Finance is a subject that often leaves us feeling confused and mind-boggled. But is managing finance that difficult?
Thus, we bring you a simple concept that will help you break down complex problems to find solutions.
The First Principles Thinking
The first principles thinking or first principles reasoning is a concept commonly used by great minds like inventor Johannes Gutenberg, the ancient philosopher Aristotle, and, more recently, by Elon Musk, to arrive at simple solutions to problems.
The idea is to dig deep and find out the root cause of the problem. You then solve each one of the problems until you don’t have a problem anymore. It also reinforces the concept of thinking for yourself.
First Principles thinking encourages you to “think like a scientist.” Just as scientists break down everything to the most basic truths or fundamental facts, we must do the same with our problems. Instead of looking at the big picture, we should go into the details and question every part of the assumption and problem. The key is to spend more time understanding your problem, to find the most effective solution.
Albert Einstein famously said, “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”
Therefore, by applying the first principles of reasoning, you not just arrive at the answer, but it also enables you to arrive at the most compelling truth as well.
For example, When Elon Musk was on a quest to launch his rocket to space, he approached several aerospace manufacturers. He found out the cost of purchasing a rocket was unbelievably high. Now, this was a problem. So he asked the most fundamental questions:
- What are my alternatives?
- What does it take to build a rocket?
- What do I need to build one?
- What is the cost of those materials?
So and so forth.
This led to him launching SpaceX. His very own aerospace company.
This simply was the most effective solution, and he would’ve never thought of this unless he broke the problem down to the most basic level.
In reality, you may not have to go to this extreme to arrive at a solution. Just break through the surface of the problem and ask a few questions, and you should be on your way to finding the best solution!
First Principles Thinking In Personal Finance
First-principles can be applied to finance in various ways. But just to understand how to use this concept in personal finance, let’s look at a typical financial problem and attempt to solve it:
PROBLEM: I am not able to save any money, no matter how hard I work!
STEP 1: Write down your current assumptions about the problem
Assumptions here basically refers to what you believe is the problem. Think about various hurdles that are posing as problems for you. Write it down. The key is to spend time thinking and understanding your problem better.
- I have to live a boring life to save money and spend on nothing.
- I have to work 24*7 to earn enough to save money.
- I’ve tried everything to save money.
Now you know what your thoughts about the problem are.
STEP 2: Break down the problem to its roots
Next, you need to boil the problems down to its roots. To break down the assumptions of the problem, ask questions. Ask yourself why, how, and why not. These questions will be fundamental to arriving at the solution.
- How much do I earn?
- How much do I want to save?
- Where am I spending my money?
- On what do I want to spend my money on?
There could be several such questions in your mind, write them all down.
STEP 3: Give multiple answers to every question
Now that you have several questions, answer them yourself. When you learn how much you earn, followed by how much you spend and where and how your money is currently being spent, you are bound to reach a simple solution.
For instance, when you answer the questions mentioned above, you might realize that you are spending more than you intend by ordering food online. The easy solution is to start cooking at home, and this, in turn, could begin to solve your actual problem of wanting to save money. Or you might realize that you spend just the right amount, yet you aren’t able to save, so maybe you need to switch to a better paying job or find a side hustle. Alternatively, you could also invest a small part of your money in multiplying your existing savings.
There is such a thing as the “right” answer, as long as it is ethical and legal, of course. As you answer each fundamental question, voila! You will have arrived at one or many solutions for your original problem! This, in turn, will solve the initial problem – which in this case was not being able to save any money.
It’s as simple as that!
The first principles thinking can be applied to any problem, not necessarily just finance. It could be business-related, personal, or anything under the sky. It’s all about simplifying and solving, just like math or even physics! However, always remember what Elon Musk said, “Good ideas are always crazy until they’re not.”
Think differently, and keep solving!