A Set of Useful Tools

Bertrand Russell considered the basic purpose of education to be the “formation, by means of instruction, of certain mental habits and a certain outlook on life and the world.”

I believe there is a small set of very powerful tools, or mental models, that can help us comprehend the dynamic world we live in. It is surprising that such a complex and complicated world is amenable to comprehension using only a small set of tools. But it is indeed true. The tools that I refer to are immensely powerful and flexible. That these tools exist is a powerful testimony to the ingenuity of humans. Seemingly innocuous and simple ideas have profound implications.

Take, for instance, the universal tool called arithmetic. Simple enough that even a five-year old can be taught to use it with ease. But profoundly powerful in the hands of a person who is trying to make sense of a world enormously complicated but often enough yields to a bit of arithmetic. Not using this tool is dangerous. Those who refuse to do arithmetic are doomed to speak nonsense. Not just speak nonsense, but wreak havoc by implementing policies that are patently harmful.

You want to figure out the world, then be prepared to do some figuring (arithmetic.)

It is important to keep in mind that tools are tools, and while you can get an instruction manual of how to use the tool and learn to use it, the more difficult bit is to learn when to use it. That is what separates the novices from the experts.

In my toolkit, I treasure a bunch of tools. I don’t claim that my toolkit is complete, of course. But I am fairly certain that what I have gathered so far must be part of a complete set. Gathering this set has been a delightful experience with its “aha!” moments. It is a profoundly moving experience when something that has been at the back of your mind begging for an explanation and then you one day find the tool that makes it all make sense. My response is usually to jump up and get all worked up and want to grab people by their shoulders and shake them and say, “Can’t you see how great this idea is?”

My greatest regret is that there are people all over the world with perfectly functioning brains who have no idea that these amazing tools exist. It is as if they have been given very powerful processors by evolution but they have not got the great software which is open source and free. With only a little mental exertion, all these tools can be internalized. I am an unabashed hedonist and I claim that the joy of using these tools compares favorably to any other pleasures one is capable of experiencing.

Our current educational system does a mighty poor job of equipping people with these tools. Why this is so is a matter that I will leave for a later date. For now, I will list a few that I find especially handy and delight in using them to make sense of the world. So in no particular order, here are some that I learnt while studying economics.

The tragedy of the commons. Want to figure out why the world is a mess, learn this one. It also will help you figure out a way out of the mess, with particular regard to population and pollution.

The Prisoner’s Dilemma. Nothing beats this one when it comes to understanding why we end up screwing up when a perfectly reasonable outcome is possible but unattainable. Understanding the PD (and all its variations) is the first step to solving some of our most pressing problems, from global disarmament to terrorism.

The Theory of the Second Best. Developed in the context of trade, it is an idea which has a much wider applicability. When you wonder how well-intentioned interventions go wrong, you can pull out this tool and figure out the real problem.

The Idea of Markets. The unreasonable effectiveness of markets for allocating resources is as astonishing as it is counterintuitive.

The Theory of Comparative Advantage. When I first learnt about it during a course in international trade, I was blown away by its simple profundity. But be warned that its simplicity is deceptive. It is a very tricky tool and is often clumsily wielded even by some otherwise sane people.

Regression to the Mean. I list it under economics although it should correctly belong to the “statistics” group. I learnt it while studying economics. Paradoxes and puzzles often rely on the ignorance of this idea for their power.

Well, that is all for now. The next time, I will take the last tool and analyze a recent column (subscribers only) which appeared in the magazine Fortune in which Geoffry Colvin asks the question Can Americans Compete?.

9 thoughts on “A Set of Useful Tools

  1. gawker Wednesday July 13, 2005 / 7:41 pm

    I think the state of our education system depends on how you look at it. I think our education system’s goal is to equip the student with knowledge that will enable him to earn a living. That means placing a lot of emphasis on the sciences. That is why Indians who come here to the United States feel they are way way ahead of the natives with respect to science and math. But in the States, the education system strives to create a well rounded individual with knowledge in all areas of life. But, it might not equip him with the tools needed to earn a living. Both education systems are a product of the need of society in each country. Thats what I think


  2. fasterfene Thursday July 14, 2005 / 4:49 pm

    hmm, what about the concepts of
    marginal utility/law of diminishing returns/opportunity cost,
    bargaining theory


  3. Atanu Dey Thursday July 14, 2005 / 6:23 pm

    Ashish, thanks for recommending Charlie Munger’s speech. Definitely worth reading.

    fasterfene, I was coming to opportunity cost. Some time ago, I wrote a piece on the importance of understanding the concept of opportunity cost. The idea of marginal analysis is of course important but more to the specialist than to the average educated person. Law of diminshing returns? Certainly.


  4. Ashish Hanwadikar Thursday July 14, 2005 / 9:57 pm

    If we understand the concept of opportunity costs then dichotomy between means and ends disappears. There are no means; we only have ends. When we choose to achieve one end, we have to give up another. Kuch pane ke liya kuch khona padata hai!


  5. fasterfene Friday July 15, 2005 / 12:02 pm

    Let me explain, I find in india, people are just jumping on capitalism bandwagon. And there is a growing tendancy to maximise the financial benifits.

    Marginal utility is a beautiful concept… that for maximum satisfaction/contentment, one needs to not just maximise the input of only a few of the components (money in this case) but rather see to it that the entire experience as a whole is maximised.

    So, maybe to let go maximising the financial aspect in favour of another component (as intangible as maybe family) to ultimately have optimum contentment.

    BTW, Atanu, your writing is quite interesting. Thanks for sharing your unique perspective.


  6. fullymubbed Friday July 15, 2005 / 2:40 pm

    “can Americans compete?”

    I think Indians should start thinking about a few things too, like..

    – Can we compete once we lose the offshore low-cost advantage?
    – Can we step up our technologies to compete with innovative American companies?


  7. Kshitij Chandan Monday August 22, 2005 / 7:48 pm

    These models were a real good read, I found them very interesting as well as useful. If you have more in the list, please blog them too 🙂


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