Mayfer's Law & More

Today’s high-signal drops:

• Makes-You-Think Tweet: The best relationships
• Mind-Expanding Concept: Mayfer’s Law
• Cool Quote or Question: Widespread beliefs
• High-Signal Content: Inflation, the ultimate guide

Makes-You-Think Tweet

There’s something to “iron sharpens iron” and “sharks eat well but live a life surrounded by sharks” when it comes to thriving human relationships. These might give the impression that tough love is the only path to achieve them. It is indeed important, but my best ones show a dance between the superficial and the deep, the mundane and the spiritual, the comfortable and the uncomfortable.

Mind-Expanding Concept

Mayfer’s Law

We all experience these situations. We schedule an hour to finish a client presentation and don't come even close. The contractor tells you (without any speck of surprise) that they need another couple of weeks (and 20% more materials) to finish the kitchen remodeling.

The thing is, we tend to underestimate the time, costs, and risks of doing future things. That's what’s called the planning fallacy. It's funny that this bias affects predictions only about one's own tasks - when an outsider predicts, the effect is inversed and they tend to overestimate completion times and cost. Also, the bias kicks in even when we account for the bias.

If we can't estimate at least somewhat close, we're guaranteed to make bad decisions. We'll misprice our consulting project and decide on the remodeling that we can't simply afford right now. So we basically have a pickle baked into our software.

But is it all bad news?

The planning fallacy is particularly true for major projects, where being late and/or having budget overruns seem to be the norm. It seems that the larger, longer, and more complex the project, the larger the surface area for the bias leech to hook on. Classic example: the Sydney Opera House's original cost was estimated at $7 million. Its 10-year delayed completion amounted to $102 million. Or look at stadiums’ budgeted vs realized costs of any World Cup.

Would we carry out these massive projects if we knew exactly the time and money involved? The economics would likely not look good. Hence, if we didn't have the bias, maybe we wouldn't venture to build these important and beautiful things. And that is what Mayfer's Law speaks to. It states: the miscalculation of time required for achievement enables the undertaking of endeavors far larger than we would knowingly attempt to achieve. The assumptions here seem to be that decision-makers are too conservative (risk-averse?) and that we are inherently bad in predicting the future - both the good and the bad.

Another example might be startup founders. If they coldly looked at the odds of succeeding, they would not start. But something makes them believe that their own odds are different. Maybe they're solving a problem they personally had and deeply care about or maybe (they believe) they have rare knowledge of an industry after having worked 15 years in it. Something makes them dismiss the base rate.

It's like we need to fool ourselves a bit to be able to take massive swings. And that might be a good thing.

Cool Quote or Question

High-Signal Content

“There are two main forces that drive up the broad money supply over time: either banks make more private loans (…) or the government runs large fiscal deficits while the central bank creates new bank reserves to buy large portions of the bond issuance associated with those deficits (…).”

See you next week,

Filipe