Loss Aversion

Loss aversion is a bias, according to psychologists, where people attribute a stronger psychological weight to losses than to gains. Some psychological studies show that people place more weight on a loss, compared to a gain of the same size. This is labeled loss aversion.

DefinitionLoss Aversion is a cognitive bias and psychological concept that describes the tendency of individuals to prefer avoiding losses over acquiring equivalent gains. It suggests that people experience the pain of losing more intensely than the pleasure of gaining. This behavioral phenomenon is a central component of prospect theory, a theory developed by Daniel Kahneman and Amos Tversky, which has had a significant impact on the field of behavioral economics. Loss aversion influences decision-making, risk-taking, and various aspects of human behavior.
Key ConceptsCognitive Bias: Loss aversion is a cognitive bias, representing a systematic pattern of deviation from rationality in judgment and decision-making. – Prospect Theory: It is a fundamental concept within prospect theory, a theory that explains how individuals evaluate and make decisions involving risk and uncertainty. – Negative Emotions: Loss aversion is linked to negative emotions such as fear, regret, and anxiety, which are associated with the prospect of losing. – Endowment Effect: Related to loss aversion, the endowment effect refers to the tendency of individuals to overvalue items they own compared to identical items they do not own.
CharacteristicsPreference for Avoiding Losses: Loss aversion reflects the preference for avoiding potential losses, which can lead to risk-averse behavior. – Subjective Evaluation: It involves a subjective evaluation of gains and losses, influenced by emotions and individual perceptions. – Magnitude Effect: Loss aversion is more pronounced for larger losses, indicating that the aversion intensifies with the magnitude of potential loss. – Asymmetry: The aversion to losses is typically stronger than the attraction to equivalent gains, resulting in a lopsided evaluation of risk and reward.
ImplicationsRisk Aversion: Loss aversion contributes to risk-averse behavior, as individuals may avoid taking risks to prevent potential losses, even when the expected gains outweigh the losses. – Investment Decisions: It influences investment choices, as people may hold on to losing investments longer than they should due to the fear of realizing losses. – Consumer Behavior: Marketers and businesses often use loss aversion to influence consumer behavior, emphasizing potential losses to encourage action. – Negotiation Strategies: In negotiations, parties can leverage loss aversion to influence the other party’s decisions by framing offers in terms of potential losses.
AdvantagesRisk Mitigation: Loss aversion can help individuals and organizations avoid excessive risk-taking, which can be beneficial in preserving assets and minimizing potential harm. – Adaptive Evolution: Some researchers argue that loss aversion may have evolved as an adaptive trait, helping individuals avoid dangerous situations.
DrawbacksSuboptimal Decisions: Loss aversion can lead to suboptimal decisions, where individuals avoid beneficial opportunities due to the fear of potential losses. – Overvaluing Losses: It may cause people to overvalue potential losses, leading to missed opportunities for gains. – Emotional Impact: Loss aversion can be emotionally taxing, as it can lead to increased stress and anxiety in decision-making scenarios.
ApplicationsInvestment and Finance: Loss aversion is highly relevant in investment and finance, influencing portfolio management, trading, and investment strategies. – Marketing and Sales: Businesses often use loss aversion in marketing and sales by emphasizing potential losses if customers do not act promptly. – Behavioral Economics: Loss aversion is a cornerstone concept in behavioral economics, informing our understanding of human decision-making. – Public Policy: It plays a role in shaping public policy, particularly in areas such as health, safety, and environmental regulations, where risk perception and aversion to potential losses are significant factors.
Use CasesInvestment Dilemma: An individual may choose not to invest in a potentially lucrative opportunity because they fear losing their initial investment, even if the expected gains are substantial. – Consumer Purchases: Retailers may employ loss aversion by offering limited-time discounts to create a sense of urgency, making consumers fear missing out on savings. – Negotiations: In negotiations, a party may use loss aversion to their advantage by highlighting the potential losses the other party may incur if they do not agree to a particular deal. – Health Behavior: Public health campaigns often use loss aversion by emphasizing the potential health losses associated with unhealthy behaviors to encourage healthier choices.

Constructive Paranoia

Constructive paranoia is a term coined by author, geographer, and ornithologist Jared Diamond in his 2012 book The World Until Yesterday. Constructive paranoia describes an appreciation (and respect for) low-risk hazards that are encountered frequently. In fact, frequency changes the degree of risk from low to high. Thus it’s important to recognize that seemingly low-risk endeavors, when performed frequently, can become highly-risky actions.

Polymath Jared Diamond, in his book, The World Until Yesterday, talks about constructive paranoia.

He learned this concept when leaving with several tribes in New Guinea.

For instance, those tribes had a cultural norm to avoid sleeping under big trees due to a seemingly irrational fear they might fall.

Indeed, there is a very low probability of that happening. And if you’re a statistician you’d think those people are mad. 

However, there is an important point to take into account.
If a big tree falls, no matter what, if you find yourself beneath, there is no way back, you’re dead.

And another critical point, is those people live in the forests, every day.
Thus, they are exposed to these big trees, frequently. 

In other words, frequency and expected outcome, make the tribe from New Guinea leverage constructive paranoia. This is what bounded rationality does. 

It helps us, naturally develop, antibodies against a world, that is noisier and noisier.

In most real-life scenarios, everyday people know that some domains of potential losses carry hidden risks, which as they can’t be computed, are ignored by psychologists, but instead are not hidden from the human mind.

So better be paranoid than a dead smart person.

Tribesmen know better while some modern psychologists have forgotten.

A labeling problem?

What if what’s been labeled as risk aversion – in some domains – is just constructive paranoia in a highly uncertain scenario? 

Take the case of how psychologists have analyzed the scenario where people feared more losing money than making money. 

Where the aversion of losing money is felt (psychologically) twice, compared to that of making money. 

But is this really irrational? 

I’ve been investing for a long time, and if there is one sure thing, it’s the asymmetry of loss. 

Take this very simple example. You have $1000 invested.
If you earn 20% you make $200 and you have $1200.
However, it only takes a 16% portfolio loss, to go back to $1000. 

Take the opposite scenario, you lose 20%, and you now have $800. 
Yet, to go back to $1000, you need to increase your portfolio by 25%. 

In other words, do you get the asymmetry here? 

If you earn 20%, you’ll get back with only a 16% portfolio loss.

But if you lose 20%, you need to increase your portfolio, by 25% to earn back the losses!

This means, that even if we do a bit of math, the brain seems to grasp that. 

Not only it, but our brain also seems to be wired to avoid the risk of ruin.
And modern society, and psychologists, do all they can, to make us forget, those built-in rules. 

To conclude, the real world is about satisficing!

Simon’s satisficing strategy is a decision-making technique where the individual considers various solutions until they find an acceptable option. Satisficing is a portmanteau combining sufficing and satisfying and was created by psychologist Herbert A. Simon. He argued that many individuals make decisions with a satisfactory (and not optimal) solution. Satisfactory decisions are preferred because they achieve an acceptable result and avoid the resource-intensive search for something more optimal.

Psychologist Herbert Simon explained that in a complex world, you don’t want to optimize. You want to satisfice. 

Satisficing is about making a decision in an uncertain world, there information is incomplete, the problem is undefined, and the context is wide. 

And satisficing, in complex situations, work actually, way better than modeling. 

It’s, in short, the opposite, of what many business people do. With the proliferation of big data, they think they can easily model the world, forgetting that the model, is such a simplified version of reality, that it doesn’t work, in the first place. 

Not only that, the model, tends to stress a few (visible) metrics, that have the potential to kill the whole thing.

Indeed, one of the worst things startups can do is the so-called “premature optimization” or for instance trying to automate, important stuff, too early. 

Think of the case of a startup that doesn’t still understand what users appreciate about the project, automating right on, the demo of the product

This is bad because 1. the demo won’t be effective 2. the startup will lose an important feedback loop to improve the software, quickly 3. the first customers might also become your core channels, and in that stage, trust is the key, and you don’t want to automate that. 

That is why it’s critical, as a business person, you keep refining your BS detector, over time. 

Loss Aversion and Asymmetric Betting

As we saw, the loss aversion more than a bias, is the byproduct of dealing in the real-world.

Where you want to prevent major screw-ups.

In addition, in most cases, what might make us loss averse might be due to our intuitive understanding of the real-world context.

When we get the feeling that something is irreversible, and it carries hidden costs, that is when loss aversion kicks in.

And in most cases, we’re correct.

That is why I created for you a speed-reversibility matrix.


The main goal here is to unlock those experiments, which I like to call asymmetric business bets.

Another dimension of asymmetric betting is given by how impactful the idea can be to the business. When we have asymmetric bets that can have a high impact and are easy to reverse, we get to the “Jackpot” and go into an “All-In-Mode” of action! And how easy to reverse.

Those are experiments with a high potential, limited downside, and no hidden costs (as the experiment is mostly reversible).

Finding them is not easy, as it takes a huge amount of iteration, tweaking and experimentation.

Yet, when you stuble on those asymmetric bets they turn into growth hacks.

Here, it’s critical to realize that those are not “hacks” which are readily available to anyone.

Those hacks come out as a result of an experimental process which is rigorous, and inbued within your business practices.

Thanks to that, you can unlock incredible growth. Yet, this process is iterative, expensive, and there is no short-cut to it.

By practicing the speed-reversibility mindset, you can unlock asymmetric bets, which can contribute to the growth of your business.

Like hidden gems they are everywhere, ready to be discovered, yet, it’s critical to have a process of continuous experimentation to find them.

Examples And Case Studies

  • Investment Decisions: Loss aversion is often evident in the behavior of investors. For example, suppose an investor purchased a stock at $100, and its value subsequently declined to $80. The investor may be reluctant to sell the stock and realize the $20 loss because the pain of the loss is perceived as greater than the potential gain from investing elsewhere. This behavior can lead to holding onto declining investments longer than necessary, hoping for a rebound.
  • Real Estate: In the real estate market, sellers may be reluctant to lower the price of their property even if market conditions indicate a need for adjustment. The fear of selling at a loss can result in overpricing the property and prolonging its time on the market.
  • Salary Negotiation: Loss aversion can also manifest during salary negotiations. A job candidate may be hesitant to accept an offer that is below their current salary, even if the overall compensation package, including benefits and job satisfaction, is more attractive. The fear of taking a pay cut creates resistance to considering other aspects of the job offer.
  • Consumer Behavior: Loss aversion influences consumer decisions as well. For example, if a person purchases an expensive item and later discovers it is available at a lower price elsewhere, they might be unwilling to return the product and purchase it again at the lower price due to the perceived loss of paying more initially.
  • Organizational Decision-Making: Loss aversion can impact decision-making within organizations. Managers may resist changing strategies or discontinuing projects, even if they are underperforming, because of the fear of acknowledging failure and incurring losses associated with the change.
  • Marketing and Promotions: Businesses can leverage loss aversion in marketing and promotions. For instance, limited-time offers, such as “last chance to buy,” appeal to consumers’ fear of missing out on a product or deal, prompting them to make a purchase to avoid the perceived loss of the opportunity.
  • Risk Aversion: Loss aversion contributes to risk aversion, where individuals are more likely to choose options with known outcomes over riskier options with potentially higher payoffs but also the risk of losses. This behavior is observed in various financial and economic decision-making scenarios.
  • Investment Portfolios: An investor holds a diversified portfolio of stocks and bonds. Despite the portfolio performing well overall, the investor may become overly focused on a single stock that has experienced a temporary decline. They hesitate to rebalance their portfolio by selling the underperforming stock because they want to avoid realizing the loss.
  • Product Development: A company has invested significant resources in developing a new product. As the launch date approaches, market research suggests that certain features may not be well-received by consumers. Despite this feedback, the company proceeds with the original plan to avoid “wasting” the resources already invested, even if adapting the product could lead to better outcomes.
  • Marketing Campaigns: A marketing team launches an advertising campaign for a product, but early performance metrics show that it’s not generating the expected results. Due to loss aversion, the team may resist making substantial changes to the campaign, even if it’s clear that adjustments are needed to avoid further losses in advertising expenses.
  • Project Management: A project manager oversees a project that has deviated from its initial scope and is likely to miss its deadline. Instead of recommending a pivot or change in project direction, the manager continues down the current path to avoid acknowledging the sunk costs and potential criticism for project failure.
  • Product Pricing: A company introduces a new product with a high initial price point. After some time, it becomes evident that the price is deterring potential customers. However, the company is hesitant to reduce the price due to concerns about diminishing the perceived value of the product and admitting that the initial pricing strategy was flawed.
  • Entrepreneurship: A startup founder invests a significant amount of personal savings and time into a business idea. Despite encountering challenges and minimal traction, the founder persists with the venture to avoid the perceived loss of their investments, even if other opportunities may be more promising.
  • Supplier Relationships: A company has a long-standing relationship with a supplier that has recently increased prices significantly. The company continues to purchase from the supplier rather than seeking alternative options, fearing the disruption and potential switching costs associated with changing suppliers.
  • Inventory Management: A retailer experiences slow sales of a particular product, resulting in excess inventory. Instead of discounting the product to clear it out, the retailer continues to hold it at the original price, hoping to avoid recognizing the loss associated with markdowns.
  • Contract Negotiations: During contract negotiations, one party may resist making concessions or agreeing to more favorable terms, even when it’s clear that the current terms are unfavorable. The fear of conceding and appearing weak can lead to suboptimal agreements.
  • Employee Retention: A company has an underperforming employee in a critical role. Despite recognizing the employee’s poor performance, the company hesitates to terminate their employment due to concerns about potential legal repercussions and the loss of invested training resources.

Key takeaways

  • Loss aversion is not a bias. It’s the built-in detector, which makes humans avoid irreversible screw-ups. 
  • Satisficing is the process of using heuristics for decision-making in a complex world, and those, in most cases, work way better than complex scenario analyses. 
  • BS detector: as a business person your BS detector becomes the critical filter, and compass that helps you make decisions in a complex world.

Read this to understand the whole point.

Key Highlights

  • Loss Aversion: Loss aversion is a psychological bias where people tend to weigh losses more heavily than gains. This bias can be attributed to the way humans intuitively avoid irreversible negative outcomes, leading them to be cautious about potential losses. Loss aversion is particularly evident in various aspects of life, including investment decisions, consumer behavior, salary negotiation, and organizational decision-making.
  • Constructive Paranoia: Coined by Jared Diamond, constructive paranoia refers to a healthy appreciation for low-risk hazards that occur frequently. People in certain cultures, like the tribes in New Guinea, develop a level of caution toward seemingly low-risk situations that are encountered regularly. This mindset is a form of bounded rationality, helping individuals avoid potential catastrophic outcomes in their day-to-day lives.
  • Satisficing: Satisficing is a decision-making strategy proposed by psychologist Herbert Simon. It involves making decisions that are satisfactory and acceptable rather than striving for optimal solutions, especially in complex and uncertain situations. Satisficing is practical in situations where full information is lacking, and the context is broad, as it prevents individuals from getting lost in resource-intensive attempts to find the best solution.
  • Asymmetric Betting: Asymmetric betting involves making high-potential, low-downside experiments or business decisions that can lead to significant growth. These bets are easy to reverse, reducing the fear of potential losses. Identifying these asymmetric bets requires a process of continuous experimentation and iteration, and when found, they can become growth hacks that contribute to business success.
  • Examples and Case Studies: The concepts of loss aversion and constructive paranoia have implications in various domains such as investment decisions, real estate, salary negotiation, consumer behavior, organizational decision-making, marketing, promotions, and risk aversion. Businesses can use loss aversion to their advantage by incorporating it into marketing strategies and limited-time offers.
  • BS Detector: A “BS detector” is a metaphorical tool that helps business people filter through information and make informed decisions in a complex and noisy world. It involves recognizing potential pitfalls, false promises, and exaggerated claims, enabling individuals to navigate uncertainties more effectively.

Connected Thinking Frameworks

Convergent vs. Divergent Thinking

Convergent thinking occurs when the solution to a problem can be found by applying established rules and logical reasoning. Whereas divergent thinking is an unstructured problem-solving method where participants are encouraged to develop many innovative ideas or solutions to a given problem. Where convergent thinking might work for larger, mature organizations where divergent thinking is more suited for startups and innovative companies.

Critical Thinking

Critical thinking involves analyzing observations, facts, evidence, and arguments to form a judgment about what someone reads, hears, says, or writes.


The concept of cognitive biases was introduced and popularized by the work of Amos Tversky and Daniel Kahneman in 1972. Biases are seen as systematic errors and flaws that make humans deviate from the standards of rationality, thus making us inept at making good decisions under uncertainty.

Second-Order Thinking

Second-order thinking is a means of assessing the implications of our decisions by considering future consequences. Second-order thinking is a mental model that considers all future possibilities. It encourages individuals to think outside of the box so that they can prepare for every and eventuality. It also discourages the tendency for individuals to default to the most obvious choice.

Lateral Thinking

Lateral thinking is a business strategy that involves approaching a problem from a different direction. The strategy attempts to remove traditionally formulaic and routine approaches to problem-solving by advocating creative thinking, therefore finding unconventional ways to solve a known problem. This sort of non-linear approach to problem-solving, can at times, create a big impact.

Bounded Rationality

Bounded rationality is a concept attributed to Herbert Simon, an economist and political scientist interested in decision-making and how we make decisions in the real world. In fact, he believed that rather than optimizing (which was the mainstream view in the past decades) humans follow what he called satisficing.

Dunning-Kruger Effect

The Dunning-Kruger effect describes a cognitive bias where people with low ability in a task overestimate their ability to perform that task well. Consumers or businesses that do not possess the requisite knowledge make bad decisions. What’s more, knowledge gaps prevent the person or business from seeing their mistakes.

Occam’s Razor

Occam’s Razor states that one should not increase (beyond reason) the number of entities required to explain anything. All things being equal, the simplest solution is often the best one. The principle is attributed to 14th-century English theologian William of Ockham.

Lindy Effect

The Lindy Effect is a theory about the ageing of non-perishable things, like technology or ideas. Popularized by author Nicholas Nassim Taleb, the Lindy Effect states that non-perishable things like technology age – linearly – in reverse. Therefore, the older an idea or a technology, the same will be its life expectancy.


Antifragility was first coined as a term by author, and options trader Nassim Nicholas Taleb. Antifragility is a characteristic of systems that thrive as a result of stressors, volatility, and randomness. Therefore, Antifragile is the opposite of fragile. Where a fragile thing breaks up to volatility; a robust thing resists volatility. An antifragile thing gets stronger from volatility (provided the level of stressors and randomness doesn’t pass a certain threshold).


Ergodicity is one of the most important concepts in statistics. Ergodicity is a mathematical concept suggesting that a point of a moving system will eventually visit all parts of the space the system moves in. On the opposite side, non-ergodic means that a system doesn’t visit all the possible parts, as there are absorbing barriers

Systems Thinking

Systems thinking is a holistic means of investigating the factors and interactions that could contribute to a potential outcome. It is about thinking non-linearly, and understanding the second-order consequences of actions and input into the system.

Vertical Thinking

Vertical thinking, on the other hand, is a problem-solving approach that favors a selective, analytical, structured, and sequential mindset. The focus of vertical thinking is to arrive at a reasoned, defined solution.

Metaphorical Thinking

Metaphorical thinking describes a mental process in which comparisons are made between qualities of objects usually considered to be separate classifications.  Metaphorical thinking is a mental process connecting two different universes of meaning and is the result of the mind looking for similarities.

Maslow’s Hammer

Maslow’s Hammer, otherwise known as the law of the instrument or the Einstellung effect, is a cognitive bias causing an over-reliance on a familiar tool. This can be expressed as the tendency to overuse a known tool (perhaps a hammer) to solve issues that might require a different tool. This problem is persistent in the business world where perhaps known tools or frameworks might be used in the wrong context (like business plans used as planning tools instead of only investors’ pitches).

Peter Principle

The Peter Principle was first described by Canadian sociologist Lawrence J. Peter in his 1969 book The Peter Principle. The Peter Principle states that people are continually promoted within an organization until they reach their level of incompetence.

Straw Man Fallacy

The straw man fallacy describes an argument that misrepresents an opponent’s stance to make rebuttal more convenient. The straw man fallacy is a type of informal logical fallacy, defined as a flaw in the structure of an argument that renders it invalid.

Google Effect

The Google effect is a tendency for individuals to forget information that is readily available through search engines. During the Google effect – sometimes called digital amnesia – individuals have an excessive reliance on digital information as a form of memory recall.

Streisand Effect

The Streisand Effect is a paradoxical phenomenon where the act of suppressing information to reduce visibility causes it to become more visible. In 2003, Streisand attempted to suppress aerial photographs of her Californian home by suing photographer Kenneth Adelman for an invasion of privacy. Adelman, who Streisand assumed was paparazzi, was instead taking photographs to document and study coastal erosion. In her quest for more privacy, Streisand’s efforts had the opposite effect.

Compromise Effect

Single-attribute choices – such as choosing the apartment with the lowest rent – are relatively simple. However, most of the decisions consumers make are based on multiple attributes which complicate the decision-making process. The compromise effect states that a consumer is more likely to choose the middle option of a set of products over more extreme options.

Butterfly Effect

In business, the butterfly effect describes the phenomenon where the simplest actions yield the largest rewards. The butterfly effect was coined by meteorologist Edward Lorenz in 1960 and as a result, it is most often associated with weather in pop culture. Lorenz noted that the small action of a butterfly fluttering its wings had the potential to cause progressively larger actions resulting in a typhoon.

IKEA Effect

The IKEA effect is a cognitive bias that describes consumers’ tendency to value something more if they have made it themselves. That is why brands often use the IKEA effect to have customizations for final products, as they help the consumer relate to it more and therefore appending to it more value.

Ringelmann Effect 

Ringelmann Effect
The Ringelmann effect describes the tendency for individuals within a group to become less productive as the group size increases.

The Overview Effect

The overview effect is a cognitive shift reported by some astronauts when they look back at the Earth from space. The shift occurs because of the impressive visual spectacle of the Earth and tends to be characterized by a state of awe and increased self-transcendence.

House Money Effect

The house money effect was first described by researchers Richard Thaler and Eric Johnson in a 1990 study entitled Gambling with the House Money and Trying to Break Even: The Effects of Prior Outcomes on Risky Choice. The house money effect is a cognitive bias where investors take higher risks on reinvested capital than they would on an initial investment.


As highlighted by German psychologist Gerd Gigerenzer in the paper “Heuristic Decision Making,” the term heuristic is of Greek origin, meaning “serving to find out or discover.” More precisely, a heuristic is a fast and accurate way to make decisions in the real world, which is driven by uncertainty.

Recognition Heuristic

The recognition heuristic is a psychological model of judgment and decision making. It is part of a suite of simple and economical heuristics proposed by psychologists Daniel Goldstein and Gerd Gigerenzer. The recognition heuristic argues that inferences are made about an object based on whether it is recognized or not.

Representativeness Heuristic

The representativeness heuristic was first described by psychologists Daniel Kahneman and Amos Tversky. The representativeness heuristic judges the probability of an event according to the degree to which that event resembles a broader class. When queried, most will choose the first option because the description of John matches the stereotype we may hold for an archaeologist.

Take-The-Best Heuristic

The take-the-best heuristic is a decision-making shortcut that helps an individual choose between several alternatives. The take-the-best (TTB) heuristic decides between two or more alternatives based on a single good attribute, otherwise known as a cue. In the process, less desirable attributes are ignored.

Bundling Bias

The bundling bias is a cognitive bias in e-commerce where a consumer tends not to use all of the products bought as a group, or bundle. Bundling occurs when individual products or services are sold together as a bundle. Common examples are tickets and experiences. The bundling bias dictates that consumers are less likely to use each item in the bundle. This means that the value of the bundle and indeed the value of each item in the bundle is decreased.

Barnum Effect

The Barnum Effect is a cognitive bias where individuals believe that generic information – which applies to most people – is specifically tailored for themselves.

Anchoring Effect

The anchoring effect describes the human tendency to rely on an initial piece of information (the “anchor”) to make subsequent judgments or decisions. Price anchoring, then, is the process of establishing a price point that customers can reference when making a buying decision.

Decoy Effect

The decoy effect is a psychological phenomenon where inferior – or decoy – options influence consumer preferences. Businesses use the decoy effect to nudge potential customers toward the desired target product. The decoy effect is staged by placing a competitor product and a decoy product, which is primarily used to nudge the customer toward the target product.

Commitment Bias

Commitment bias describes the tendency of an individual to remain committed to past behaviors – even if they result in undesirable outcomes. The bias is particularly pronounced when such behaviors are performed publicly. Commitment bias is also known as escalation of commitment.

First-Principles Thinking

First-principles thinking – sometimes called reasoning from first principles – is used to reverse-engineer complex problems and encourage creativity. It involves breaking down problems into basic elements and reassembling them from the ground up. Elon Musk is among the strongest proponents of this way of thinking.

Ladder Of Inference

The ladder of inference is a conscious or subconscious thinking process where an individual moves from a fact to a decision or action. The ladder of inference was created by academic Chris Argyris to illustrate how people form and then use mental models to make decisions.

Goodhart’s Law

Goodhart’s Law is named after British monetary policy theorist and economist Charles Goodhart. Speaking at a conference in Sydney in 1975, Goodhart said that “any observed statistical regularity will tend to collapse once pressure is placed upon it for control purposes.” Goodhart’s Law states that when a measure becomes a target, it ceases to be a good measure.

Six Thinking Hats Model

The Six Thinking Hats model was created by psychologist Edward de Bono in 1986, who noted that personality type was a key driver of how people approached problem-solving. For example, optimists view situations differently from pessimists. Analytical individuals may generate ideas that a more emotional person would not, and vice versa.

Mandela Effect

The Mandela effect is a phenomenon where a large group of people remembers an event differently from how it occurred. The Mandela effect was first described in relation to Fiona Broome, who believed that former South African President Nelson Mandela died in prison during the 1980s. While Mandela was released from prison in 1990 and died 23 years later, Broome remembered news coverage of his death in prison and even a speech from his widow. Of course, neither event occurred in reality. But Broome was later to discover that she was not the only one with the same recollection of events.

Crowding-Out Effect

The crowding-out effect occurs when public sector spending reduces spending in the private sector.

Bandwagon Effect

The bandwagon effect tells us that the more a belief or idea has been adopted by more people within a group, the more the individual adoption of that idea might increase within the same group. This is the psychological effect that leads to herd mentality. What in marketing can be associated with social proof.

Moore’s Law

Moore’s law states that the number of transistors on a microchip doubles approximately every two years. This observation was made by Intel co-founder Gordon Moore in 1965 and it become a guiding principle for the semiconductor industry and has had far-reaching implications for technology as a whole.

Disruptive Innovation

Disruptive innovation as a term was first described by Clayton M. Christensen, an American academic and business consultant whom The Economist called “the most influential management thinker of his time.” Disruptive innovation describes the process by which a product or service takes hold at the bottom of a market and eventually displaces established competitors, products, firms, or alliances.

Value Migration

Value migration was first described by author Adrian Slywotzky in his 1996 book Value Migration – How to Think Several Moves Ahead of the Competition. Value migration is the transferal of value-creating forces from outdated business models to something better able to satisfy consumer demands.

Bye-Now Effect

The bye-now effect describes the tendency for consumers to think of the word “buy” when they read the word “bye”. In a study that tracked diners at a name-your-own-price restaurant, each diner was asked to read one of two phrases before ordering their meal. The first phrase, “so long”, resulted in diners paying an average of $32 per meal. But when diners recited the phrase “bye bye” before ordering, the average price per meal rose to $45.


Groupthink occurs when well-intentioned individuals make non-optimal or irrational decisions based on a belief that dissent is impossible or on a motivation to conform. Groupthink occurs when members of a group reach a consensus without critical reasoning or evaluation of the alternatives and their consequences.


A stereotype is a fixed and over-generalized belief about a particular group or class of people. These beliefs are based on the false assumption that certain characteristics are common to every individual residing in that group. Many stereotypes have a long and sometimes controversial history and are a direct consequence of various political, social, or economic events. Stereotyping is the process of making assumptions about a person or group of people based on various attributes, including gender, race, religion, or physical traits.

Murphy’s Law

Murphy’s Law states that if anything can go wrong, it will go wrong. Murphy’s Law was named after aerospace engineer Edward A. Murphy. During his time working at Edwards Air Force Base in 1949, Murphy cursed a technician who had improperly wired an electrical component and said, “If there is any way to do it wrong, he’ll find it.”

Law of Unintended Consequences

The law of unintended consequences was first mentioned by British philosopher John Locke when writing to parliament about the unintended effects of interest rate rises. However, it was popularized in 1936 by American sociologist Robert K. Merton who looked at unexpected, unanticipated, and unintended consequences and their impact on society.

Fundamental Attribution Error

Fundamental attribution error is a bias people display when judging the behavior of others. The tendency is to over-emphasize personal characteristics and under-emphasize environmental and situational factors.

Outcome Bias

Outcome bias describes a tendency to evaluate a decision based on its outcome and not on the process by which the decision was reached. In other words, the quality of a decision is only determined once the outcome is known. Outcome bias occurs when a decision is based on the outcome of previous events without regard for how those events developed.

Hindsight Bias

Hindsight bias is the tendency for people to perceive past events as more predictable than they actually were. The result of a presidential election, for example, seems more obvious when the winner is announced. The same can also be said for the avid sports fan who predicted the correct outcome of a match regardless of whether their team won or lost. Hindsight bias, therefore, is the tendency for an individual to convince themselves that they accurately predicted an event before it happened.

Read Next: BiasesBounded RationalityMandela EffectDunning-Kruger EffectLindy EffectCrowding Out EffectBandwagon Effect.

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