Until Tesla began developing battery packs, battery packs were very expensive at $600 per Kilowatt hour (kWh). In tackling this problem, Elon Musk illustrates the difference between reasoning by analogy vs. reasoning by first principles. The normal way to think about battery packs would be to reason by analogy and say – we buy battery packs at this price because that’s what other people are doing.
With a first principles approach, however, you would ask – what do we know for sure is true? Then, reason up from there. So, Musk and team asked – what are batteries made of? (Cobalt, Nickel, Steel can, etc.) and then asked – what is the value of these constituents in the London metal exchange? It turns out that these constituents cost just $80/kWH.
By using a similar first principles approach, Musk realized that rockets were obscenely expensive because they used parts and technology that had been designed in the 1960s. The constituents of a rocket could be bought in a commodity market today for 2% of the typical price. Cue: SpaceX.
It’s computationally easier to reason by analogy and if you tried to reason from first principles all the time, you wouldn’t be able to get through your day. But, when you’re trying to do something new and complicated, that is the way to do it because analogies are not necessarily perfect and they’re relying on things that have already occurred, so, if you’re trying to make something new then it’s not a great way to go. – Elon Musk