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The Mental Models To Enhance Your Decision-Making
A mental model is a sort of thinking process applied to the real world, which is usually simple yet powerful to solve complex problems. In short, mental models are simple and yet effective solutions or guiding principles to complex real-life scenarios. Therefore, the central point is those complex problems can be solved with simple solutions that, in most cases, work much better than more complex solutions.
The Pareto Analysis is a statistical analysis used in business decision making that identifies a certain number of input factors that have the greatest impact on income. It is based on the similarly named Pareto Principle, which states that 80% of the effect of something can be attributed to just 20% of the drivers.
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.
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.
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.
The crowding-out effect occurs when public sector spending reduces spending in the private sector.
A network effect is a phenomenon in which as more people or users join a platform, the more the value of the service offered by the platform improves for those joining afterward.
Fat-tailed distributions are graphical representations of the probability of extreme events being higher than normal. In many domains fat tails are significant, as those extreme events have a higher impact and make the whole normal distribution irrelevant. That is the case when it comes to power laws. Therefore, understanding the properties of those extreme events become critical to business survival and success.
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