Saturday, December 19, 2009

Critical Thinking -- Stein's Law

Bernie Madhoff--former chairman of the NASDAQ and recently admitted Ponzi scheme engineer, Ken Lay--founder of Enron, and Tiger Woods--professional golfer and branding empire -- What do they all have in common?  They were all successful millionaire businessmen with one major flaw --- they all apparently never heard of:

Stein's Law:  "Things that can't go on forever, don't."  (loose translation). According to Wikipedia,  Herbert Stein (1916-1999) was chairman of the Council of Economic Advisors under Presidents Nixon and Ford.     Stein's law is not often quoted and is generally not too well known ...... it's  less than a full page on Wikipedia.  Even though the intent of Stein's law was originally probably directed towards economic issues, it can easily be applied to other, more common situations.    Don't underestimate it -- it is a powerful critical thinking tool-- and simple!

Empires, world powers, governments--nothing lasts forever.  Looking back at the top 100 companies from 100 years ago--probably only 5 are still in existence.  The tech bubble of 2001, the housing bubble of 2008, credit default swaps -- none of them could go on forever--and they didn't.   A highly visible Tiger Woods, having multiple extramarital affairs--he thought that he would remain under the radar of a scandal thirsty tabloid press  --forever?

We all want to ride the wave of success--even though, deep down inside, we know that in some cases, it will inevitably come to an end.  We all muttered under our breath that housing prices "can't keep going up forever".  How many of us acted on it?  How many ignored it and kept on "flipping" houses?    How far are we willing to ride the next wave?   We need to develop more trust and confidence in Stein's law so we don't get drawn into the next bubble du jour.   Once again, it's not a lack of data that results in our bad decisions, it's our own human bias.

I talk a lot about the need to have a "mental drop down menu" -- a menu of quick use critical thinking tools -- a list of mental tools that visually drop down  like a Windows menu.  Keeping these tools simple, makes it much more likely they will magically appear just at the time we need them.   One of the simplest to add to your toolbox is: 

Stein's Law:  "Trends that can't continue, won't" 

Anyone have any other examples ??

No comments: