A few weeks ago, during a casual conversation with an old friend who happens to be a seasoned investor, I was met with an unexpected revelation. Sipping his coffee, he remarked,
“You know, my biggest wins have often come down to some simple rules of thumb, followed consistently.”
That statement made me pause.
But as I thought about it, I realized that his revelation was neither unique nor unusual.
Over the years, I've observed countless professionals lean on these principles — these heuristics or “rules of thumb.” From seasoned doctors to savvy investors, these simple yet profound heuristics guide their decisions, even when faced with seemingly complex situations.
(Also, have you noticed that a lot of Stoa Daily pieces center around specific rules of thumb? If you haven't, you'll notice them after reading this piece.)
So, what exactly is a rule of thumb?
“Knowledge works through rules of thumb: flexible guides to action that developed through trial and error and over long experience and observation. Rules of thumb (or, in the language of the artificial-intelligence community, heuristics) are shortcuts to solutions to new problems that resemble problems previously solved by experienced workers. Those with knowledge see known patterns in new situations and can respond appropriately. They don't have to build an answer from scratch every time. So knowledge offers speed; it allows its possessors to deal with situations quickly, even some very complex ones that would baffle a novice.”
— From the book Working Knowledge, by Larry Prusak and Tom Davenport
A rule of thumb refers to an approximate method for doing something, based on practical experience rather than theory. It's a type of heuristic: usually, a very simple calculation that captures knowledge of what tends to work and holds true in most scenarios.
Rules of thumb do not necessarily replace more rigorous analysis when it comes to detailed design, but their condensation of knowledge gained from experience quickly leads you to the “probably workable” region of the design space, especially when you have only started thinking about a problem.
For example, think about the famous “80/20 rule” or the Pareto Principle, often used in business and economics. This simple heuristic states that roughly 80% of the effects come from 20% of the causes. Whether it's analyzing sales data, prioritizing tasks, or allocating resources, this rule offers a quick and effective way to navigate the inherent complexity.
Similarly, doctors often use the rule of thumb,
“When you hear hoofbeats, think horses, not zebras,”
reminding themselves to first consider common diagnoses before jumping to rare conditions. This rule helps them streamline their decision-making process.
But why is it that practitioners, more than academics and theorists, lean heavily on these rules of thumb?
The answer lies in the difference between the two realms: the world of hands-on practice and the world of theoretical knowledge.
Theory, as its name suggests, dwells in the domain of ideas. It seeks to understand and explain phenomena in a systematic, often abstract, way. Theoretical knowledge is vital, no doubt, but it often doesn't account for the myriad of variables and unique circumstances that pop up in the real world.
On the other hand, practice is all about action and adaptation. Practitioners live in a world where theory meets reality, a world filled with unexpected turns, variable conditions, and the pressing need for immediate, effective action.
This is where rules of thumb truly shine. They allow practitioners to apply their experience swiftly and efficiently, bridging the gap between theory and practice, and making sense of the complexity that defines their everyday reality.
Consider, for instance, Charlie Munger often speaking about using a mental checklist when evaluating a business opportunity. This checklist isn't merely a list of theoretical concepts. Instead, it's a set of guiding principles, each forged from years of investing experience — a set of rules of thumb that have helped him make sound judgments quickly and effectively.
Now, I'm not saying that theory has no place in practical fields. Quite the opposite. A strong theoretical base provides the foundation upon which practitioners can build their unique set of rules of thumb.
But at the end of the day, when faced with a real-world decision under time pressure, it's these tried and tested heuristics that often make the difference between an effective decision and a missed opportunity.
Rules of thumb are a practitioner's best friend.
The magic lies in their ability to condense and encapsulate a plethora of past experiences, observations, and lessons learned into a simple, actionable format. This isn't an overnight phenomenon. Rather, it's a gradual process that unfolds over years of practice and learning.
Every rule of thumb carries within it countless hours of trial and error, numerous successful and failed ventures, and a lifetime of learning from the school of hard knocks. They are like compact guidebooks, each page filled with invaluable insights gained from the real world.
For instance, take a common rule of thumb used in the real estate industry:
“Buy the worst house in the best neighborhood.”
This simple principle encapsulates a wealth of wisdom about property value, neighborhood development, and investment potential. It implies that the value of a property is not solely dependent on the property itself, but also on the surrounding neighborhood. It suggests that it's better to buy a less appealing house in a sought-after neighborhood as it is likely to appreciate in value due to its location.
The creation of such a rule has likely been informed by countless real-world experiences of property investors and real estate professionals. It’s a succinct distillation of practical wisdom that’s been handed down through generations.
Similarly, take photography, where the “Rule of Thirds” is an often-used rule of thumb. This rule suggests an image should be divided into nine equal parts by two equally spaced horizontal lines and two equally spaced vertical lines, and that important compositional elements should be placed along these lines or their intersections.This rule of thumb provides you with an immediate and easy guide to composing visually pleasing photographs. It's a way to encapsulate centuries of artistic knowledge and practice about visual balance and interest into a simple instruction.
Likewise, every field, every practice, has its own set of rules of thumb that are borne out of the collective experience of its practitioners.
Consequently, these rules of thumb also allow easy transfer of know-how from experts to novices.
You see, the beauty of rules of thumb is that they serve as bridges between the experienced and the inexperienced. They provide a structured framework within which novices can start to navigate their new terrain. They act as a compass, helping newcomers orient themselves in an unfamiliar landscape.
Imagine a young chef, just starting in a busy kitchen. The head chef might pass on the rule of thumb:
“A falling knife has no handle.”
While it’s a quirky phrase, it embodies decades of kitchen safety wisdom in just a few words. It advises the novice to let a falling knife land and not attempt to catch it, avoiding potential injuries. This simple rule can act as an effective and immediate lesson in safety.
Similarly, a novice investor might learn the rule of thumb,
“Don't put all your eggs in one basket.”
It’s a basic principle of investment diversification, a foundational concept that every investor must grasp. Without the context of countless investment outcomes or deep financial understanding, this rule still offers a valuable guiding principle to mitigate risk.
Most importantly, this transfer of rules of thumb is not just about sharing shortcuts to solutions. It's about passing down a tradition of wisdom, fostering a new generation of experts, and ensuring the continuity of practical but undocumented and tacit know-how within a certain domain of practice.
The best rules of thumb are not something you'll find in textbooks. Here are two examples of rules of thumb for hiring that you probably won't find in any textbook:
“As a rule of thumb, you can make a nice place to work, or you can promise people they’ll get rich quick. But you have to do one of those, or you won’t be able to hire.”
— Joel Spolsky
“You can train someone to do a job well but you can’t train someone to care.”
— forgor 💀
Leveraging Rules of Thumb as a Novice
As a novice investor, you might feel overwhelmed by the intricacies of the stock market. But with a rule of thumb like “Diversify your portfolio”, you can make an informed start, even without knowing much about why diversification is the safest strategy in the long term.
This is all the more important considering that in the early stages of learning, mistakes are common. While they are a great source of learning, some blunders can be discouraging, even detrimental. Rules of thumb serve as guardrails, helping you avoid common pitfalls.
And while rules of thumb provide guidance, they also leave room for exploration. You can use them as a starting point, and then venture out, experiment, and discover your own rules.
For instance, a budding copywriter could start with the rules “Show, don't tell” or “Or avoid writing in passive voice” or “Use simple sentences” as decent rules that they won't go wrong with in most situations. They can then evolve their unique style over time.
When followed consistently, rules of thumb can have a significant impact on the quality of your decision-making in the long term.
At face value, rules of thumb may seem almost too simplistic to bear significant results. But if followed consistently, and with proper judgment of course, they can lead to remarkable outcomes, a sort of compound effect that gathers momentum and leads to drastically better outcomes over the course of a few decades.
For example, one rule of thumb that's often preached in the realm of personal finance is
“Pay yourself first.”
This means that before you pay your bills, buy groceries, or even have a night out, set aside a portion of your income for savings — say 20%. At first glance, it may seem like a small step, but done consistently over time, it can lead to significant wealth accumulation.
Let's say you save ₹10,000 each month. In a year, that amounts to ₹1,20,000. Over 30 years, assuming a modest interest rate of 5%, this would yield approximately ₹80 lakh. A simple rule, but the results, when applied consistently over a long time, are far from insignificant!
Or consider the rule of thumb
“Move for at least 30 minutes a day.”
It doesn't specify any intense workout regimen or strict diet. Just a commitment to stay active daily. Initially, the changes in your fitness levels may not be stark. But fast-forward a few years, and this simple rule could translate into maintaining a healthy weight, improved cardiovascular health, stronger muscles and bones, and even better mental health.
Also, here's something interesting I read about recently:
In medicine, they have a simplistic rule of thumb called “ABC”, which stands for “Airway, Breathing, Circulation.”
This mnemonic is used as a guide in life-saving procedures, prioritizing the steps healthcare providers should take in emergency situations. It embodies the knowledge that ensuring a patient's airway, breathing, and circulation (in that order) are functional is crucial in many emergency medical situations.
Of course, the rule of thumb isn't designed to cover every possible scenario, nor does it take the place of deeper medical knowledge and understanding. However, it serves as a guide for quick decision-making in high-pressure situations, allowing even less experienced practitioners to take meaningful, effective action. Moreover, it also helps transfer this vital knowledge to others, such as trainee medics, paramedics, and even the general public, without requiring them to understand all the underlying medical theory.
In this way, the ABC rule has potentially saved countless lives, even though it sounds way too simple for a doctor.
Finally, rules of thumb are not a substitute for deeper understanding.
“Heuristics are simplified rules of thumb that make things simple and easy to implement. But their main advantage is that the user knows that they are not perfect, just expedient, and is therefore less fooled by their powers. They become dangerous when we forget that.”
― Nassim Nicholas Taleb
Rules of thumb serve as useful guides and shortcuts, but they don't replace the need for thorough knowledge and critical thinking.For instance, an aspiring photographer will quickly hit a wall if they only rely on the Rule of Thirds without understanding light, exposure, depth of field, or the mechanics of their camera. However, it provides a starting point for novices and a tool they can use to create better compositions even as they're learning the nuances of their craft.
One of the main benefits of rules of thumb is their ability to simplify complex situations when venturing into them and serving as a handy guide. However, this can also lead to oversimplification if you're not careful.
A classic example is the marketing rule of thumb that “content is king.” While quality content is undoubtedly important, deploying this rule without considering the specific product, audience, channel, or cultural cues may not deliver the intended results.
Bonus: Interesting examples of rules of thumb used by various founders and businesses
1. Amazon's Two-Pizza Rule
Jeff Bezos, founder of Amazon, has a famous rule of thumb called the “Two-Pizza Rule”. According to this rule, Bezos never organizes a meeting where two pizzas wouldn't be enough to feed the entire group. The goal is to avoid dilution of ideas that often happens in larger meetings and encourage efficient decision-making.
It's a simple rule, but it has contributed to maintaining a culture of agility and innovation at Amazon.
2. Google's 70/20/10 Rule
Google follows a rule of thumb known as the “70/20/10 Rule” for managing its product portfolio. They spend 70% of their time on core business tasks, 20% on projects related to the core business, and 10% on projects unrelated to the current business.
The rule has helped Google diversify and innovate while staying focused on its core business.
3. Berkshire Hathaway's Rule of Buying a Business
Warren Buffett, the chairman and CEO of Berkshire Hathaway, has a rule of thumb he uses when considering buying a business:
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
This rule guides Buffett to invest in companies with durable competitive advantages and has contributed to his enormous success as an investor.
4. The Ritz-Carlton's 10 and 5 Rule
The Ritz-Carlton Hotel Company, known for its exemplary customer service, uses a rule known as the “10 and 5 Rule”.
When a Ritz-Carlton staff member is within ten feet of a guest, they must make eye contact and offer a friendly greeting. When they are within five feet, they must verbally greet the guest.
This simple rule of thumb has helped the Ritz-Carlton maintain an exceptional level of customer service and build a loyal customer base.