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I often find that my understanding of the world is strongly informed by a few key concepts. For example, I've repeatedly found the concept of opportunity cost to be a useful frame. My previous post on privileging the question is in some sense about the opportunity cost of paying attention to certain kinds of questions (namely that you don't get to use that attention on other kinds of questions). Efficient charity can also be thought of in terms of the opportunity cost of donating inefficiently to charity. I've also found the concept of incentive structure very useful for thinking about the behavior of groups of people in aggregate (see perverse incentive).
I'd like people to use this thread to post examples of concepts they've found particularly useful for understanding the world. I'm personally more interested in concepts that don't come from the Sequences, but comments describing a concept from the Sequences and explaining why you've found it useful may help people new to the Sequences. ("Useful" should be interpreted broadly: a concept specific to a particular field might be useful more generally as a metaphor.)
Credibility also can be useful. Most importantly: Are the threats, precommitments and offers you make credible? Could and would you actually go through with them if you found yourself in a situation where the conditions you stated are fulfilled? If you arrange the exchange in such a way that acting on your words imposes a low cost (better yet: no cost) on yourself, you'll gain lots of bargaining power.
A quick example: When educating children, misbehaviour has to have consequences. Now, you have to choose these punishments in such a way that they impose little organizational and emotional cost on yourself while being serious enough that kids want to avoid them (but, of course, also not too serious ;)). If done correctly, you'll have to punish a few children a few times, but then they will have learned. If done incorrectly, you continuously threaten with punishment, but there is no clear line where you have to act, and put in such a situation you don't even want to punish them, so the children will continue to misbehave.
Unfortunately, this quick example is something that teachers and school administration often don't get. If you make a threat for misbehavior, you must follow through, otherwise you have seriously undermined your and every other teacher's credibility, and then you will predictably get misbehavior on almost every lesson since now.
Unfortunately, the reality is often that teachers make empty threats, hoping that using big words will scare students, and when this does not work, they rationalize not following through by "they are just children" and &qu... (read more)