Linear thinking in a nonlinear world
De Langhe, Bart Puntoni, Stefano Larrick, Richard
De Langhe, Bart
Puntoni, Stefano
Larrick, Richard
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Publication Type
Journal article with impact factor
Editor
Supervisor
Publication Year
2017
Journal
Harvard Business Review
Book
Publication Volume
95
Publication Issue
3
Publication Begin page
130
Publication End page
139
Publication NUmber of pages
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Abstract
The human brain likes simple straight lines. As a result, people tend to expect that relationships between variables and outcomes will be linear. Often this is the case: The amount of data an iPad will hold increases at the same rate as its storage capacity. But frequently relationships are not linear: The time savings from upgrading a broadband connection get smaller and smaller as download speed increases. Would it surprise you to know that upgrading a car from 10 MPG to 20 MPG saves more gas than upgrading from 20 MPG to 50 MPG? Because it does. As fuel efficiency increases, gas consumption falls sharply at first and then more gradually. This is just one of four nonlinear patterns the authors identify in their article. Nonlinear phenomena are all around in business: in the relationship between price, volume, and profits; between retention rate and customer lifetime value; between search rankings and sales. If you don’t recognize when they’re in play, you’re likely to make poor decisions. But if you map out relationships in data visualizations, you can actually see whether they are nonlinear and how—and then make choices that maximize your desired outcome.
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Keywords
Linear Statistical Models, Corporate Profits, Sales, Consumers, Thought and Thinking, Cognitive Bias, Psychology