Make Better Decisions with 2 Models

If you want to make better decisions you have to models for how the world works. 

The more models you can hold or understand the more lenses you have with which you can view your decision-making. 

Two models come to mind for me when evaluating investment decisions. 

The 80/20 Principle and The Lindy Effect. 

The reason these two models work together is they give you a framework for evaluating good judgements when allocating capital. 

The 80/20 principle - Preato Optimal - tells us 80% of our results will come from 20% of our efforts. 

The trick with this mental model is understanding which 20% of results are worthy. 

This is where the Lindy Effect comes into play. 

The Lindy Effect tells us the longer something has been around the more likely it will remain to be around. 

That is the things that have longer staying power are more likely to retain that staying power than newer flashier items. 

While these are now laws etched in stone they are more guiding principles for evaluating decisions. The important thing to remember here is institutional favorites do fail - see Black Swan events - and new items can take flight to become huge successes - see the network effect. 

The Lindy Effect

The Lindy Effect which was popularized by Nicholas Nassim Taleb in his books The Black Swan and Antifragile is a concept that refers to the Lindy deli in New York City. 

It is named for a deli where comedians would gather and do post mortems on their performances from the evening with the basic understanding that the more material they had the longer they would last in show business. 

Thus born out of this idea the longer something is around the more likely it is to stick around. 

Think of a company like Google. 

Google has been around for over 20 years. So it is safe to assume that Google will still be in business for at least another 20 years. 

Let's compare that to the new tech start-up that is only a few years old. Why would anyone think this business would have a shelf life longer than a few years. It has not proven the test of time it has not demonstrated a long enough track record. 

It is not to say that this new start-up will not be a long-time player. It might very well be the next Google. 

What the Lindy Effect tells us is to be skeptical of claims of hype and the freshness of new. 

This is why Bitcoin will outlast the new altcoins coming to the market every day. Why Apple will still be making new devices people stand in line to buy 30 years from now. 

Or why slight calorie deficits and moderate levels of exercise 5 days a week is the best, most consistent way to lose weight and new fad diets come and go through the ages. 

The Lindy Effect is a mental model we can use to evaluate ideas and concepts and see through the hype. 

There is a reason Tiffany's is a trusted brand and Ford still makes trucks. These companies have withstood the test of time through booms and busts. The likelihood of Tiffany's being in business 100 years from now is greater than a new jewelry company being in business 100 years from now with only a few years of operations under their belt. 

It is not to say any of these are certainties but with regression always going to mean we can confidently estimate with some level of certainty this is more likely an outcome. 

The Lindy Effect helps sort through the hype and shiny new objects and see the realities more clearly.