First Principles Thinking & Analysis: How To Think Like Great Minds

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the most successful minds in the world have one thing in common: they think a lot about how they think. many times, they turn to a framework to help add order to their most important daily decisions and add coherence to their lives.

Elon Musk, Reed Hastings, and a handful of other great entrepreneurs use a framework called first principles to structure their thinking. In this article, we’ll explore why they do it and how you can too.

Recently, I’ve been rereading Ray Dalio’s book Principles, which is just a fantastic book. it’s a book I read about a year ago and it really resonated with the way I was already thinking, but also added more terminology to it. It’s from Ray Dalio, the CEO of Bridgewater, breaking down all the different principles and algorithms he uses in life to execute and manage all the decisions he makes.

You are reading: First principles thinking books

so it made me think a lot more about principles, how to think and how to live according to principles. It got me thinking about first principles theory again, and I’m excited to share my learnings.

elon musk & first principles thinking

I first learned about first principles thinking from elon musk, who I think illustrates this very, very well. In 2002, he began this journey to Mars. the problem he was thinking about was: “we need to get the human population off of one planet and onto a second planet”. Mars was his solution.

He started looking into it, and rockets cost an insane amount of money, upwards of $40, $50, even $65 million for single use rockets that you fire and can’t be used again. and he was thinking, “well, that’s crazy. What can a rocket really consist of? what are the parts?”

then used this framework of physics to start with first principles, and asked, if I break a rocket down into individual components, what is actually there?

I wanted to know what something like building a rocket really was. took it apart, well, there are aerospace-grade aluminum alloys. there is some titanium, copper, carbon fiber.

then asked, what is the value of these materials in the commodity market? and he found that the material cost of a rocket turned out to be only about two percent of the typical price. the markup was all in the manufacturing, the assembly of the parts, the research, the research and development. when he broke down a rocket, it turns out it wasn’t that expensive.

and thus spacex was born out of first principles thinking. he said, “we could do better.” If we can vertically align the entire manufacturing process, buy the materials ourselves, design and build it, we can reduce the price.

then, after much prototyping and testing, they quickly reduced the price to around 10% of the current price, and spacex has dominated the market ever since.

first principles theory focuses on deconstruction

So what first principle thinking really is is deconstructing the problem down to its core elements and building from there.

so what is a first principle? a first principle is just the basic assumption that cannot be reduced further. there are no assumptions about it.

It boils down to the fundamental truth that you can say, “we know this to be true.”

or at least, “we’re reasonably sure this is true”.

here is a thought experiment i found with john boyd that may help explain this concept a bit better. boyd is a famous military strategist and he used a simple framework to explain how to think from first principles. imagine three scenes:

scene one is a motorboat towing a skier behind it.

scene two is a military tank rolling through the desert.

scene three is a bicycle riding down the street.

Now, using first principles thinking, break those three scenes down into their constituent parts, and what do you have?

for the boat: a helmet, a motor, skis.
for the tank: tracks, a cannon, armor.
for the bicycle: wheels, handlebars, gears and seat.

There are several answers here, but one clear answer is a snowmobile. By taking these materials and combining them (tank treads, boat motor and skis, and bike seat and handlebars), you’d have one pretty sweet snowmobile.

and john boyd calls this “snowmobiling”, and it’s an incredibly powerful mental model consisting of observations.

you observe, “hey, what do we have in this problem?” then you perform the deduction on individual truths. so you ask, “what is really here? what is available from the individual components?”

and then you reassemble the parts into a larger whole. I use snowmobiles frequently in the test.

how snowmobiles set great start-ups apart

In startups, if you do the exact same thing as everyone else, there won’t be any margin left. there is no room to create value if you just copy and incrementally do what everyone else does.

They say, “well, this is like something else.” and instead of putting all the mental energy into breaking it down and building it up from there using the first principles approach, they say, “well, it’s like something else, so I’m going to assume it’s pretty similar to that.” /p>

In startups, you see people saying, “We’re the supers of _____.”

and people start and say, “well, uber is a great company and I want to be like uber.” uber already has cars, but what if I take uber’s model and apply it here?

what if you applied it to houses?
what happens if I apply it to online storage?
what if I apply it to anything else?

and that’s why by analogy, and what fails is to break the problem down into basic principles and build from there. instead you should ask:

does the company need an uber model?
does the uber model only work for cars or does it work specifically for cars?
and what is not true of the uber model that should be true of my startup or idea here?

It’s really lazy to just think about it and say, “Hey, we’re the supercar of cars.” it is reason by analogy, and it is really dangerous.

I do it all the time of my life. to really create massive amounts of value, you probably won’t do it by analogy.

innovation versus imitation

Starting as an entrepreneur, I simply imitated. I didn’t really have my own voice. I had no thoughts of my own in this space.

I was really playing a small game and just needed a small reward. I had quit my job. i was working in this campus ministry at the university of missouri, and i needed to make a few thousand a month, just to live on. I started a digital marketing consulting business and it was nothing fancy. I was just copying what other consultants were doing. you can’t just offer the same thing as everyone else, reason by analogy, and say, “hey, that agency looks good. I’m going to do something very, very similar.”

we have to mimic non-essential business functions. we’re not rethinking the wheel of how we run our books or how we do our accounting or how we do customer service. many of these peripheral parts of the company. for things that are not our core offering, we generally look at the big companies and try to do something similar to what they do.

but for our core offering, for our software that helps businesses increase website conversions, we broke it down into basic principles and said, “we’re trying to make people more money. we can do it by increasing rates.” What are the different ways I can increase website conversion rates and make them more money?

and thinking starts from there.

I’ve found that you need to add more innovators to the mix and continue to grow your core business around innovation. in order to innovate, in order to break something down to first principles, you have to really know something.

how we have used first principles thinking to make a big change

We’ve made a big change recently. When I looked at our company about six months ago, this is what I found.

the good:

We had a very caring and talented team. I love our team, and I think our team is one of the best things we have going for us.
We had a wealth of experience in the field of conversion rate optimization and digital marketing.
We had your support and a lot of cash in the bank.
We had a lot of motivation. we are not going anywhere, we are willing to roll up our sleeves, work hard and solve big problems. that’s what we had that was really good.

the not so good:

We had three thousand clients, which is actually pretty good, but they were in a small and volatile market. we were mainly serving small businesses, some of them came and went or closed for the summer. it was just this kind of really volatile non-market, and it didn’t allow us to scale very far.
We had a good but not great product that increased the conversion rate. our nps was around 40 which again is good not great. we wanted more than 50.
we had a high monthly turnover. so no matter what we’ve done over the course of the last two years, we haven’t been able to get our churn rate down to around one to three percent per month. we were able to do a lot of damage on that and we were actually able to improve it a lot, but we couldn’t get to where we wanted to be.
we had what was becoming a painful amount of tech debt in some places. not everywhere, we just made some decisions early on before we knew what the tests would become that became painful to repeat and painful to change.

For me, I stopped and looked back and said we were making a lot of money, profitable, a lot of things looked great, and people were like, ‘hey, this business is great.’

but i realized we should try to build a spaceship to take us to mars.

Like elon, our goal was nothing less than to build this great company. when I stepped back and looked at it, we were flying a pretty good plane that we could keep pushing higher and higher into the sky, but ultimately we wouldn’t and we couldn’t imagine it leaving orbit. we had been adding incremental improvements to the product, the churn had slowed down a bit, the product was getting better, but finally we felt like we were just making a horse faster when what we needed was the quantum leap to create a car.

I broke the concept down into basic principles. I said, “We can’t rebuild this into a rocket, we don’t know how.” I took a step back, examined the pieces and realized that what we were doing was not on the right track.

And when I started sizing up these other companies and these other great startups that we were trying to be similar to, I realized what it takes to be a great startup that creates lasting value in the world.

This is what I came up with:

have an innovative new product that fills a huge need for a huge market.
The product is typically characterized by low customer churn and negative net revenue churn. basically revenue that expands and grows every month, even if you don’t add new customers, an nps score of 50 or higher, and a product market fit score of 40% or higher

so to bring it all together here, there are actually three steps to thinking about first principles.

identify and note your existing assumptions.
break down the problem into its fundamental building blocks.
build new solutions using the first principles there.

Did you like this article? want to hear more of the ideas I’m having as I build the test? Tune in to my founder’s Friday podcast every week.

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