a commanding tool that you should be wise to apply to all decision-making. If you integrate this concept into your thought process, you will not only make judicious choices, but also better understand the world in which you live.

Idea for Impact: Whether you’re choosing graduate school, mulling over switching careers, starting a business, investing your money, buying a car, or frittering away your evening watching TV, considering the value of forgone alternatives will help you make better choices. Make the lens of opportunity costs the underpinning of your decision-making processes.

How to Guard Against Anger Erupting

July 28, 2017 By Nagesh Belludi 2 Comments

The Destructive Effects of Anger are Easily Recognized

Most people who have problems managing their anger hate themselves for losing their temper but can’t bring themselves to prevent their flare-ups.

Here’s an appropriate reading from Chapter 17, “Anger”, of the Dhammapada (trans. Gil Fronsdal), a profoundly insightful compilation of the historical Buddha’s teachings:

Guard against anger erupting in your body;
Be restrained with your body.
Letting go of bodily misconduct,
Practice good conduct with your body.

Guard against anger erupting in your speech;
Be restrained with your speech.
Letting go of verbal misconduct,
Practice good conduct with your speech.

Guard against anger erupting in your mind;
Be restrained with your mind.
Letting go of mental misconduct,
Practice good conduct with your mind.

The wise are restrained in body,
Restrained in speech.
The wise are restrained in mind.
They are fully restrained.

Discover Ways to Work with Anger and Other Negative Emotions

In its many forms, anger can be extremely energetic. When even a mild annoyance arises due to some apparent injustice, it can quickly grow and overwhelm you. Your inner peace is lost instantly.

When anger surfaces, it usually takes you over by the time you come to observe it. Your mind gets infuriated under the direct influence of aggression and can tempt you to act impulsively through aggressive words or actions—which consecutively feed even more anger.

The mind’s furor intensifies until you are able to lash out like a cornered cat. Even if you can repress your emotions in the heat of the moment, anger can manifest as a subtle simmering of resentment that you carry along with you for some interval of time.

How to Refrain from Erupting in Anger

The most effective way to deal with anger in yourself is by not disregarding or repressing it. Science and experience have shown how poorly “anger containment” strategies work.

When anger rises past a threshold, it requires a reasonable and pleasing expression—an outlet, if you will—to be diffused. The key to expelling anger in a way that must feel good and fair is to invoke your calm, wise self and put out some of the fire of the emotion before moving forward.

To prevent anger from flaring out of control, practice the following first-aid system.

Make a list of what triggers your anger. Most people get angry under predictable circumstances—when faced with situations that they see as unpleasant and unfair. Record events that trigger your anger: being insulted, being blamed unjustly, deceit or laziness in others, anything. Commit them to memory.
When you identify a trigger—when you start to feel angry at someone or at something—induce yourself to immediately take a few deep breaths. As the Founding Father and President Thomas Jefferson suggested, “when angry, count to ten before you speak. If very angry, count to one hundred.” Preferably, break away from the situation for a minute or two: step away, go get water, or go the bathroom. Removing yourself from the offending environment will buy you a few moments to decide how you want to respond.
When you can separate yourself from the cause of anger, take a deep breath, and ask yourself if whatever you’re getting worked up over is a priority. Is the issue worth getting upset over? Put your irate-self wise by posing the following “5-5-5” questions:

Will this matter in 5 days?
Will this matter in 5 months?
Will this matter in 5 years?

The “5-5-5” questions will prevent you from being caught up in the little trivialities of life. Remind yourself how good you’ll feel if you respond as your best, wise self and how bad you’ll feel if you rashly fly off the handle.

Only when you’re feeling less agitated and more calm, only when your sensible mind is back, can you assess the triggers of anger rationally, and take action in an prudent way.

Idea for Impact: Guard Against Anger Erupting in Your Body, Your Speech, and Your Mind

The antidote to anger and aggression is patience. Patience has a great deal to do with being mindful about the storms of distress and refraining from doing or saying anything, no matter how strong the urge to do so may be. Reflect before you respond.

The more you can manage your emotions, the more effective you’ll be.

Our Vision of What Our Parents Achieved Influences Our Life Goals: The Psychic Contract

July 14, 2017 By Nagesh Belludi 1 Comment

Understanding Others’ Motivations is a Key to Building Better Relationships

Understanding others’ deep-held motivations involves recognizing what drives them, why and how they want to work, work styles they may adopt in various circumstances, and what levers you have to motivate them.

Take for example Abraham Maslow’s Hierarchy of Needs, a motivation hypothesis used widely for several decades now. Represented as a pyramid, this hypothesis proposes that people are motivated to fulfill basic subconscious desires such as food and shelter before trying to fulfill higher-level needs such as affection and prestige. Even though academics have extensively debated its specifics, Maslow’s Hierarchy of Needs has provided a handy framework to value the multifaceted composition of human motivation and to understand how to engage others.

The Relationship between Your Own Vision of Success and Your Parental Influence

One less-known framework for understanding the provenance of people’s life goals—their deep-seated aspirations for want to achieve in life—is the “Psychic Contract” hypothesis, a concept that dominates The Anatomy of a Great Executive (1991) by John Wareham, a leadership psychologist from New Zealand.

According to Wareham, a psychic contract is a set of “deals” we subconsciously strike with our parents early in life. Our life-goals are defined primarily by our own vision of what our parents achieved—and what they failed to achieve:

As we grow we absorb the values of our parents, and are conditioned to improve (albeit marginally) upon their achievements. We strike a psychic contract with them whereby “success” in life is defined by the attainment of a similar social positioning, which we later embark upon attaining, sometimes very consciously, but often entirely unconsciously.

Throughout our lives, we unintentionally adhere to our psychic contracts, despite the limitations they place on us. We use our psychic contracts to not only define and approach our life goals but also think about how we measure success.

We consciously measure success in terms of milestones and standards instilled by our parents.

As a rule of thumb, about three quarters or more of people in westernized culture seek first to equal, then marginally to improve upon the lifestyle or status level perceived to exist in the childhood home.

Psychic Contract Theory: Children are Programmed to Want to Do as Well as or Better Than Their Parents

In The Anatomy of a Great Executive, Wareham goes into depth explaining how we can know our own psychic contracts and how we can reset our goals to give ourselves permission to succeed. Here are some other prominent learning points:

Our psychic contract is based on our birth order, our parents’ birth order, and roles we play relative to our parents in our families.
The so-called “prime parental injunction” sits at the heart of our conscious. We go through our lives trying to become the people our parents wanted us to be. Even people who spend their lives trying to become exactly the opposite of what their parents wished are still influenced by this injunction.
Every person has a pre-programmed financial comfort level. Most of us strive to reach this level; but once there, we slow down—not because we are lazy, but because we have fulfilled our inner desires and don’t need more. Wareham cites the example of commission-based sales people who, after earning adequate commission to reach their financial comfort level, tend to be less aggressive in selling cars to customers for the rest of the month.

Idea for Impact: “Psychic Contract” is a handy and thought provoking—if unsubstantiated—hypothesis to understand how your and other people’s deep-seated life goals are established. It can give you one more data point in trying to figure people out.

Become a Smart, Restrained Communicator Like Benjamin Franklin

July 11, 2017 By Nagesh Belludi Leave a Comment

Benjamin Franklin, America’s founding father, statesman, and polymath, was a doyen of the self-improvement movement. His methods for self-mastery are worth taking a serious look at if you’re interested in getting better at anything in life.

In his wonderful Autobiography (1791,) Franklin discusses his once-foolish delight in spinning artful arguments and doggedly winning over his opponents.

Winning an Argument Aggressively is but a Short-term Ego Victory

As a young man, Franklin had a habit of fervently arguing his case in all matters and alienating people around him. He frequently ensnared his challengers with hard-hitting rhetoric:

I found this method safest for myself and very embarrassing to those against whom I used it; therefore I took a delight in it, practis’d it continually, and grew very artful and expert in drawing people, even of superior knowledge, into concessions, the consequences of which they did not foresee, entangling them in difficulties out of which they could not extricate themselves, and so obtaining victories that neither myself nor my cause always deserved.

However, Franklin ultimately recognized that his take-no-prisoners approach of arguing was by no means endearing him to other people. His realized that his brash way of outwitting his challengers had been self-defeating.

Benjamin Franklin, Doyen of the Self-improvement Movement

Arguing, if it is to Be Constructive, Must Be Done Tactfully

In an attempt to develop amenable character traits, Franklin radically improved the way he interacted with others. He let go of all expressions of conceit and bold self-confidence. He stopped using words such as “certainly” and “undoubtedly” in his speaking and replaced them with phrases that signified personal opinions—for instance, “It appears to me, or I should think it so or so for such & such Reasons, or I imagine it to be so, or it is so if I am not mistaken.”

I continu’d this method some few years, but gradually left it, retaining only the habit of expressing myself in terms of modest diffidence; never using, when I advanced any thing that may possibly be disputed, the words certainly, undoubtedly, or any others that give the air of positiveness to an opinion; but rather say, I conceive or apprehend a thing to be so and so; it appears to me, or I should think it so or so, for such and such reasons; or I imagine it to be so; or it is so, if I am not mistaken. This habit, I believe, has been of great advantage to me when I have had occasion to inculcate my opinions, and persuade men into measures that I have been from time to time engag’d in promoting; and, as the chief ends of conversation are to inform or to be informed, to please or to persuade, I wish well-meaning, sensible men would not lessen their power of doing good by a positive, assuming manner, that seldom fails to disgust, tends to create opposition, and to defeat every one of those purposes for which speech was given to us, to wit, giving or receiving information or pleasure. For, if you would inform, a positive and dogmatical manner in advancing your sentiments may provoke contradiction and prevent a candid attention. If you wish information and improvement from the knowledge of others, and yet at the same time express yourself as firmly fix’d in your present opinions, modest, sensible men, who do not love disputation, will probably leave you undisturbed in the possession of your error. And by such a manner, you can seldom hope to recommend yourself in pleasing your hearers, or to persuade those whose concurrence you desire. [Alexander] Pope says, judiciously:

“Men should be taught as if you taught them not,
And things unknown propos’d as things forgot;”

farther recommending to us

“To speak, tho’ sure, with seeming diffidence.”

Learn to Resolve Important Issues through Sensible Discourse

Franklin realized that this measured conversation and gentler interactions was helpful in preventing conflicts and softening resistance in those he wanted to influence. He writes, “This Habit, I believe, has been of great Advantage to life, when I have had occasion to inculcate my Opinions & persuade Men into Measures I have been from time to time engag’d in promoting.”

This rule of skilful conversation and interpersonal relationships later became one of the foundational principles in Dale Carnegie’s masterful self-help manual How to Win Friends and Influence People—specifically, that our ticket to success in life is the ability to make others feel good about themselves.

Persuasion is Not About Outmaneuvering Others and Proving Them Wrong

The ability to communicate effectively, plead your case, and influence others is one of the most useful skills for succeeding in the modern world.

Learn to resolve important issues through sensible and mindful discourse.
Be assertive where you must, but never aggressive.
Be open-minded, understand the other person’s perspective, and keep your emotions under control.
Never insult, disgrace, or cause the other person to lose face.

Views, opinions, and judgments can differ, and these can and should be discussed civilly. However, to debate such differences vigorously so as to cause bad feelings toward is not necessary and is almost always counterproductive.

Idea for Impact: Arguing for the sake of deciding a winner is never constructive. When an argument starts, persuasion stops.

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Mental Models

Incentives are Powerful Extrinsic Motivators

Incentives Shape Behavior

Incentives Can Backfire Even If Launched with the Best of Intentions

Idea for Impact: A Little Incentive Goes a Long Way

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Many High-IQ People Tend to Be Overthinkers: They Incessantly Overanalyze Everything

Intelligence Can Sometimes Be a Curse

Intelligent People Overanalyze Everything, Even When it Doesn’t Matter

Idea for Impact: Don’t Make Everything Seem Worse Than it Actually is!

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Physicist Enrico Fermi Was a Master of Guesstimation

Teaching Physics Students the Fermi Way of Contemplating Open, Non-Standard Problems

Classic Fermi Problem: Number of Piano Tuners in the City of Chicago

Back-of-Envelope Calculations for Fermi Problems

The Ability to Guesstimate: A Key Problem-Solving Aptitude

Idea for Impact: Use Effective Guesstimation Techniques Before Undertaking a More Complete and Formal Investigation

Recommended Resources for Guesstimation

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Idea for Impact: Learn to Corral Your Anger and Manage Your Emotions

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Group Polarization Strengthens of the Opinions of Each Person in the Group

Social Media and Group Polarization

The Persuasive Ability of Social Proof in Consumer Behavior

Idea for Impact: Hanging Around with Like-Minded People is a Dangerous Intellectual Trap

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Multidisciplinarity Leads to Better Internalization of Knowledge

“Cross-Training for the Mind” à la Charlie Munger

Idea for Impact: Pursue Multidisciplinary Thinking

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Doing One Thing Makes You Sacrifice the Opportunity to Do Something Else of Value

You Can Do Anything but Not Everything … What Will You Sacrifice When You Choose One Option Over the Others?

Opportunity Costs Apply to All Your Choices—Big and Small

Charlie Munger’s Wisdom on Opportunity Cost

Learn to Evaluate Life Choices Via the Lens of Opportunity Costs—The Stakes Become Clearer

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The Destructive Effects of Anger are Easily Recognized

Discover Ways to Work with Anger and Other Negative Emotions

How to Refrain from Erupting in Anger

Idea for Impact: Guard Against Anger Erupting in Your Body, Your Speech, and Your Mind

Wondering what to read next?

Understanding Others’ Motivations is a Key to Building Better Relationships

The Relationship between Your Own Vision of Success and Your Parental Influence

Psychic Contract Theory: Children are Programmed to Want to Do as Well as or Better Than Their Parents

Wondering what to read next?

Winning an Argument Aggressively is but a Short-term Ego Victory

Arguing, if it is to Be Constructive, Must Be Done Tactfully

Learn to Resolve Important Issues through Sensible Discourse

Persuasion is Not About Outmaneuvering Others and Proving Them Wrong

Wondering what to read next?