Whether in business, investing, trading or life in general, good decision making is an invaluable skill & we believe good decision making is the result of good thinking. Today’s blog has been inspired by a Harvard Business Review article I recently came across on “Linear Thinking in a Nonlinear World”.
‘‘Thinking, good thinking that is, is a lonely sport. This may explain why so many of us do it poorly.’’
- Arthur Zeikel
Our brains tend to think in straight lines, so if one case of beer costs R160, then two cost R320 and three cost R480 (proof of linear relationships). However, it’s this same bias towards linear thinking that often clouds our ability to make good decisions when faced with non-linear relationships. Linear calculations are easy and intuitive and that is why we get in trouble, according to de Langhe, Puntoni and Larrick in a Harvard Business Review article we often expect linear relationships between variables when in actuality the relationships are non-linear.
In the article, a case study about a fleet manager looking for more fuel-efficient replacements for his cars is presented, the problem at hand is this: Do you trade in a 10 mile-per-gallon car for a 20 mile-per-gallon car or do you trade in a 20 mile-per-gallon car for a 50 mile-per-gallon car?
Linear thinking almost intuitively leads most of us to assume the second option is the better option, I mean you’d be increasing fuel efficiency by 30mpg rather than by 10mpg! But hold on, here we practice math, not meth, so hear me out, upgrading a 10mpg car for a 20mpg car saves 500 gallons of gas on a 10000-mile trip compared to just 300 gallons saved on the same trip if you trade in a 20mpg car for a 50mpg car.
If you had to graph the above example with gas mileage on the x-axis and gas used on the y-axis, you would have a line that starts from the northwest corner and dips down very steeply as you move from 10mpg to 20mpg gas mileage and then flattens out more and more between the 20mpg and 50mpg (the non-linear relationship). In short, going gambling is a better option than intuition here (option b).
The fact that the answer which seemed to be so obvious turned out to be the wrong one is exactly why the linear thinking bias is such a deceitful trap (then again, what’s the point of a trap if it’s easy to identify). Nonlinearity is as prevalent in the business world as it is anywhere else in the world and it is imperative we are aware of the pitfalls of linear thinking in a nonlinear world (if the current market isn’t enough proof of the worlds nonlinearity for you, then I don’t know what will be).
Author: Sihle Hlatshwayo