I am passionate about learning and logical, rational thinking. If something does not make sense or fails to explain how things work, then it doesn’t make sense or explain. At a minimum, it is incomplete. Perhaps it answers a different question. Or, simply, it is wrong.

Hamburgers are not made of ham. Hot dogs are not made of dogs.[1] Daylight savings time, the Electoral College, and the U.S. approach to financing and delivering health care complicate, confuse, and obfuscate. They do not clarify, elevate, or facilitate.

From a decision-making perspective, I’ve found that we are neither as smart nor as dumb as we think we are in any given situation. We often accept or regurgitate ideas or information without checking sources or “holding them to the light,” and we sometimes ignore our own hard-earned life experience and insight when making choices about people, investments, and that third (or fourth) drink at the company holiday party.

Each one of us carries seams of golden knowledge and knowhow that we sometimes fail to mine, extract, and apply. With that in mind, here are three useful, practical, and easy-to-use tools and rules to filter options and simplify decisions.

Rule of 72

Being good with money starts with being good at math. Want a quick way to estimate the number of years required to double your money? Divide 72 by the interest rate you expect to receive on your investment. For example, assume you have $100 earning 10%. Dividing 72 by 10 indicates it will take about 7.2 years to double our money to $200.

How accurate is the Rule of 72? The actual future value of $100 compounded annually at 10% will be $198.62, or within 1% of $200. The Rule of 72 supports quick math because 72 is easily divided by common rates such as 4, 6, 8 and 9. Our example shows that 7 and 10 are easily applied. Overall, the Rule provides a good estimate of investment growth based on annual compounding.

[Use the “Rule of 69” for continuous compounding (though it’s a bit curlier to divide quickly in your head). If doubling your money fails to warm your blood, consider the “Rule of 115” to estimate the years required to triple your investment.]

80/20 Rule

Also referred to as Pareto’s 80/20 Rule, this helps us avoid making the perfect the enemy of the good. The Rule suggests that 80% of improvement results from just 20% of causes, or 80% of sales flow from 20% of your customers, or 80% of the variance is driven by 20% of the factors.

This is consistent with our experience at Forisk, where we applied the 80/20 Rule to better allocate resources for sales and marketing, forecast models, market assessments, and strategic planning. It even applies in forestry, where 70 to 80% of the bare land value (BLV) for a timberland property derives from the current (standing) rotation, which, for many situations, may provide sufficient guidance for deciding whether to consider a given investment.

Don’t Do the Dumb Thing

This is one of the most helpful guidelines I’ve adopted, ranking up there with “begin with the end in mind” and “eat more fiber.”[2] I learned this one from reading and watching interviews with the investor (and philosopher) Charlie Munger, Warren Buffett’s business partner. Munger emphasizes the importance of avoiding the tragic error, unmanageable risk, or opaque business model.

In sum, there are a lot of ways to do things, and many of them can or will work. But one of them will always be the dumbest, the worst, the riskiest. Avoiding that one alone makes you better off. Asking the question, “which one of these is the dumb approach?” or “which is the dumb option?” is surprisingly, incredibly powerful. Consensus accrues more quickly when ranking for the worst choice than for the best.

Conclusion

According to Spinoza, “reason is no match for passion.” This implies that strong emotions will dominate, suppress, or inhibit rational, reasonable thinking. I acknowledge that we really don’t know how random events will make us feel, so it helps to maintain a sense of curiosity, openness, and patience. I advocate for feeling and showing passion and commitment to clear thinking and logical explanations consistent with the evidence.

Adopt and apply helpful frameworks. Ask follow-up questions. Listen and observe. And, if nothing else, don’t do the dumb thing. 

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[1] Digression: Richard Lederer, in his 2006 book Word Wizard, shares the old joke of the Buddhist who said to the hot dog vendor, “Make me one with everything.”

[2] I know, these last two overlap. 🙂