Bart de Langhe

Stefano Puntoni

Richard Larrick

<article-ideainbrief class="article-ideainbrief">
 <h4 class="ideainbrief-title">In Brief</h4>
 <div class="ideainbrief-contents">
  <h5>The Problem</h5>
  <p>People expect that relationships between variables and outcomes will be linear. Often they are: The amount of data an iPad will hold increases at the same rate as its storage capacity. But often they are not: The time savings from upgrading an internet broadband connection get smaller and smaller as download speed increases.</p>
  <h5>The Challenge</h5>
  <p>How can you overcome the inclination to think linearly so that you don’t make poor business decisions when nonlinear phenomena are in play?</p>
  <h5>The Solution</h5>
  <p>First you need to understand four types of nonlinear relationships and how linear thinking produces errors in judgment in these situations. Then you can use data visualization to see whether and how relationships in your environment are nonlinear, which will help you make choices that maximize your desired outcome.</p>
 </div>
</article-ideainbrief><p>Test yourself with this word problem: Imagine you’re responsible for your company’s car fleet. You manage two models, an SUV that gets 10 miles to the gallon and a sedan that gets 20. The fleet has equal numbers of each, and all the cars travel 10,000 miles a year. You have enough capital to replace one model with more-fuel-efficient vehicles to lower operational costs and help meet sustainability goals.</p>

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<p>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.</p>
<p>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.</p>
<p>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&#8217;t recognize when they&#8217;re in play, you&#8217;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 &#8212; and then make choices that maximize your desired outcome.</p>

Linear Thinking in a Nonlinear World

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.

Linear Thinking in a Nonlinear World

Summary.

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