Maxims for Thinking Analytically: The wisdom of legendary Harvard Professor Richard Zeckhauser

by Dan Levy

After reading this book in August of 2021, I wrote,

 

"Some good reminders of guidelines that make sense once we stop to consider things more deeply." 

See all my book recommendations.  

Here are the selections I made:

Maxim 1 When you are having trouble getting your thinking straight, go to an extreme case

 

Of all the maxims in this book, this is the most popular among Richard’s coauthors and former students. Broadly speaking, this maxim can be especially helpful for two kinds of situations: To understand a concept, problem, or idea better; or To assess the best-case or worst-case consequences of a decision you are struggling to make.

 

To understand a concept or idea better Students new to economics sometimes struggle to grasp the concept of the marginal propensity to consume (abbreviated as MPC). MPC is the proportion of additional disposable income (income after taxes and transfers) that an individual consumes. Even harder to understand is what a specific numerical value for MPC implies. In such situations, it helps to go to extreme cases to gain some intuitive feel for what the numbers mean. In this case, since the MPC is a proportion, the two extremes are 0 and 1. An MPC of 0 means that if an individual received an extra $100 of income, she would spend none of it. Think of Warren Buffett. He already has plenty of money to consume what he wants. If Berkshire Hathaway were to pay him an extra $100, he would not change his consumption. At the other extreme, an MPC of 1 means that if an individual received an extra $100 of disposable income, he would spend it all. Think of someone in extreme poverty. An extra $100 could go immediately to satisfy his basic needs. These extreme cases can help ground our understanding of MPC.[2]

 

To assess the best-case or worst-case consequences of a decision you are struggling to make

 

Xiaochen Fu is one of Richard’s former students at the Kennedy School and now a manager at the Bank of China. When she worked at Agricultural Bank of China, the third largest bank worldwide, she used this maxim to help the bank make its transition to the digital era. At a time when clients were increasingly using smartphones to conduct banking transactions, her bank still had more than 300,000 staff working at 25,000 branches around the country. Some branches found that fewer and fewer clients came in person. She and her staff were struggling to decide how they should adjust the number and location of their branches. “Then I remembered Professor Zeckhauser’s maxim. To find the extreme case, we went through regulations and procedures for all the services provided by a full-function bank branch, in order to identify which services would be very difficult or impossible to deliver online. (For example, the government forbids third-party couriers to deliver physical gold, so clients who want to buy physical gold products must go to branches.) After finding all such services, and considering the needs and preferences of clients served at different branches (for example, senior clients and rural area clients still prefer face-to-face financial services), it became much clearer which branches should be closed, and which ones should be saved. The planning project proved to be cost-efficient, and allowed the bank to adapt to the digital age and better meet the needs of our clients. I reckon that the maxim gave me not only the tools but also the courage to deal with such complicated conditions.” Xiaochen’s account identifies two critical benefits a maxim may bring. It can help you focus on how to approach a problem, and it can give you the courage to take action when you determine the best decision. This is true for many other maxims in this book. 

 

Maxim 2 When you are having trouble getting your thinking straight, go to a simple case

 

Richard tells about how two of his other major mentors, Thomas Schelling and Kenneth Arrow (both Nobel Prize winners), sought simplicity. Schelling, for example, regularly employed everyday and easily grasped examples, such as a parent negotiating with a child, as an analogy to a much more complex situation, such as an international negotiation. A Schelling lecture often moved from a simple example, say a stop sign, to a riff on a dozen critical issues that involved a metaphorical stop sign. One element of Arrow’s genius was to see, and then distill, simple principles, where others saw only murky complexities.[11]

 

Maxim 3 Don’t take refuge in complexity

 

I sat down to prepare a new presentation. It was time for me to get my thinking and my teaching straight. The simplicity principle was my lodestar and salvation. At the next team practice I decided to concentrate on the three factors I thought were most important. “It’s all about the three Hs: Hands, Hips, and Head.” Hands: how you grip the bat with your hands and where you hold your hands in relation to your torso. Hips: how you orient your hips toward the pitcher and swivel them as you swing. Head: how you keep your eyes on the ball all the time, from watching it in the pitcher’s hand to trying to see it touch your bat.

 

Hands, Hips, and Head. That became our mantra. I simplified the complexities of hitting a baseball into its three core elements. They were digestible and sticky.

 

That season our baseball team won the championship for 11-year-old boys in their division of the Newton, Massachusetts, Little League.

 

Maxim 4 When trying to understand a complex real-world situation, think of an everyday analogue

 

Richard often uses an actual negotiation with a contractor fixing his home as an example to illustrate complex real-world negotiations like the Iran nuclear deal. As Alice Heath, a PhD student at the Harvard Kennedy School and a multi-year teaching fellow with Richard says: “Big policy problems are often similar in structure to “smaller” problems that we face every day. The main difference is the number of people impacted. But if we see the analogue to an everyday example, we will be able to really understand the problem and then apply our intuition to the bigger problem.”

 

For example, imagine you are contemplating transporting 100 identical items, one by one, over the Niagara Falls using buckets. There are two types of buckets. The first type has been used 100 times and succeeded in 70 of them. The second type has been used 2 times and succeeded only once. What would you do? This is the kind of classic puzzle that Richard gives to his students and colleagues. Pause for a minute to think about it before you read the answer in the next paragraph. In the absence of any other information or constraints, you should use the second bucket for a few times until you have a better sense of its overall success rate. With the first one, you are reasonably sure that its success rate is close to 70 percent, whereas with the second one you are highly uncertain because it has only been used twice. So you should use the second bucket a number of additional times until you accumulate more evidence and either conclude that the success rate is below 70 percent (in which case you switch to the first bucket), or conclude that the success rate is above 70 percent (in wh