Last week, I talked about how first principles thinking fails. This week, I go deep into one specific example: commoncog.com/blog/cash-flow
(Yes, the title is not a mistake ;-)
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The piece is long because I had to bootstrap an intuitive understanding of cash flows. If you have a finance background, you'll find this rather boring (and terribly basic!)
But I wanted to demonstrate that not understanding a SINGLE axiom might lead to a mistaken conclusion.
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A surprising number of comments about the post are on logic problems with the original argument (‘Startups Shouldn’t Raise Money’).
Two points:
1) if you steelman the argument, it’s actually quite reasonable. I can see where the author is coming from.
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2) The main issue I have, though, is that it’s not even worth it to engage the argument on its own terms. My assertion is that the entire framing isn’t as useful as if you start from the ‘first principle’ of cash flow. And this takes actual business experience to know.
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Similarly, when you lack experience, it’s common to frame some analysis in terms of a ‘weird’ set of base principles. The right response in such a situation isn’t to nitpick the argument, but to toss it ALL out. Just reject the framing altogether.
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Maybe I lack experience...
But, as a mental model, first principles thinking helps you solve problems by
1. Understanding a problem down to its basic elements
2. Use the understanding to find an alternative solution
Does experience negate step 1?
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Yup! At least whenever I've tried it, I've found it totally possible to break things down to the 'wrong' set of 'basic elements'.
The blog posts always make it seem straightforward. But in practice, it's a lot trickier to know how to break things down.
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