Developing a Mental Framework for Effective Thinking

Snow was a truly consilient thinker, in the sense of the term as it was originally formulated by the Cambridge philosopher William Whewell in the 1840s (and recently popularized by Harvard biologist E. O. Wilson). “The Consilience of Inductions,” Whewell wrote, “takes place when an Induction, obtained from one class of facts, coincides with an Induction obtained from another different class. This Consilience is a test of the truth of the Theory in which it occurs.” Snow’s work was constantly building bridges between different disciplines, some which barely existed as functional sciences in his day, using data on one scale of investigation to make predictions about behavior on other scales. In studying ether and chloroform, he had moved from the molecular properties of the gas itself, to its circulation of those properties throughout the body’s overall system, to the psychological effects produced by these biological changes. He even ventured beyond the natural world into the design of technology that would best reflect our understanding of the anesthetics. Snow was not interested in individual, isolated phenomena; he was interested in chains and networks in the movement from scale to scale. His mind tripped happily from molecules to cells to brains to machines, and it was precisely that consilient study that helped Snow uncover so much about this nascent field in such a shockingly short amount of time.

Inverting, or thinking problems through backward, is a great way to understand information. Charlie Munger provides the best illustration I have ever seen of this type of thinking.

During a speech he offered an example of how a situation could be examined using the inversion process. He discussed the development process of Coca-Cola from the perspective of a person creating a soda company from scratch and examining the key issues that would need to be resolved to make it a reality.

He listed some of the issues the entrepreneur would need to address:

• What kind of properties should the new drink strive for, and what are those it should avoid? One property the drink should not have is an aftertaste. Consumers should be able to consume large quantities over a period of time and not be deterred by an unpleasant aftertaste.
• The soda should be developed in such a manner that it can be shipped in large quantities at minimal costs. This makes it easier to develop an efficient, large-scale distribution system.
• Keeping the soda formulation a secret will help alleviate competition and create a certain aura of mystique around the product.
• The company also can deter competition by expanding the business as quickly as possible. For example, the distribution system could be expanded until it reaches a critical mass that competitors would find hard to duplicate without massive capital expenditures.

Let’s examine the decision-making process by breaking it down into two components. The first component, first-level thinking, generally occurs when you make decisions quickly based on a simple theme or common sense. For example, a person may decide to invest in a company simply because its products are trendy. Making decisions based on first-level reasoning has significant problems, however. Common sense “is wonderful at making sense of the world, but not necessarily at understanding it.” (Duncan Watts Everything Is Obvious: How Common Sense Fails Us)

The danger is that you may think you understand a particular situation when in fact you have only developed a likely story.

1. What is the range of likely future outcomes?
2. Which outcome do I think will occur?
3. What is the probability that I’m right?
4. What is the prevailing consensus?
5. How does my expectation differ from the consensus?
6. How does the current price for the asset comport with the consensus view of the future— and with mine?
7. Is the consensus psychology that is incorporated into the price too bullish or bearish?
8. What will happen to the asset’s price if the consensus turns out to be right, and what if I’m right?

Decision trees are excellent tools for helping you decide on a course of action. They enable you to lay out several possible scenarios, investigate their possible outcomes, and create a balanced picture of the risks and rewards associated with each.

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Let’s examine the decision-tree process in greater detail. First, identify the decision and the outcome alternatives available at each point. After you lay out each course of action, determine which option has the greatest value to you. Start by assigning a cash value to each possible outcome (i.e., what the expected value would be if that particular outcome were to occur). Next, look at each break, or point of uncertainty, in the tree and estimate the probability of each outcome occurring. If you use percentages, the combined total must equal 100% at each break point. If you use fractions, these must add up to 1.

After these two steps have been taken (i.e., the values of the outcomes have been entered and the probabilities have been estimated), it is time to begin calculating the expected values of the various branches in the decision tree.

When trying to resolve a difficult situation or determining exactly why a product has been, and may continue to be, successful, it helps to think about the problem by creating a checklist that incorporates the vital components of other disciplines.