Many of us struggle to learn new things after a certain age or deal with complex systems outside of our core domain. Often the reason for that is we tend to box ourselves with information that has been handed out to us without questioning the fundamental basis. On the other hand, most successful innovators or problem solvers have relied on first principles which involves questioning everything other than what is really a fundamental truth, often a law of nature. That doesn’t mean first principles works primarily in the field of science or physics in particular. As this piece in the Farnam Street shows, it is a remarkable thinking approach in any field involving complex systems including investing and life in general. The article begins by helping us understand what first principles mean, a couple of techniques we can use to train ourselves to think on first principles and a few case studies to drive the point home.
“Sometimes called “reasoning from first principles,” the idea is to break down complicated problems into basic elements and then reassemble them from the ground up. It’s one of the best ways to learn to think for yourself, unlock your creative potential, and move from linear to non-linear results.
This approach was used by the philosopher Aristotle and is used now by Elon Musk and Charlie Munger. It allows them to cut through the fog of shoddy reasoning and inadequate analogies to see opportunities that others miss.
A first principle is a foundational proposition or assumption that stands alone. We cannot deduce first principles from any other proposition or assumption.
….So much of what we believe is based on some authority figure telling us that something is true. As children, we learn to stop questioning when we’re told “Because I said so.” (More on this later.) As adults, we learn to stop questioning when people say “Because that’s how it works.” The implicit message is “understanding be damned — shut up and stop bothering me.”
If we never learn to take something apart, test the assumptions, and reconstruct it, we end up trapped in what other people tell us — trapped in the way things have always been done. When the environment changes, we just continue as if things were the same.”
Then we learn about the Socratic questioning technique to think from first principles:
“Socratic questioning generally follows this process:
Clarifying your thinking and explaining the origins of your ideas (Why do I think this? What exactly do I think?)
Challenging assumptions (How do I know this is true? What if I thought the opposite?)
Looking for evidence (How can I back this up? What are the sources?)
Considering alternative perspectives (What might others think? How do I know I am correct?)
Examining consequences and implications (What if I am wrong? What are the consequences if I am?)
Questioning the original questions (Why did I think that? Was I correct? What conclusions can I draw from the reasoning process?)
This process stops you from relying on your gut and limits strong emotional responses. This process helps you build something that lasts.”
The article then uses Elon Musk as a case study, someone who is perhaps the most famous exponent of first principles thinking today to solve real world problems spanning multiple disciplines:
“His approach to understanding reality is to start with what is true — not with his intuition. The problem is that we don’t know as much as we think we do, so our intuition isn’t very good. We trick ourselves into thinking we know what’s possible and what’s not. The way Musk thinks is much different.
Musk starts out with something he wants to achieve, like building a rocket. Then he starts with the first principles of the problem. Running through how Musk would think, Larry Page said in an interview, “What are the physics of it? How much time will it take? How much will it cost? How much cheaper can I make it? There’s this level of engineering and physics that you need to make judgments about what’s possible and interesting. Elon is unusual in that he knows that, and he also knows business and organization and leadership and governmental issues.”
Rockets are absurdly expensive, which is a problem because Musk wants to send people to Mars. And to send people to Mars, you need cheaper rockets. So he asked himself, “What is a rocket made of? Aerospace-grade aluminum alloys, plus some titanium, copper, and carbon fiber. And … what is the value of those materials on the commodity market? It turned out that the materials cost of a rocket was around two percent of the typical price.”
Why, then, is it so expensive to get a rocket into space? Musk, a notorious self-learner with degrees in both economics and physics, literally taught himself rocket science. He figured that the only reason getting a rocket into space is so expensive is that people are stuck in a mindset that doesn’t hold up to first principles. With that, Musk decided to create SpaceX and see if he could build rockets himself from the ground up.
Musk then gave an example of how Space X uses first principles to innovate at low prices:
Somebody could say — and in fact people do — that battery packs are really expensive and that’s just the way they will always be because that’s the way they have been in the past. … Well, no, that’s pretty dumb… Because if you applied that reasoning to anything new, then you wouldn’t be able to ever get to that new thing…. you can’t say, … “oh, nobody wants a car because horses are great, and we’re used to them and they can eat grass and there’s lots of grass all over the place and … there’s no gasoline that people can buy….”
He then gives a fascinating example about battery packs:
… they would say, “historically, it costs $600 per kilowatt-hour. And so it’s not going to be much better than that in the future. … So the first principles would be, … what are the material constituents of the batteries? What is the spot market value of the material constituents? … It’s got cobalt, nickel, aluminum, carbon, and some polymers for separation, and a steel can. So break that down on a material basis; if we bought that on a London Metal Exchange, what would each of these things cost? Oh, jeez, it’s … $80 per kilowatt-hour. So, clearly, you just need to think of clever ways to take those materials and combine them into the shape of a battery cell, and you can have batteries that are much, much cheaper than anyone realizes.”
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