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 which case you should continue using it).

 

Maxim 5 The world is much more uncertain than you think

 

The starkest recent illustration of the world as a surprisingly uncertain place, for most people other than experts and science fiction fans, is COVID-19. At the beginning of 2020, few of us considered the possibility, however remote, that our lives and those of everyone in the planet would be upended by a global pandemic.

 

Maxim 6 Think probabilistically about the world

 

Thinking probabilistically about the world involves three distinct elements: 1)    Understanding what these subjective probabilities actually mean (as we saw above), 2)    Assigning probabilities to many things (events, beliefs, etc.) in our lives, to help us better understand the world around us and make better decisions, and 3)    Updating these probabilities appropriately when relevant new information comes in.

 

The idea of assigning probabilities to events may strike you as impossible. Many of Richard’s students, friends, and colleagues have made this same claim of impossibility. But after thinking about it and practicing, many think this is the most valuable lesson he ever imparted.

 

“As our group approached the checkout line of the cafeteria, he passed his credit card to me and asked, ‘What do you think the probability is that the cashier will question the name on the card if you use it to pay for our group?’ Because the world is more uncertain than you think, I knew the answer should not be 0. And because I am a different gender than the cardholder I thought the answer might be higher for me than it would be for a man. I think I said less than 2%. We passed through the line without question. Examples like these remind me of all of the opportunities you have in the day to be curious and to think probabilistically.”

 

Typically, subjective probabilities stem from intuition alone. A slightly improved method, perhaps, is to solicit an expert’s opinion. One could ask the expert, “Do you think this theorem is true?” and an answer of “yes” or “no” will follow. Slightly more information about the expert’s opinion can be collected via a small bet. Would the expert be willing to bet a dollar that the theorem is true? Maybe at 2 to 1 or 3 to 1 odds? Such bets are not made to earn money – the sums are trivial. Instead, they are a small price to pay for more information to further refine one’s own assessment of the problem, which will determine which path to follow.

 

As that line suggests, the side of this story that Richard emphasizes is that it’s critical to know when to kill projects.[39] Time and energy are scarce resources, and even if a project of any nature – not just economics papers – starts out strong, we should constantly be thinking probabilistically and updating our expected values. This is a hard but essential skill.

 

Thinking probabilistically can be hard. As Howard Kunreuther, emeritus professor and codirector of Wharton Risk Management and Decision Processes Center at the Wharton School, University of Pennsylvania, puts it: “I now believe that even if people understand probability theory, it is challenging to learn how to apply these concepts when making decisions, particularly when dealing with extreme events, such as natural disasters, few people think probabilistically when deciding whether to protect themselves against future losses.”

 

Ultimately, thinking probabilistically starts by correctly viewing the world as a highly uncertain place. With that view in mind, the logical prescription is to assign probabilities to the various events that could occur, and then update those probabilities as new information arrives.

 

Philosophically, I may view the world as deterministic, but in practice I have to accept that I am far from omniscient and even farther from omnipotent. Accepting that everything is effectively uncertain and that my thoughts, hopes, and actions can at best indirectly influence the world by influencing probability distributions: this has brought me a kind of peace through acceptance, and a greater mastery over the world around me. What can I do to control an outcome? That’s the wrong question. What can I do to influence the odds? Now that’s productive. That I can work with – in my life and in my job.

 

Maxim 7 Uncertainty is the friend of the status quo

 

Status quo bias is a term coined by Richard and his coauthor William Samuelson in an article published in 1988, Richard’s most widely cited academic paper.[41] In its pages, the authors document a series of fascinating decision-making experiments that show that people disproportionally do nothing or maintain their current or previous decision, often when an easily assessable alternative would be superior.

 

brilliantly contributed to our understanding of status quo bias driven by fear of uncertainty. I have seen it impact poor decisions, including my own, on when to change jobs/careers and when to move on from bad marriages.

 

Gernot Wagner, a student and coauthor, notes the need to use judgment when assessing whether refraining from action reflects status quo bias. More generally, maxims describing human behavior apply in some contexts, but not others. “Status quo bias is a prime example. It is the friend of not acting, and you ignore it at your peril. But we also see ‘action bias.’ Often political leaders just want to be seen as doing something, anything – leading them to want to act, even if no action is the preferred choice.”

 

Maxim 8 Good decisions sometimes have poor outcomes

 

Annie Duke, former world poker champion, psychologist, and author of two wonderful books on probabilistic thinking and decision making, has asked this question to hundreds of people around the world. The great majority responded with a decision that turned out well. This suggests that many people confuse the quality of the decision (how good was the process we used to make the decision with the information we had at the time?) with the quality of the outcome (how good was what happened after the decision?). Confusing the quality of the decision with the quality of the outcome is so prevalent that poker players have a term for it: resulting.[47]

 

Being the kind of person who is very careful with your phone, you assessed that the price of insurance was too high given the likelihood that you would have an accident or lose your phone. Three months later, you were at the grocery store; you dropped your phone and it broke. If you are like most people, the first thought going through your mind is regret about your insurance decision. Worse, you may have recriminations, concluding that not buying insurance was a bad decision.[49] But the fact that you got a bad outcome does not imply that your decision was a bad one.

 

 

It was a freak accident; you very rarely drop things. This maxim reminds us to judge the quality of your decision by what you knew at the time you made it, not what you found out afterwards.

 

Rob Stavins, a colleague of Richard’s at the Harvard Kennedy School for more than thirty years, summarizes this maxim well: “One of my greatest frustrations when reading the newspaper is when someone explicitly or implicitly judges the quality of a decision on the basis of its outcomes, rather than judging the quality of the decision in the context of information that was available at the time. A related pet peeve is when politicians and others claim that an improved economy, or decreased pollutant emissions, or some other raw change, is evidence of a policy success. The comparison that ought to be made is not how things have changed from time A to time B, but rather how things are at time B, compared with how they would have been without the policy.”

 

Maxim 9 Some decisions have a high probability of a bad outcome

 

Alice Heath, a student of Richard’s at the Harvard Kennedy School and one of his current teaching assistants, experienced this maxim very clearly when she started working with state child welfare agencies, whose mission is to prevent child abuse and neglect. The children and families they work with face very tough circumstances. Unfortunately, there is often no policy choice that a child welfare agency’s leadership can make that is likely to completely prevent abuse or neglect. “Completely preventing abuse or neglect would likely require draconian measures that would not be good for anyone. The best an agency can do is make the choice that has a higher probability of a better outcome relative to the other choices. Even with the best decisions there will still, sadly, be a high chance that some children suffer abuse and neglect. I have seen state legislators and commentators fail to understand this idea over and over, reading every tragic incident as a decision-making failure rather than the result of a set of choices where the best option is not a good option. As a result, state child welfare directors too often have very short terms and agencies lack stable leadership, which only makes things worse for the children and families who need help.”

 

Maxim 10 Errors of commission should be weighted the same as errors of omission

 

The two decisions are equivalent in their material consequences: both Pat and Chris invested $20,000 in stocks that were not Amazon stocks in 1998, and missed out on the monumental gain over the next two decades. But the two individuals perceived their decisions differently. Chris, who sold his stocks, kicks himself regularly for his stupidity. Pat, who didn’t buy the stocks, rarely thinks about it. If you are like most people, you would feel much more regret had you been Chris than had you been Pat.

 

More generally, errors of commission generally get weighted more heavily than errors of omission, a tendency sometimes referred to as omission bias.

 

Maxim 11 Don’t be limited by the options you have in front of you

 

famous saying among policy analysts is “let me pick your options, and I will make the decision for you,” which illustrates the importance of keeping an eye out for a better option.

 

Maxim 12 Information is only valuable if it can change your decision

 

Alice Heath, a student and teaching assistant of Richard’s, has successfully used this maxim in her work with governments, where people ask for additional analysis “because it’s interesting.” She said “So during a presentation about program performance a government official might ask to see the age profile of clients served by a home visiting program, or the number of phone calls made by program staff. We would always filter these requests by asking ‘What might we do differently if we had that information?’ and if the answer was nothing, we conclude that collecting this information wouldn’t be worth the time and push back against the request.”

 

At around 5:00 pm, after the results came back, the surgeon said, “I believe your mother has appendicitis or a tumor. However, her white blood count is lower than what we typically see for appendicitis, and palpating her abdomen, it does not feel like a tumor. I would like to keep her here until tomorrow so we can monitor her symptoms. We will then know a lot more.” Richard responded: “I presume that in either case you will operate, is that correct?” “Yes.” “Then, shouldn’t you operate now, and bring both sets of tools?”[62] The surgeon proceeded to operate that evening. It turned out that Richard’s mother had a leaky appendix, and peritonitis (infection in the abdomen). Waiting another day would have been dangerous. The doctor, a man in his fifties and a faculty member at Harvard Medical School, observed that no one had ever taught him “Don’t wait for information if it won’t change your decision.”

 

Maxim 13 Long division is the most important tool for policy analysis

 

In sum, this maxim involves figuring out some metric of “bang per buck” for different options, ordering these, and then choosing the options with the highest bang per buck until the bang becomes worth less than the resources required, or you simply run out of resources.

 

Maxim 14 Elasticities are a powerful tool for understanding many important things in life

 

“Often times, I find myself or others around me making decisions based on absolutes instead of thinking marginally. Are those extra five hours of work worth the extra money when compared to spending an extra five hours with family? Of course, having a job and earning a decent living are good things, but usually we forget to ask ourselves whether that additional time spent doing such and such is worthwhile.”

 

Maxim 15 Heterogeneity in the population explains many phenomena

 

Maxim 16  Capitalize on complementarities

 

For example, the value of fertilizer for a farmer is likely to be higher if other inputs (seeds, irrigation, farming practices, etc.) are available. The value of a blackboard in a school will depend on the availability of other school inputs (such as chalk, teachers, classrooms, etc.). In economics terms, the situations described above exhibit positive cross-partial derivatives.[80] In fact, when Richard teaches this maxim to his students, he refers to it as “capitalize on positive cross partial derivatives,” a much more technical formulation intended to be playful and memorable.

 

One key application of this maxim arises when we choose a collaborator, for example in an intellectual project or in business. As Richard frequently argues, we often choose people whose skills are similar to our own. The result is that the gains from collaboration are much smaller than if we were to choose people who would bring different capabilities to the undertaking. If two engineers are planning the construction of a bridge, adding a third engineer to the team won’t help as much as adding an architect or a project manager.

 

“The most important maxim Richard taught me is one I never heard him pronounce but always saw him practice: engage with people from different fields, interests, mindsets, countries, and ages.

 

Maxim 17 Strive hard not to be envious – see your friend’s success as your gain

 

Bertrand Russell’s claim that “envy is one of the most potent causes of unhappiness.”[81]

 

“If we are constantly measuring our self-worth relative to the performance of those around us, we will always feel we fall short.

 

“From that day on I stopped comparing myself to my peers and started to actively take joy in the success of others. Not only has this made me a happier person in my professional life, but also in my personal interactions. Indeed, I have found that rejecting envy helps you appreciate others more, and helps build lasting friendships and relationships. I hope that my friends and family know that I’m their biggest cheerleader and I always will be, thanks to Richard.”

 

Maxim 18 Eliminate regret

 

The sunk cost fallacy occurs when you use the fact that you have previously invested resources (time, money or effort) on an activity to justify further investment in the activity.

 

You have fallen victim to this fallacy if you have ever followed through with plans to go to the theater just because you already purchased the tickets (even though the weather is foul and the play has received poor reviews). Or you hold on to a bad investment (or even worse, put in additional money) because you had already made the investment. Or you continue a personal relationship, though the relationship has soured, just because the relationship has persisted many years.

 

Maxim 19 Make pleasure-enhancing decisions long in advance, to increase the utility of anticipation

 

“Strive to make the right decision; afterwards you’ll make your decision right”

 

There are some things you just don’t want to know

 

Richard once told me a story about viewing a new piece of furniture arriving in his home fairly early in his marriage. Richard asked Sally, “How much did this cost?” Sally replied, “You don’t want to know.”[87] Richard realized that in fact he did not want to know and inquired no further.

 

If you focus on people’s shortcomings, you’ll always be disappointed

 

Practice asynchronous reciprocity

 

When you are having trouble getting your thinking straight, consider an extreme or simple case. This will often give you the insight you need to move forward. More generally, make a problem as simple as possible without losing its essence – but no simpler. The world is full of uncertainty, much more than you think. Almost every important decision you make will be in the face of uncertainty. Therefore, learning to think probabilistically (assessing subjective probabilities of various scenarios and updating these probabilities with new information) is a critical life skill. Because of uncertainty, some good decisions will result in poor outcomes. In fact, for some decisions there are no good outcomes. Your job will be to choose the option likely to lead to the least bad outcome. Also, resist the tendency to dislike more the errors resulting from your actions (errors of commission) than the errors resulting from your inactions (errors of omission). These two types of errors are equally bad; what matters is their consequences, not their source. 

 

Three important concepts to understand policy: Long division (how much bang for the buck) helps you decide among competing policy options. Elasticities (the change in one quantity associated with a change in another quantity) allow you to think at the margin, which is crucial for making good decisions. Look at subgroups within a population to better understand the group’s overall patterns. Three ideas for living more fully: Try not to be envious. Do your best to eliminate the detrimental feeling of regret, which lowers your pleasure and leads you to poor decisions. Remember that you can increase the enjoyment you get out of a pleasant experience by anticipating it and recalling it often.

Summary of Maxims

1 – Thinking Straight Maxim 1 - When you are having trouble getting your thinking straight, go to an extreme case Maxim 2 - When you are having trouble getting your thinking straight, go to a simple case Maxim 3 – Don’t take refuge in complexity Maxim 4 - When trying to understand a complex real-world situation, think of an everyday analogue   2 – Tackling Uncertainty Maxim 5 - The world is much more uncertain than you think Maxim 6 - Think probabilistically about the world Maxim 7 - Uncertainty is the friend of the status quo 3 – Making Decisions Maxim 8 - Good decisions sometimes have poor outcomes Maxim 9 - Some good decisions have a high probability of a bad outcome Maxim 10 - Errors of commission should be weighted the same as errors of omission Maxim 11 - Don’t be limited by the options you have in front of you Maxim 12 - Information is only valuable if it can change your decision   4 – Understanding Policy Maxim 13 - Long division is the most important tool for policy analysis Maxim 14 - Elasticities are a powerful tool for understanding many important things in life Maxim 15 - Heterogeneity in the population explains many phenomena Maxim 16 - Capitalize on complementarities Maxim 17 - Strive hard to avoid envy – see your friend’s success as your gain Maxim 18 - Do your best to banish regret Maxim 19 - Make pleasure-enhancing decisions long in advance, to increase the utility of anticipation Brief but important maxims for a satisfying life.