We Can’t Understand the World Without These
Steal these tools to see clearly
People are often short on tools.
Even highly educated specialists might rely on just one or two, self-ghettoizing themselves into the tiny life boxes where their tools work. They look on everything outside with bafflement, which makes them mistake-prone and easily fooled.
“If all you’ve got is a hammer, every problem looks like a nail,” we’re often told. But the simple solution is to get a toolbelt and load it up. When we do, we demolish our self-made ghettos and see the world more clearly.
By taking a few powerful tools from different domains, we’ll think better, have better personal lives, and create better solutions for society. The alternative is going through life with just a hammer, smashing away and wreaking havoc.
The First Philosopher-Economist
Consider the so-called first Western philosopher, Thales of Miletus, who added psychological, economic, and scientific models to his philosophical toolbelt.
The famous Socratic and Apollonian maxim, “know thyself,” originated with Thales, But he might have as easily said, “know thy world.”
Thales was ambivalent about money and had only what he needed. But he was taunted for his relative poverty — “If you’re so wise, why aren’t you rich?”
He decided a demonstration was in order.
Through weather and astronomical observations over the winter, Thales determined that the next olive harvest would be massive. He leased every olive press in Miletus before anyone realized a bounty was incoming and reaped the profit when the mad rush to process it began. Aristotle tells us he didn’t do this to become rich but to demonstrate philosophy’s practical side to skeptical citizens1.
If you don’t understand your world it’s hard to think clearly, plan, and live a good life. Here are a few tools to help.
And Then What x3
It’s easy to predict what the result of an action will be. But when we ask, “And then what?” the 2nd order effects are somewhat hazier in our mind’s eye. If we can figure out a reasonable answer to a third, “And then what?” we’ll be ahead of most businesses, governments, and individuals and better able to navigate life.
These 2nd and 3rd order predictions become easier if we continuously reason things through using our growing toolbelt, and the cost of not trying is often disastrous.
A great example is the massive environmental catastrophe of Australia’s decision to import cane toads.
But examples are endless:
DDT Ban:
Intended: The US banned DDT in 1972 due to environmental concerns.
Unintended: Many equatorial countries stopped spraying DDT on mosquitoes.
Disaster: Millions of Africans, South Asians, and South Americans died in malaria epidemics after mosquito populations surged.
US Prohibition:
Intended: The US banned alcohol in 1920 to reduce crime, domestic abuse, and alcoholism.
Unintended: A black market for alcohol sales emerged, turning millions of law-abiding citizens into criminals.
Disaster: Organized crime syndicates arose to profit from the black market, leading to violence, corruption, and a crime wave.
French Wealth Tax:
Intended: France created an annual tax on assets over €1.3 million in 2013 to increase government revenue
Unintended: 12,000 millionaires and many companies moved abroad, including some of France’s richest people.
Disaster: €80 billion in capital left France, decreasing investment and business formation. Tax revenue was €2.5 billion to €3 billion below expectation, exacerbating France’s financial straights.
Fate isn’t always easy to predict. The chains of causality we’re caught up in lead to surprising places, and our guesses will always be tentative. But anyone with basic psychological or economic models in their heads could have predicted all three of these disastrous outcomes if they’d spent a few minutes brainstorming. If we care about virtue, we need to figure out the long-term consequences of what we say, do, think, and legislate.
On a personal level: Every morning, I ask, “What is likely to go wrong today and how will I respond when it does?” This trains me to think several steps ahead. It also prepares me for unpleasant things so I’m not caught flat-footed.
Incentives Explain the World:
Baffling situations often become legible when we figure out what incentives are at play, locally and globally.
An incentive can be almost anything pushing us toward a behavior:
Food, or better food.
Status, power, or respect
Sex
Land, money, or resources
Money can’t buy peace of mind or love, but most actions — good or bad — have levers that incentivize them.
Incentives are not the only reason people do things — I’m not arguing for an incentive-deterministic world where we’re helpless meat puppets dancing on strings. But we need to actively resist what we’re incentivized to do, and many people won’t or can’t.
Aristotle suggests there are two types of actions which I term the virtue game and the utility game, and incentives have more pull on the latter.
But even if your intentions are entirely altruistic, like a politician crafting social welfare programs or a charity helping foreign children suffering from malnutrition, you’ll swim against the tide if you pay no attention to the incentives driving human behavior.
The American welfare system is rife with poorly considered incentives. A single parent with two kids who earns more than $30,000 will lose a ton of money if they earn $31,000. The only way to bridge that gap is to leap to $80,000 in one go, which is frequently impossible2.
And so welfare recipients are incentivized to turn down promotions and raises, to not work more, and to not expand their skillset. They may be unable to perfectly limit their income, but they're financially incentivized to try. This acts like a negative gravitational pull on society and welfare recipients.
Other Bad Incentives:
Police Quotas: Distracts officers from public safety work so they can make unnecessary arrests and citations for minor infractions.
Planned Obsolescence: Companies seeking cash infusions design products to fail, which creates piles of waste and unnecessary spending.
Government Bank Bailouts: Big financial companies take huge financial risks because they know our government thinks they’re “too big to fail,” and will save them if their bets sour, thus making bailouts more likely.
Medical Test Reimbursement: Instead of being paid for positive health outcomes, hospitals make extra money for running more tests and doing more procedures, incentivizing them to do more than is necessary and driving up costs for everyone.
Test-Based Education Standards: If the test is what matters, teachers will teach to the test, robbing students of a broad education. (Campbell’s Law).
Incentivize Yourself
How good can you become at incentivizing good outcomes and avoiding mistakes in your life and business dealings?
When I’m unmotivated to push major projects across their finish line, I’ve sometimes sent emails to friends and family. I tell them I’ll finish the project by X date and if I fail I’ll donate a significant sum of money to a cause I’m not a fan of (but not “evil”).
This incentives me through several human biases:
Loss Aversion
Consistency Bias
Public Observation.
The feeling of being watched pushes me. I also don’t want to lose the money or fund something I don’t like.
I’ve never failed to achieve a goal when I set up incentives like this.
Ditch Things Sooner:
Sunk costs are irrecoverable investments of money, time, or emotional energy. We’re not getting them back no matter what happens.
Humans frequently fall for the “sunk cost fallacy,” of sticking with or doubling down on investments when it’s clear they’re not working. This compounds our mistakes instead of freeing us of them.
You go to a movie but are disappointed 40 minutes in.
The chances of it getting better are slim and you’ll never get the next hour of life back. Leave and use your time for something meaningful.
You’ve started a business but soon realize you’re not cut out for it. Two years of additional training and effort don’t help, but you figure maybe one more might and so put down money for further training.
Failing quickly and finding out something doesn’t suit you is often helpful in honing in on what you should do. There’s no disgrace in trying something else.
The book still sucks four chapters in?
Put it down and try another!
You’re dating someone but after two years the relationship isn’t going anywhere. Yet you’ve already sunk so much time and energy into getting to know each other and “breaking each other in.”
You know what I’m going to say. Time to rip the bandaid off.
The sunk cost fallacy is one of the more emotionally freeing things I’ve learned to flout. Escaping its inertia feels subversive. I’ve used this frame to escape numerous paths that past Andrew started down but which weren’t serving me.
The only exception to the “abandon what doesn’t work,” rule is when doing so conflicts with virtue.
I’m considering writing more articles on tools/models and their role in good thinking. If you’re interested in seeing more of them, please let me know:
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Aristotle, Politics, 1259a
American welfare program income requirements shift regularly and are continuously tinkered with. This chart is outdated but still directionally correct.
Gained a lot from this read, the map you made was very intuitive and revealing of how incentives drive the individual and economy as a whole.
This way if thinking is critical. I call every day with people who ask for “best practices” from “experts” who have little to no knowledge of their business or environment, this every fail to foresee 2nd or 3rd order impacts.