Reasoning from First Principles: How to Master Solving Hard Problems

Read time —
7 Minutes
Last updated
March 26, 2024

When I look back, I know reasoning from first principles was how I solved the hard problems facing me. It wasn't easy, because most people can't think from first principles. Most people have a top-down approach that only lets them see the effect, not the cause.

Working in business means thinking differently. By nature of the role, not everything will work as it should. Complexity creates problems. And it is here you either win or lose opportunities.

Customers aren't impressed with temporary solutions. In the short term, it fixes the pain, but it doesn't stop the problem from occurring again. And the bigger the customer, the more adverse they are to risk. They know the root cause and an explanation demonstrates understanding. These are the foundations of a proper solution.

Let's forget temporary fixes, and instead use a framework for finding the true problem. I will explain how to reason from first principles and give you some powerful examples of it in action.

This article covers:

What is Reasoning from First Principles?

Reasoning from first principles is a method of problem-solving. You break problems down into their most basic, foundational elements. By understanding these core truths, you can reassemble them to create innovative solutions. This framework encourages deep questioning and critical thinking. It takes you away from assumptive thinking.

How to Reason from First Principles

Reasoning from first principles is like going down a rabbit hole to the earth's core. When you return through the warren it's from a different — quicker — way to the one you descended.

So, what does this framework look like?

  1. List Assumptions: Write down all the beliefs you have about the problem.
  2. Question Assumptions: Challenge each assumption to see if it’s necessary. Remove what isn't.
  3. Fundamental Truths: Identify what you know for sure about the problem—undeniable facts.
  4. Rebuild the Problem: Using only these truths, reconstruct the task towards the problem.
  5. Innovate: Now, think creatively. How can you solve the problem from this new perspective?

Every step is critical. Finding assumptions — and then questioning them reveals add-ons and false beliefs. It is when we assume that false expectations appear. Before you know it, they become truths you'll hang your hats on.

The innovation part is where entrepreneurs make giant leaps. They don't just understand the first principles of their niche, they understand others. This is clear in the examples below.

But first, a warning.

How First Principles Fails — Understanding

There is a danger with thinking from first principles. As I explained, to reason from first principles, you first need to get those basic elements.

In an era where mental models are fashionable, first principles thinking has become a buzzword.

What follows are those who think they understand, but don't. They accept assumptions and opinions over fundamentals.

Let's face it, asking questions about what we think we know reveals a perceived weakness. Questions go unasked in the face of what we believe. For some, it is easier to look top-down and deal with the effect.

In business, problems attract fire-fighters. They see the effect of the problem as a fire and work like mad to put the fire out. What they don't do is establish what the cause of the fire was.

Examples of Reasoning from First Principles

Everyone knows Elon Musk. We also know Elon is a successful businessman who reasons from first principles. There are countless examples of Elon using this framework.

From grasping the fundamental principles of flying in space or working with batteries. Elon can reason from these points to reinvent what’s gone before. Space X, developed reusable rockets to dramatically reduce the cost of space flight.

Seizing the language of first principles is easy.

But here is the thing. When you look for examples of first principles thinking, it’s hard. Yes, we know about Elon, of course.

But where else are there examples?

I found several involving Nick Kokonas. He was the CEO of Tock, and the co-owner of Alinea, Next, and The Aviary. Interviewed twice on The Tim Ferriss Podcast, Nick also talked with Patrick O'Shaughnessy on his Colossus podcast. Below is my narrative from those interviews.

Tuesday is not Saturday

Grant Achatz, the head chef and Nick's partner became ill with cancer. It resulted in Nick taking a more active role in the restaurant's operations.

An observant guy, Nick noticed empty tables on a Tuesday evening. He also saw overbooking on a Saturday night.

“Why?” was the simple question he asked.

No one could adequately explain. That was the restaurant trade for you, was one explanation.

As he searched for answers, he began to learn what was happening. Demand for tables on Fridays and Saturdays was massive (The Aviary is a high-end restaurant). Bookings went on for weeks ahead. But some customers wouldn’t turn up, leaving empty tables and lost revenue.

A customer's only commitment was a verbal reservation. It meant if something came up for them, it was easy not to turn up.

Some were so keen to get a reservation, that they would book for more than their party. A customer would phone to book a table for two, only to discover a table of six wasn't reserved. Then they would book it and then turn up as a party of two.

To compensate, the restaurant would overbook. Saturday's were chaos, Tuesday's, the complete opposite. The lost revenue from seeing four empty seats was frustrating, to put it mildly.

Clearing the assumptions left a few fundamental truths. But, within the list, two basic facts became clear to Nick.

  1. Customers could book without commitment.
  2. Weekdays were not the same as weekends.

It was clear that these truths needed innovation. Rebuilding from first principles created the same issues. It was a double-edged problem. Lower revenue for the business and a poor experience for the customer.

The beginning of Tock

Nick now understood the fundamental truths.

He knew the first principles and now he could reason from them.

Quite simply, this was a supply and demand problem.

Reasoning from first principles enabled Nick to copy other supply and demand businesses. Nick could see his restaurant was no different from a theatre selling tickets. In a theatre, the better the view, the more the seats cost. Applying the same logic in a restaurant, the busier the night, the more a table should cost.

Conversely, with less demand, the cheaper the table could be.

The other opportunity Nick could see was prepayment. When you go to the theatre, you pay upfront for your seat, not after the show. And you still pay, regardless of whether you show up or not.

So, Nick opted to build an online booking system. It would enable customers to book online — and pay a deposit — to secure their table. Dynamic pricing allowed the restaurant to price according to demand. Tuesdays were cheaper than Saturdays, and so on.

Customers having skin in the game — paying a deposit to secure their table — changed everything.

Empty tables became a thing of the past. Occupancy rates achieved new heights not seen in the industry. It not only led Nick to increase seating occupancy at The Aviary, but it also turned the cash flow model on its head.

Oh, and it also led Nick to create Tock, a software system he could license to other restaurants to use.

Food Costs Money

With reservations taking upfront payments, the business was now cash-rich. Instead, of collecting payment at the end of the meal, the restaurant had a huge chunk of it paid in advance.

Nick began thinking about how they could use this to their advantage.

Restaurant suppliers offered credit terms to their customers. For some, payment terms were 120 days net. 4 months after they had supplied. With the cash in the bank, Nick contacted a meat supplier and asked him a question.

“What the price be if I paid you in advance for the next four months' meat orders?”

“I’ll get back to you.” came the reply.

When the reply came, it blew Nick away. The price was now $18 a kilo, down from $34 per kilo, which was nearly half. “I’ll pay you $20, if you tell me why”, Nick wanted to know.

The answer lay in the hidden cost of selling meat.

Once beef went past a certain age, price reductions occurred to help sell it or dispose of it. With the security of the payment and supply, the disposal costs became irrelevant.

Of course, Nick was quick to try this with other suppliers. The restaurant's food costs tumbled, increasing margins significantly.

Reasoning from First Principles

I find this story fascinating for many reasons.

The issue of occupancy haunts every restaurant owner and entrepreneur. And yet, everyone lets the assumptions go unchallenged. The customer is king, so the saying goes. But when you challenge those assumptions, things change. Truths reveal themselves.

As Einstein said, you can't solve problems with the same thinking that created them.

So, when you have a broken model, you have to understand the foundational elements. You need to be able to see them in their simplest form. Viewing occupancy as supply and demand gives you a first principle frame. One that becomes transferrable. And when you see it, you can't unsee it.

I think it makes for a remarkable story. It also highlights the opportunity that comes from reasoning from first principles.

We all marvel at first principles thinking. We lap up the wisdom which flows from entrepreneurs like Elon Musk and Nick Kokonas, as they use this powerful way of thinking.

But then, we ignore the hard part.

We assume we understand. We don’t question our assumptions or what others are telling us. Instead, we try and solve problems without understanding the underlying principles.

To reason from first principles, you first must understand what they are. This means — as Elon puts it — boiling things down to their fundamental truths.

The challenge we all face is we think we know those truths already. So, when we reason from them, we’re reasoning by analogy, not first principles. It is how we end up saying things like “We’ve always done it this way.”

We accept what’s gone before as fact.

And that’s the crux of me writing this. If you want to reason from first principles, first, you must understand.

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