The Smart Thinking Formula
As humans, we are often presented with information as opinion rather than fact. It's up to us to think critically and determine what is true.
Imagine coming off a call with a well-respected economist who shares that we're entering a global recession. This also aligns with other opinions you’ve been hearing, so you’re inclined to believe him, accepting his confirmation as truth.
You pass along this warning without verifying the data yourself. Only then you come to realise that the underlying macroeconomics data is telling you the opposite. You’ve missed the signs because you took the general or “accepted” consensus to be the truth.
As humans, we are wired to follow the general consensus and fit in with the larger world.
However, going along with the crowd can lead us to stop thinking critically and lose our independent reasoning.
If you had questioned the consensus about the recession and tracked the underlying data fundamentals, it would allow you to make smarter decisions and have rational opinions. This thinking process can be applied to any scenario to make us smarter, leading to greater success.
So how can we avoid getting swept up in consensus thinking and ensure we're being rational? As entrepreneur Naval Ravikant says: there are few fundamental principles we can believe to be true and therefore should apply to our rationalisation.?
In the rest of this article, I'll break down key principles we can use when analysing information and making decisions.
What are these magical principles?
I know you’re probably hoping for some quick fix “magic principles” that will make you a smarter thinker overnight. Unfortunately, improving rational thinking takes more work than that.
The key is understanding System 1 vs 2 thinking. System 1 is reactionary and instinctive, while System 2 is analytical and looks deeper. Engaging System 2 helps overcome biases for wiser choices.
Imagine having a gift with 10 layers of wrapping. Most people would unwrap just one before guessing the contents. But smarter thinkers keep uncovering layers until they reach the truth.
“Our beliefs about ourselves and the world are built in a jenga-like fashion.” - Philip Tetlock
Recently, I spoke with a startup founder who was struggling to get results from their initial go-to-market strategy. They had messaged over 10,000 LinkedIn accounts with a generic sales pitch and received little response.
Their reasoning was that volume was all that mattered - the more people contacted, the better. However, this premise is flawed. While reach is important, message quality matters too.
If we examine human psychology, people are wired to connect personally, not respond to mass outreach. Dating back to prehistoric times, we needed close communities to survive. So how could they have crafted an appealing message based on this insight? A personalised message building rapport would likely perform far better.
The lesson is to evaluate strategies against proven scientific principles. In this case, ignoring key truths about human nature undermined the campaign. There are anchors like science, maths and economics we can use to reality-check logic.
While new theories constantly evolve, certain scientific foundations have endured over time. Analysing information against these lodestars develops our rational thinking skills for smarter choices.
6 foundational principles?
There are lots of proven principles out there, but for this section I have chosen my favourite with an explanation of how I apply them. I urge you to further go through this list and consider which principles resonate most with you.
Physics: Velocity
Speed tells how fast you're moving. Velocity includes both speed and direction. For example, a train speeding along tracks has speed. But combine knowing both the speed and where the train is heading - that gives you velocity.
Have you spent hours working on a project before realising you're heading the wrong way? I have, many times when I first became an entrepreneur.?
Inexperience had me chasing speed haphazardly. The result - going in circles wasting time. The key is determining strategic direction through small experiments before executing at scale. This velocity mapping ensures speed produces outcomes rather than just motion.
Physics: Leverage
Leverage refers to magnifying force or mechanical advantage through the use of a lever. It allows small input effort to lift much heavier loads by effectively multiplying the applied force.
Leverage demonstrates how proper application of physics principles multiplies work capacity exponentially. Architectural wonders like ancient pyramids were built using inclination planes leveraging gravity and human labour. Leverage drives progress.
As Archimedes famously said - "Give me a lever long enough and I shall move the world."?
As we mature in careers, we better understand the importance of using leverage. Entrepreneur Naval outlines 4 key levers to create leverage:
Smart leverage application lets us punch far above our weight class across contexts from household chores to global enterprises. Progress at scale depends on it. Leverage drives outsized outcomes through force multiplication.
Maths: Game Theory
Game theory studies strategic decision making scenarios with multiple players who interact. It uses maths models to analyse the best possible strategies that optimise outcomes for each player given others' decisions.
Game theory helps break down complex multiplayer situations to provide intelligence on likely behaviours and equilibriums. This empowers making decisions on whether to collaborate or compete. It is universally relevant wherever strategic interdependence exists.
Consider two firms dominating a market. Should they compete aggressively on pricing and advertising which hurts profitability short-term? Or agree to maintain higher pricing to benefit both long term? Game theory models can assess the incentives, risks, and optimal approaches in such situations.
Biology: Natural Selection
Natural selection means organisms better adapted to the environment tend to survive and reproduce more. Beneficial traits that help survival get passed down over generations.
Understanding natural selection gives insight into how species evolve. It explains biodiversity and why organisms exhibit capabilities fitting their habitats. These concepts form the foundation of modern biology.
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Natural selection appears in business with companies playing survival of the fittest. Firms able to adapt best to changing markets, consumer needs and technology survive, while outdated rigid businesses decline. People who evolve demanded skill sets excel in careers while others risk displacement. Just as in nature, business ecosystems reward those fitting the landscape.
Microeconomics: Supply & Demand
Supply and demand refers to the economic model showing the interaction between the willingness of sellers to offer goods at certain prices (supply) and the willingness and ability of buyers to purchase those goods (demand).
Understanding supply and demand is key for both consumers and businesses. It helps set appropriate prices, anticipate market movements, and make smart purchasing decisions. Knowing when supply or demand drives a market empowers better cost planning and investments.
Think of buying gas during holiday travel seasons. More drivers on the road spikes the demand for gas. But if oil production and distribution remains stable, then limited gasoline supply struggles to meet increased vacation demand. This supply-demand mismatch can lead to price hikes at the pump. Similarly for goods like airline tickets, hotel rates or even toys during Christmas - prices climb when demand growth outpaces supply.
Psychology: Narrative Instinct
Narrative bias means that people tend to make judgments based on stories more than facts. We naturally create storylines in our minds about events and situations. These stories powerfully shape our predictions even if they are inaccurate or have holes.
Understanding this bias prevents us from misreading realities on the ground. We can check whether our storytelling instincts lead us astray from what data actually suggests. This gives us more accurate expectations when analysing information for decisions.
Think of election race projections. The most gripping media narratives around candidates capture public attention. But statistical models better predict results. Yet we fall for storyline seduction and get surprised when numbers contradict our intuitive tales. Similar dynamics apply in markets, relationships or any forecasting. Distinguishing narrative appeal from factual probability is vital for balanced choice-making.
3 steps to applying principles
Step 1: First Principles Thinking
First principles thinking breaks down problems or statements to their basic elements in order to critically examine them. This approach was documented by the philosopher Socrates and has been adopted by many great thinkers since, such as Elon Musk.
Below you can find Plato's documentation of Socrates’ principles from his book “Republic.”
For example, when told a recession is imminent, first principles thinking would analyse key economic components like unemployment, GDP growth and interest rates. Scrutinising the data for each factor may reveal trends that contradict the claim.
By questioning and digging into fundamental building blocks, this thinking process allows us to evaluate the validity of assertions more objectively. Using first principles provides a smarter analysis framework for decision making.
Step 2: Understand Your Principles
In order to think critically, having clear principles and beliefs to anchor your analysis is crucial.?
As Naval advises, start by identifying widely accepted universal principles based on proven theories, such as mathematics, science, economics or psychology. Understand how each principle can be used - for example, applying the mathematical concept of regression to the mean when evaluating claims about interest rate projections and forecasts.
Choose a select few fundamental principles that you understand well. Anchor your analysis in these to scrutinise the validity of components and claims objectively.
While universal principles provide the bedrock, also develop fundamentals for your particular industry. These will allow you to better evaluate the specifics of business models, technologies, trends etc. within your field.
For example, working in blockchain requires core knowledge of the technology itself - cryptography, consensus mechanisms, wallets etc. As well as economic fundamentals like tokens, incentives, market dynamics.
I recently met a Web3 founder pitching a vague model using lots of buzzwords. By asking questions to break down their platform and tokens to basic components, I realised their decentralised finance (defi) app was essentially just gambling with no true innovation. My industry-specific knowledge revealed the fundamentals were flawed.
Always break things down into the simplest fundamental components so a 5 year old could understand it. Only then do you truly understand it!
Step 3: Practise?
The key is regular practice. Try journaling or discussing ideas and embrace potentially getting it wrong. Consistent application develops critical thinking “muscle memory.”
When evaluating new information, use this 3-step workflow:
Start implementing this workflow to strengthen rational thinking skills over time. The more you practise first principles analysis, the more instinctive it will become.
Conclusion
In an age of information overload, adopting rational thinking practices is more critical than ever. Rather than accepting opinions as fact, we must engage our minds to determine truth.?
The key takeaways for developing smarter analysis and decision making are:
In closing, the path to truth requires thoughtfulness, not thoughtlessness. By arming our minds with these practices for sharper, anchored analysis while avoiding consensus blindness, our decisions can advance to higher standards. And better individual choices compound to drive progress collectively.
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