Understanding the world requires seeking good explanations, not fooling oneself, and figuring out why things truly happen. Only this way we can do better next time.

In my quest to achieve this, I have found that many mental models are rooted in psychology. They start right there and lean into marketing, behavioral economics, product management, negotiation, and even how we approach everyday tasks.

This living post collects those nuggets of psychology I wish to remember and add to my latticework of mental models. I have learned them from multiple authors and books: Thinking Fast and Slow, The Paradox of Choice, Poor Charlie’s Almanack, and more. In describing them here, I will make simplifications that might make experts shiver. If you find something that interests you and you want to dive into it, start out with those books – or better yet, the original research. And if you spot any mistake or over-simplification, please do reach out and let me know!

# The paradox of choice

It is much easier to spend several hours binge-watching a TV series than to pick a good movie and commit a couple of hours to it. Why? Because freedom of choice can lead to difficult decisions and, sometimes, to less happiness.

If you have already watched a few episodes of a show, you know what to expect from it. If you have previously enjoyed it, you expect to continue doing so. Instead, modern streaming platforms encourage us to pick a movie among hundreds. It is much easier to decide not to pick and just watch another episode of that familiar show.

When we do try picking something, we face uncertainty and we fear regret: “What if I pick a worse movie than the TV show?”. Even when exclusively focusing on movies, we will compare two or more options on multiple features (genre, duration, actors, etc.). No movie will clearly win across all dimensions, but the act of weighting the options will be enough to frustrate us, so that we will be less satisfied, regardless of what we choose.

Forcing people to make a decision along a trade-off will make them unhappy and indecisive. When applied to product management, this teaches us that more choices are not always better. With limitless choices we might achieve better results, but at the cost of significant struggle and energy to sort among the different options. This is particularly bad for maximizers, who, as opposed to satisficers won’t settle for something “good enough”.

# Availability bias

Kahneman and Tversky originally termed it availability heuristic because we take this mental shortcut to save energy: when something is readily available or very vivid in our memory, we think it is also frequent or important. I prefer calling it a bias because it hinders our ability to make good decisions unless we take measures to do better.

I think of this bias also when we are blindsided by information or options that are in front of us, but fail to see that with a bit more digging we would find much better options.

Availability bias is also why we misestimate facts. For instance:

  • That deadly car accidents are more frequent than disease-related deaths (they are not).
  • Why we tend to form judgements or stereotypes based on extremely small (and likely non-representative) samples.
  • Why we attribute to our egocentric self more merits or faults than we really should.

# Anchoring

Hi dad, can I have 100 dollars?

80 dollars? What do you need 50 dollars for, kid? Here, take 10 and bring back some change.

We make decisions based on relativeness and reference points. That is why anchoring can be powerful or lead to biased decisions. The number we hear first in a negotiation sets a reference point and we judge what comes next against it. If someone successfully manages to place an artificial anchor, then they can bias the decision-maker into making that direction.

Some stores seem to always offer a discount on merchandise. The original price is typically shown prominently and serves as an anchor which makes the discounted price look like a bargain. In a negotiation, an extreme “opening” has better odds to the desired outcome than a moderate proposal, closer to one’s true value.

# Framing

The way information gets presented influences how we make decisions about it. This is why it is more effective to advertise “a discount on credit cards” instead of a “surcharge on cash”. This is also why when juries are asked to choose one parent for childcare, they will look for markedly good traits. If they were asked to discard a parent as being ineligible, they would look for markedly bad traits.

# Prospect theory

When faced with the choice of getting $100 or having a 50% chance of either getting nothing ($0) or $200, most people will choose the sure choice. Even though they have the same expected value, the “psychological” value of $200 is not twice as much as the one from $100. For this reason, regardless of the same expected value, people will not take the bet. Things are not symmetrical. As humans, we tend to be risk averse.

There is diminishing marginal utility in satisfaction. This is also why $100 provide different satisfaction to someone with a thousand and a million dollars in their bank accounts.

When facing losses, things do work symmetrically, but not the way you would expect. If asked to surely loose $100 or flip a coin and either lose nothing or $200, most will choose the coin flip. Why? Because losing $200 does not hurt twice as much as losing $100: there is a decreasing marginal disutility of losses.

Lastly, losing $100 will produce, in absolute terms, a much stronger reaction than winning $100. We are loss averse. This applies even to small, symbolic losses as small as a few dollars. Loss aversion also explains why, on average, few people return products after they have bought them, even if return is free. They would experience more loss than the pleasure of getting it in the first place. This is the endowment effect.

# Sunk costs

You are months into an expensive project at work, only to discover that you are not building the right thing, or that no one will use it. Do you keep working on it, or do you scrap it? The work or money you have put into is already sunk. Dropping the project would be the right thing to do – completing it, would not benefit anyone. But loss aversion will sometimes trick us into continuing that work, worsening an already non-optimal situation.

This recently happened to me. I had invested significant time, money, and effort into training for a bicycle competition. A few weeks before the race, I developed a small injury which prevented me from enjoying cycling and put competitiveness out of the picture. Due to the sunk costs, I considered racing anyways, almost surely dropping out and, possibly, making the injury worse. Luckily, I decided to ignore sunk costs and make a decision based on present conditions. Time and money were already gone and I now had to think about recovery and future rides.

# Inversion

This is a tool, not a fallacy, where we think backward rather than forward, succeeding by avoiding mistakes instead of seeking brilliance.

By inverting “How do I get there?”, picture where you want to avoid going and then describe what it would take to get there. This is the principle inversion. It helps because it allows us to look at problems differently and leverage the ability of our minds to reduce and simplify rather than to add. It allows us to first figure out what we would define bad outcomes and then prune any decision-tree branch that would end up there.

When building proofs by contradiction, mathematicians often use something similar to inversion. They assume that what they want to prove is false and use logic to find a contradiction – indicating that what they are trying to prove is true.

# The man with the hammer

A Charlie Munger’s favorite, this fallacy warns about how having only a limited set of mental models will encourage you to use the wrong one for the job. Somehow, this relates to availability bias since “shinier”, more available tools will lure you into thinking they are the most appropriate.

This is the reason why I am collecting several tools here and why I like learning from unfamiliar disciplines (e.g., biology, systems thinking, psychology).

# Confirmation bias

We often make this mistake when navigating through available facts by prioritising information that supports our belief (or hypotheses, etc.). This applies to search, recall, interpretation and “favoring”. Essentially, we select the information that fits outs view of the world.

It typically happens without us realizing it and we fall for it because it makes us save energy plus it makes us feel good about ourselves. To fight it, we should first be aware it exists (exactly what we are doing here) and then try to actively falsify our hypotheses instead of looking for information that confirm them.

Social media “bubbles” create resonance chambers that make confirmation bias insidious. Social media timelines tend to weigh more shared beliefs, which will make it more likely for users to only be exposed to other users of the same “opinions”. This compounds the effect of confirmation bias, because it actively makes it harder to find conflicting information and debate them with others.

# The hedonic treadmill

As humans, we will adapt to everything. The hedonic treadmill conjectures that our levels of pleasure, happiness, and sadness will return to a relatively stable level even after major life events. We “adapt” to those new levels. I think of it like “mean reversion” (described both in finance and mathematics) for our feelings.

A few studies have tested this conjecture, finding out that people would return to their “average” happiness after significant spikes (e.g., when winning the lottery) or downturns (e.g., falling victims of a debilitating accident).

It has strong pragmatic implications: it will make new things shine less over time and it might lead to exaggerate (or unconstrained) spending while seeking additional stimuli – always seeking more.

Knowing about the hedonic treadmill is a powerful way to counteract it. We should not fool ourselves by thinking that a new purchase (or a promotion, or more money) will make us happier, because we will quickly adapt to it. Instead, we can focus on those long-lasting things whose effect compound over time and bring us meaningfulness and purpose (e.g., social relationship or long-term missions).

# Perception of past experiences

We rely on past experiences to make decisions about our future, but we often misremember and misjudge the past. Our memories of an event rely on:

  1. The absolute high (or low) we experienced.
  2. What we felt when the experience ended.

This study ingeniously demonstrated this. Two groups of patients underwent a colonscopy. In one group, the exam was made artificially longer by leaving the probe still for a few minutes before ending the procedure. Because a still probe is less unpleasant, the patients fell less discomfort when the colonscopy ended. As a result, they were more likely to come back for additional checkups than those in the other group, despite the actual exam being longer and the absolute discomfort being the same.

# Incentives

Incentives are powerful system levers and keeping them in mind is fundamental in decision-making. According to Charlie Munger, we routinely underestimate their effects on behavior and forget that people will do what they are paid to do.

In his almanack, Munger tells two stories about incentives. One is the story of a new Xerox product. Despite being better than older products, it was selling a lot less. Why? Because salespeople were motivated by outdated incentives, rewarding them for each sale of an old product.

In another story, FedEx needed packages to move from A to B, every night. The task was not completed unless all packages had moved. And they needed to move fast! FedEx management tried a whole set of things to incentivize workers. None worked, until someone realized that workers were paid by the hour and were lacking incentives to complete their tasks quickly. When they started to be paid by shift, their incentives aligned with FedEx’s: to quickly and effectively complete their tasks before going home.

# Interest, not reason

If you would persuade, appeal to interest and not to reason.

Ben Franklin, Poor Richard’s Almanack

Rather than pure rationality, we are often motivated by self-interest and incentives. Sometimes all this happens subconsciously: we rationalize flawed reasoning without even noticing it.

To change someone’s behaviour through product management, we need to keep all this in mind. Instead of trying airtight logic or reasons, build products or systems that support our users’ interest. Only then their behavior will change.

This has profound implications in business as well. Users won’t buy a new technology because it is shinier, faster, or better than some legacy. They will only adopt it if it aligns with their interests by letting them save or gain money.

# Seven, plus or minus two

Our working memory can hold roughly seven (± two) “items” before performance declines. Once that happens, we become unable to effectively remember all the options or even differentiate among them. Grouping related items together by “chunking” them alleviates the burden on our brains.

This cognitive limitation is also known as Miller’s law. It should impact the design of products and features by ensuring that we do not overwhelm users with more than they can effectively work with – remembering that, in the worst case, five choices will already push them to their limit. Structuring information in a hierarchy helps. Simplifying the user journey and reducing the number of choices will do even better.