Think Better by Identifying and Using Principles
Identifying principles isn't important to every endeavor.
For example, knowing how to properly gap a spark plug or replace
brake pads are things a good mechanic can learn quickly through
experience and practice without much theory. But to design an
engine you need a higher level of thinking. You need to understand
the principles that make a car engine function. Of course you
can be a mechanic and a designer at the same time, but the thinking
that goes into the making of an engine will usually have greater
impact than that which goes into maintaining it (though understanding
the principles involved can certainly help with the latter too).
Okay, so you don't want to either fix car engines nor design
them. But you do want to think more effectively, in ways that
relate to whatever it is that you do want in life. Then you need
to train your mind to think about the principles involved in
things. The consequences of not understanding basic principles
are often made obvious in life in big and small ways. Let's see
how, starting with one of the "small" examples.
Years ago a friend of mine wanted to cool his apartment with
an air conditioner, but he didn't have a window that was suitable
for installation, nor a another easy way to vent the unit to
the outdoors. He thought he could just set the machine in the
middle of the room and it would somehow create coldness that
would then be blown out into the surrounding space.
Most air conditioners work by compressing freon gas, which
gets hot as a result, and then running this high pressure gas
through coils that dissipate the heat (venting it to the outside
air) and condensing it into a liquid, which then evaporates into
gas form again in another set of coils, which causes it to cool.
Air is blown over the cold coils and into the room to cool it.
It then cycles through the same process over and over.
The relevant principle here is that air conditioners transfer
heat. They cannot "uncreate" heat, but only move it.
If they can't transfer it outside, they just remove heat and
add it back to the same air. If you just take heat out, add it
back in, and add the heat created by the motor, the room
gets hotter, not cooler. Had I not been able to convince my friend
of this he may have sat there getting hotter and hotter and perhaps
he would have returned the machine, complaining that it didn't
work.
Thinking without Understanding Important Principles
More Serious Examples
Obviously, a lack of understanding of such simple principles
can lead to discomfort. Another example is people (and countries)
who don't quite get the principle of spending no more than they
make or of investing for the future or planning for unpredictable
circumstances. They get into serious troubles due to their lack
of understanding. Let's look at a more detailed example having
to do with mortgages and foreclosures.
Suppose in the name of "fairness" new laws made
it difficult for mortgage lenders to foreclose on the homes they
lent money for. At first glance, many people would like this
idea. Nobody wants to lose a home nor see others lose theirs.
It seems to many that such laws would be good for families or
anyone buying a house. Unfortunately, this just isn't true, which
becomes clear if you look at the principles involved - especially
the ones that are being ignored or just not understood.
The Important Principles
1. Home lenders lend money to make a profit.
2. They will stop lending if they can't make money at it.
3. Lending involves the risk of loss.
4. That risk is reduced by having the right to take the home
if the loan isn't paid on time.
5. The potential loss of the home through foreclosure makes borrowers
more likely to pay.
6. The more difficult it is to foreclose on the home, the less
willing lenders are to lend.
7. The less lenders lend, the more difficult it is for people
to own homes.
These crucial principles are mostly ignored by those seeking
to "help" people by making foreclosures more difficult.
They answer the question of why any lender would ever risk large
sums of money to make a little interest each month. It is because
they have collateral and the borrower has consequences for not
paying. A house is mortgaged as collateral for a loan. If the
lender can take the house easily when the terms of the loan aren't
met, then the lender can more safely lend the money to buy it.
The buyer, meanwhile, will try hard not to violate the terms
of the agreement if faced with the consequence of losing the
home.
With those principles in mind, let's look again at the idea
of laws making it tough for a lender to take a home. They make
loans riskier for lenders, don't they? A house which the lender
has to fight for years to take (while possibly receiving no payments)
isn't the same kind of collateral as one he can foreclose on
in months. And if a home owner can't lose his home too easily,
the consequences of not paying on time are less severe. We can
safely predict that under such laws there will be more loan delinquencies,
but more importantly, we can predict that lenders will be less
likely to risk their money on such loans.
That, by the way, has been proven true in experience. Several
recent articles in financial magazines reported on the home mortgage
situation in Brazil. It used to be that it was very difficult
for a bank to foreclose on a home and take it. The process took
over ten years as I recall. As you might imagine, there was almost
no mortgage lending industry in the country, making it extremely
difficult for most people to buy a home.
After changes that simplified and shortened the process, there
are suddenly lenders who will finance home purchases. More people
than ever are starting to buy their own homes in Brazil. Of course,
if the foreclosure process is ever reduced in time to a few months,
lenders will probably make it even easier for buyers, offering
lower down payment options, for example.
So are laws "protecting" people from foreclosure
good for them? Experience argues the opposite. If "good"
in this context is defined as the opportunity to have a home
of one's own, then making it legally easy to lose that home is
ironically the best way to go - perhaps a counter-intuitive solution
for those who are not in the habit of looking at the principles
involved in things. The United States, with one of the more streamlined
processes for a lender to foreclose on a home, has one of the
highest rates of home ownership in the world. But if laws made
foreclosure difficult enough, there would be few loans made -
a disastrous consequence of making laws in ignorance of the principles
involved.
Thinking Using Principles
Here is a basic formula for generating new ideas or just new
understandings:
1. Identify the principles involved in a process, event or
thing.
2. Test their validity (ideally by finding supporting evidence,
but at least by logical supposition).
3. Consider or reconsider the subject based on these principles.
4. Look for new solutions or ideas based on your new understanding.
This probably isn't anything new to those who visit this site
or read the brainpower newsletter, but sometimes we need reminding
or a new explanation. Then we need to actually apply and practice
what we know. In this instance you might want to pick out any
issue suggested by the evening news and see if you can find some
important principles that are being overlooked and generate some
new ideas from those. Do this until it becomes a habit. Making
processes like this habitual is how you become a powerful thinker.
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