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62 Cards in this Set
- Front
- Back
- 3rd side (hint)
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AutoCatalysis
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In chemistry, you can have processes or reactions that speed up due to a “catalyst.”
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“The invention of the air conditioner created the need for air conditioning, hence the self-stimulated increase in the demand for air conditioners.”
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Compound interest
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It arises when interest is added to the principal.
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While the easy example to give is that you have a $100 in your savings account and you earn 5% each year so after year 1 you have $105 and after year 2 you have $110.25 and after year 3 you have $115.76, etc., I find that boring so let’s instead talk about fun bigger business numbers!
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Invert (“Always Invert”)
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Munger encourages people to think through problems backwards — mathematician Carl Jacobi was fond of saying, “Invert, always invert.”
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One recent example of inverting a business was when University of Florida professor Jay Ritter looked at Facebook’s potential financial upside by inverting a much larger and more successful company: Exxon Mobil.
“Let’s say [Facebook] grows so fast over the next decade that it will match the size of the world’s largest stock, Exxon Mobil, whose shares this week had a total value of around $380 billion. So, if the company grew in total value from its current $50 billion to $380 billion over the next 10 years, Facebook’s stock would generate an average annual return of 22.5%. ‘ As a maximum upside,…that’s not as rosy as I think some [Facebook] investors might hope.’” |
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Incentives
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People respond most strongly to what they view as their incentive or disincentive.
Munger recommends that you always reflect on: “What is someone getting out of this.” |
Munger’s favorite business example about incentives is from the early days of FedEx — he said that they couldn’t get the planes to shift packages from plane to plane in a timely manner.
The problem was that the workers were being paid per hour. When they changed to paying the workers per shift, the workers were able to to shift packages faster. |
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Law Of Large Numbers
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The law of large numbers indicates that the higher the number of times something is performed, the more likely you will receive something close to the average of the results.
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For example, it’s easier for Facebook to grow its annual profits 100% than Berkshire Hathaway to do so; because Facebooke’s profits are roughly $500 million while Berkshire’s are $13 billion.
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Law of Scale
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The more volume you put through an operation, the better you get at processing that volume.
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In a beer business, for example, Anheuser Busch operates at such a higher volume than Anchor Steam beer (based in San Francisco), that Anheuser Busch can buy bottles and cans for much cheaper than Anchor Steam (and thus charge less for their beer).
A major drawback to scale — and this is also the downside to the Law Of Numbers — is that the larger you get the more bureaucratic you get. And with bureaucracy comes territoriality which then leads to you ignoring opportunities outside your territory. |
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Pareto Principle (aka “The 80/20 Rule”)
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The Pareto Principle states that 80% of the effects come from 20% of the causes.
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80% of our profit comes from 20% of our products.
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Parkinson’s Law
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“Work expands so as to fill the time available for its completion.”
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You probably recognize this in your day to day life where you might wait until the last moment to return a library book or leave to the aiport.
In important version of Parkinson’s Law in business states that “expenditures rise to meet income.” |
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Pavlovian Association
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When the experience of one thing leads to the effect of another — after repeatedly being paired together — that is called Pavlovian Association (after Ivan Pavlov’s classical conditioning).
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Munger says that Paley of CBS was a business example of this: he didn’t want to hear what he didn’t like to hear. Those around him learned that and soon told him only what he wanted to hear.
Eventually that led to a decline in market share for CBS (which was once the only major tv network). |
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Scarcity
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People are motivated by what they stand to lose if they don’t act now. That’s why the QVC countdown clock is so important.
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Self-Interest
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Munger says one of his favorite “human misjudgments”is how the brain subconsciously will decide that what’s good for the holder of the brain is good for everyone else.
Some folks refer to this as people dialing into the WIIFM radio station (as in”What’s In It For Me”) |
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Social Proof
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Munger points to Social Proof as a psychological form of scale. Many people are influenced by what others do and approve — they believe that the more people that use a product the better that product is.
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For example, if you’re Google and you get the largest number of people using your tool to search the Web, then you’re likely going to get the largest number of advertisers willing to reach those searchers.
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Cognitive dissonance
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is a discomfort caused by holding conflicting cognitions. people have a motivational drive to reduce dissonance by altering existing cognitions or adding new ones to create a consistent belief system.[1
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An example of this would be the conflict between wanting to smoke and knowing that smoking is unhealthy; a person may try to change their feelings about the odds that they will actually suffer the consequences, or they might add the consonant element that the smoking is worth short term benefits
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Black swan
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an event is a surprise (to the observer) and has a major impact. After the fact, the event is rationalized by hindsight.
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An example Taleb utilized to explain his theory was the events of September 11th 2001. 9/11 was a shock to all common observers; and its ramifications are to this day felt in the increased level of security and the adoption of "preventive" strikes/wars by Western governments.
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Supply and Demand
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is an economic model of price determination in a market. It concludes that in a competitive market, the unit price for a particular good will vary until it settles at a point where the quantity demanded by consumers (at current price) will equal the quantity supplied by producers (at current price), resulting in an economic equilibrium of price and quantity.
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Inertia
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is the resistance of any physical object to a change in its state of motion or rest, or the tendency of an object to resist any change in its motion.
Inertia comes from the Latin word, iners, meaning idle, or lazy. |
If you've ever come to the end of a TV show, then passively continued watching the next show on the same channel, you know the power of inertia. You have only to press a button on the remote (an expenditure of less than one calorie of energy) to change the channel. Many of us cannot even do that, much less turn the thing off. We continue doing what we're doing even when we no longer want to do it.
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Critical Mass
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When a company reaches critical mass, it is thought that they can remain viable without having to add any more investment.
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Synergy
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is two or more things functioning together to produce a result not independently obtainable.
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Availability Model
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If a product or service is widely and conveniently available, consumers are less likely to try the competition. Easy availability encourages behaviors changes.
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Think Starbucks, where being everywhere plays to the creatures of habit principles, reducing the need to try other coffee establishments;
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Habit
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People tend to stick with the current situation, a status quo bias. The default option is, often, mindlessly picked.
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Most teachers know that students tend to sit in the same seats in class.
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loss aversion
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refers to people's tendency to strongly prefer avoiding losses to acquiring gains. Some studies suggest that losses are twice as powerful, psychologically, as gains.
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people failing to sell an investment when it’s worth less than they paid (“It’ll go back up I hope”).
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Homeostasis
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the tendency of a system, especially the physiological system of higher animals, to maintain internal stability, owing to the coordinated response of its parts to any situation or stimulus that would tend to disturb its normal condition or function.
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when glucose levels in the blood are too high, the pancreas secretes insulin to stimulate the absorption of glucose and the conversion of glucose into glycogen.
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Default
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If an option is designated as the 'default', it will attract a large market share. Default options thus act as powerful nudges.
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In many contexts defaults have some extra nduging power because consumer may feel, rightly or wrongly, that default options come with an implicitly endorsement from default setter, be it the employer, government, or TV scheduler.
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Human Action
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Man acts when he feels some uneasiness; has an image of a better state; and is confident of reaching that better state.
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Negotiation
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Focus on interests, not positions. What is your alternative to a negotiated agreement (BATNA)?
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BATNA is the course of action that will be taken by a party if the current negotiations fail and an agreement cannot be reached. BATNA is the key focus and the driving force behind a successful negotiator. BATNA should not be confused with the reservation point or walkaway point. A party should generally not accept a worse resolution than its BATNA. Care should be taken, however, to ensure that deals are accurately valued, taking into account all considerations, such as relationship value, time value of money and the likelihood that the other party will live up to their side of the bargain. These other considerations are often difficult to value, since they are frequently based on uncertain or qualitative considerations, rather than easily measurable and quantifiable factors.
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Operant Conditioning
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A behavior is followed by a consequence, and the nature of the consequence modifies the organisms tendency to repeat the behavior in the future
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Your car has a red, flashing light that blinks annoyingly if you start the car without buckling the seat belt. You become less likely to start the car without buckling the seat belt.
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Pain/Pleasure
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We tend to behavior that derives pleasure or avoids pain
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Paradox of choice
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lots of choice makes people less likely to choose anything, and less happy when they do choose.
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“maximizers need to be assured that every decision was the best that could be made. Satisficers settle for something that is good enough and not worry about the possibility that there might be something better.
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Pavlovian Conditioning
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A reflexive action to a stimulus can be taught, or learnt subconsciously
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Science of Achievement
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Creat a written PLAN to reach the GOAL within a TIMEFRAME. Take Action by implementing the PLAN. Get FEEDBACK from Actions - make CHANGES if necessary
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Authority Model
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We tent to follow legitimate or perceived figures of authority. C
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Commitment and Consistency Model
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People will respond in ways that justify an earlier decision, especially when those decisions are active, public and viewed as uncoerced.
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People are called and asked to predict what they would say if they were asked to volunteer for 3 hours. Then when asked participation went up 700 percent
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Deprival Syndrome
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People tend to overreact to losing something that has been in their possession for some time - the endowment principle
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Losing $10 pains us much more than gaining $10 excites us
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Framing the issue
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If you want people to listen to you, you have to express yourself in a way that resonates with them. Does it have enough emotional appeal
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Incentive-Cause Bias
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People can drift into immoral behavior when driven by powerful incentives to reach goals
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ex. Sub Prime Mortgages
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Liking
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People prefer to say yes to individuals they know and like. Physical attractiveness seems to engender a halo effect that extends to favorable impressions of other traits such as talent, kindness, and intelligence. A second factor that influences liking and compliance is similarity. We like people who are like us
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Reciprocation Model
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We feel a sense of obligation after receiving something
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Three Levels of Innovation
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1. Incremental Innovation. This consists of small, yet meaningful improvements in your products, services, and other ways in which you do business. These tend to be the "new and improved" innovations we are all bombarded with every day: new flavors, shifts to better or all-natural ingredients, packaging improvements, faster/slower functioning, just-in-time supply chain enhancements, bigger/smaller sizing, cost reductions, heavier/lighter weight. We see them every day and they help extend product, service, and business life cycles and improve profitablity. They can be easily visualized and quickly communicated and give you something new with which to grab consumer attention in an increasingly noisy marketplace.
2. Breakthrough Innovation. This is a meaningful change in the way you do business that gives consumers something demonstrably new (beyond "new and improved"). Breakthrough innovation produces a substantial competitive edge for a while, although the length of time anyone can maintain such an advantage is growing increasingly shorter. 3. Transformational Innovation. This is usually (but not always) the introduction of a technology that creates a new industry and transforms the way we live and work. This kind of innovation often eliminates existing industries or, at a minimum, totally transforms them. For this reason, transformational innovations tend to be championed by those who aren't wedded to an existing infrastructure. Transformational innovation is exceedingly rare. Think about it: how many truly new-to-the-world ideas happen in a year? In a lifetime? Not many! |
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Flow
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A skillful person fully engaged in a task
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Learn to Look
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When a conversation turns crucial, we either miss or misinterpret the early warning signs. We want to be able to step out of the content of the conversation and learn to look for signs that a conversation has become crucial and that safety is at risk so we can get back to dialogue more quickly.
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Sucker's Choice
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A false choice between two bad alternatives
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The bay of pig: when an official who knew that invading cuba was a bad idea, but chose to not voice this because he felt the president needed to know his cabinet was loyal
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Silence vs. Violence
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The communication styles we revert to when we don’t feel safe in open dialogue. Silence is purposely withholding meaning from the shared pool; it ranges from playing verbal games to avoiding a person entirely. Violence is trying to compel others toward your point of view using tactics like controlling, labeling, and attacking.
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"Or" Thinking
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"Or" thinking is thinking that gets us into the rut of a “Sucker’s Choice” (see "And" Thinking). We believe we can only achieve one of two good outcomes, and there will be negative consequences either way (e.g., we can either be honest OR we can be kind).
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Loss Aversion
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A person's tendency to place a higher premium on a loss than a gain.
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WWWF
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Once you’ve diagnosed the root cause of a problem, it's time to move to action and resolve it. Do this by creating and agreeing on a specific plan. Determine WWWF: Who does What by When and how you'll Follow up.
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STATE My Path
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set of skills that help you share difficult feedback or risky meaning. STATE stands for Share your facts, Tell your story, Ask for others’ paths, Talk tentatively, and Encourage testing.
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Fundamental Attribution Error
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The automatic assumption we often make that the other person's motives are bad. This can happen when someone says or does something we think is harmful or threatening. We immediately attribute bad motive—we tell a villain story. For example, "They are evil or selfish; they do bad things because they enjoy it."
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Incremental Innovation
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his consists of small, yet meaningful improvements in your products, services, and other ways in which you do business. These tend to be the "new and improved" innovations we are all bombarded with every day: new flavors, shifts to better or all-natural ingredients, packaging improvements, faster/slower functioning, just-in-time supply chain enhancements, bigger/smaller sizing, cost reductions, heavier/lighter weight. We see them every day and they help extend product, service, and business life cycles and improve profitablity. They can be easily visualized and quickly communicated and give you something new with which to grab consumer attention in an increasingly noisy marketplace.
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Breakthrough Innovation
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This is a meaningful change in the way you do business that gives consumers something demonstrably new (beyond "new and improved"). Breakthrough innovation produces a substantial competitive edge for a while, although the length of time anyone can maintain such an advantage is growing increasingly shorter.
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Transformational Innovation
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This is usually (but not always) the introduction of a technology that creates a new industry and transforms the way we live and work. This kind of innovation often eliminates existing industries or, at a minimum, totally transforms them. For this reason, transformational innovations tend to be championed by those who aren't wedded to an existing infrastructure. Transformational innovation is exceedingly rare. Think about it: how many truly new-to-the-world ideas happen in a year? In a lifetime? Not many!
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Zeigarnik Effect
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n this paper, the authors stated that there is a tendency or “need” to complete a task once it has been initiated and the lack of closure that stems from an unfinished task promotes some continued task related cognitive effort. The cognitive effort that comes with these intrusive thoughts of the unfinished task is terminated only once the person returns to complete the task.
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researchers interrupted people doing “brain buster” tasks before they could complete them… nearly 90% of people went on to finish the task anyway, despite being told they could stop
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transportation effect
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people place themselves in the situation being told, reimagining themselves as the main character.
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I often see web hosting providers showcase stories of customers past “cheap web-hosting nightmares” in which the customer describes a situation where they were freaking out from their site being down after receiving massive exposure, eventually “learning their lesson” and vowing to never again use anything but ______ [insert whoever is selling]
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Ambiguity effect
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the tendency to avoid options for which missing information makes the probability seem "unknown."
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I know that there is at best a moderate chance of my winning a local singing competition as the local singers are good. There is a competition in the next town but I do not know how good the singers are there. Rather than 'risk it' I just enter for the local competition.
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Anchoring
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the tendency to rely too heavily, or "anchor," on one trait or piece of information when making decisions.
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For example, when people were asked how much happier they believe Californians are compared to Midwesterners, Californians and Midwesterners both said Californians must be considerably happier, when, in fact, there was no difference between the actual happiness rating of Californians and Midwesterners.
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Attentional Bias
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the tendency to pay attention to emotionally dominant stimuli in one's environment and to neglect relevant data when making judgments of a correlation or association
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God always answers my prayers
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Berne's Six Hungers
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Eric Berne, the originator of Transactional Analysis, identified what he called 'six hungers' that act as fundamental drivers that push us into action. Stimulus, Recognition, Contact, Sexual, Time Structure, Incident.
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CIA Needs
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CIA stands for Control, Identity and Arousal, which is the general priority order in which we experience them.
Our Sense of Control tells us when we are safe and can bend our environment to our purposes. Our Sense of Identity tells us who we are, especially relative to other people. Our Sense of Arousal tells us that we are learning, improving and evolving. It also helps us compete. |
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Herzberg's Motivation-Hygiene Theory
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We have basic needs (hygiene needs) which, when not met, cause us to be dissatisfied. Meeting these needs does not make us satisfied -- it merely prevents us from becoming dissatisfied. The 'hygiene' word is deliberately medical as it is an analogy of the need to do something that is necessary, but which does contribute towards making the patient well (it only stops them getting sick). These are also called these maintenance needs.
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I need to be paid on time each month so I can pay my bills. If I am not paid on time, I get really unhappy. But when I get paid on time, I hardly notice it.
On the other hand, when my boss gives me a pat on the back, I feel good. I don't expect this every day and don't especially miss not having praise all of the time. |
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Boiling The Frog
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Take the changes very quietly and slowly without telling anyone, so each small change is hardly noticeable. For example:
Make temporary changes that become long-term. Slip things in whilst people are distracted elsewhere. Bury changes in larger items. Gradually isolate unwanted people and organizations. |
A company that wants to reduce the amount of social space in a building nibbles at it during moves, taking small amounts out for needed desk space. It also puts meeting equipment such as tables, flipcharts and network points in what were once just rest areas. Before long, the occasionally-used soft areas are in constant use.
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Von Restorff Effect
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We remember things that stand out.
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If you want people to remember something, make it stand out. You can be very creative in this.
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Availability Heuristic
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is a mental shortcut that occurs when people make judgments about the probability of events by how easy it is to think of examples. The availability heuristic operates on the notion that, "if you can think of it, it must be important."
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For example, if someone asked you whether your college had more students from Colorado or more from California, under the availability heuristic, you would probably answer the question based on the relative availability of examples of Colorado students and California students.
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Primacy Effect
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Given a list of items to remember, we will tend to remember the first few things more than those things in the middle. We also tend to assume that items at the beginning of the list are of greater importance or significance.
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If you want something to stand out in a person’s mind, use it at the beginning of a conversation, a written list, etc. Don’t let it get lost in the middle. Repeat the message consecutively several times to embed it in their minds.
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