mental model Archives - Page 2 of 2

[Note: I shared this mental model with my email subscribers on Oct 30, 2016. If you want to receive a new mental model every week, join the club.]

In Lewis Carroll’s Through the Looking Glass, the Red Queen tells Alice:

Here, you see, it takes all the running you can do, to keep in the same place. If you want to get somewhere else, you must run at least twice as fast!

What it is:

The Red Queen mental model comes from biological evolution. Trees in a forest grow taller and taller, to better capture sunlight. Soon, all the trees have expended enormous energy to get much taller. Yet, they get the same amount of sunlight as before.

This evolutionary arms race happens among animals too. Prey evolve to better ward off predators (e.g., rabbits running faster). But predators, in turn, evolve to better capture prey (e.g., foxes run faster too).

Everyone runs much faster, to stay in the same place.

Examples in business:

A business differentiated only on price will likely never make money. If what you’re selling is a commodity, then someone will always come along to offer it at a lower price. And good luck if someone = Amazon. Your margin is Jeff Bezos’ opportunity.

Buffett also highlights the futility of price reduction efforts in textiles (a commodity). Once you install new tech to reduce costs, so will your competitors. Soon, everyone is making less money than before.

Perfect competition is for losers. If you’re not differentiated at all, then you won’t make money. All your profits will get competed away.

And just incremental differentiation won’t do. So your new cab service is the only one with wifi. Well, guess what? Uber will have it in 24 hours!

Rules to protect yourself:

Don’t assume your competitors are stupid. They’re as interested in survival and growth as you are. And yes, they are as smart as you.
If you’re launching a business in a crowded market, you can’t be differentiated only incrementally. Or worse, only on price. Remember: 10x, not 10% (and cheaper too). Like Uber.

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What it is:

It’s a shortcut that our minds take, when evaluating the consequences of a decision. We ascribe more importance to the first examples that come to mind. But here’s the thing – they’re not necessarily more important or probable. They’re just easier to recall / visualize.

Examples in business:

What you see is all there is – When we get into a strategic business partnership, we get complacent, thinking “we’ve made it”. But we haven’t. It’s just that success is easy to visualize, but the thousand ways it can fail are not.
Tyranny of the quantifiable – what gets measured gets managed. Your teams chase specific performance targets, and not your overall business goals. What doesn’t get measured might as well not exist!
Attribute substitution – when we hear a hard question, we substitute it with a simple one. “How happy are you?” becomes “How much money do you have?”. “Will this strategy work?” becomes “Do I remember an instance of this working?” Never mind that you’ve only heard of instances where it worked (if it didn’t work, you probably wouldn’t have even heard about it).

Rules to protect yourself:

Remind yourself that just because you can recall or visualize something easily, it doesn’t become more probable or valuable.
Use checklists for decisions that are influenced by a number of factors. [Note: checklists are very useful when evaluating startups at OperatorVC. It’s surprisingly easy to get swayed by a good looking product].

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mental model

The Red Queen Effect

What it is:

Examples in business:

Rules to protect yourself:

Further reading:

The Availability Heuristic OR “What you see is all there is”

What it is:

Examples in business:

Rules to protect yourself:

Further reading:

Meta