The Fermi Rule: Better be Approximately

Right than Precisely Wrong

What’s the size of the market for razors in China? How many golf balls
does it take to fill a Boeing 747 aircraft? How many piano tuners are
there in the world?

Non-standard problems such as these are called “Fermi problems” after

the distinguished Italian-American nuclear physicist Enrico Fermi (1901–
54.) Fermi delighted not only in creating and solving them, but also in
challenging his fellow scientists with similar problems.

Physicist Enrico Fermi Was a Master of Guesstimation

Fermi was celebrated for his ability to make fast, excellent approximate
calculations with little or no concrete data. In one well-known example,
when the first atomic bomb was detonated during the Manhattan
Project, Fermi dropped a few scraps of paper as the shock wave from
the detonation passed. After some coarse calculation,
Fermi estimated the power of the blast from the motion of the scraps
as they fell. Fermi’s guesstimate of 10 kilotons of TNT was remarkably
close to the now-established value of 20 kilotons. Even though Fermi’s
estimate appears 50% off, it was a reasonable order-of-magnitude
estimate.

Fermi believed that the ability to guesstimate was an essential skill for
physicists. A good way to solve physics problems—and complex
problems in any line of work—is by coming up with simple shortcuts to
make approximate, but meaningful, calculations.

Teaching Physics Students the Fermi Way of Contemplating Open, Non-Standard

Problems

Based on Fermi’s technique, at the beginning of many physics courses,

professors pose problems such as “how many piano tuners are there in
Chicago?” Such questions require students to employ quick reasoning
and unsophisticated numerical methods to attack problems without
the knowledge of any core physics concepts.

The historical emphasis on the order-of-magnitude calculation was

propelled by the lack of computing power available to solve complex
problems. Such approximate calculations
were considered necessary to decide if an
onerous and lengthy full-blown calculation
was required.

Classic Fermi Problem: Number of Piano Tuners

in the City of Chicago

Fermi problems are typically restructured

by breaking them up into smaller
problems that are easier for the students
to approach than the original problem.
The challenge of estimating the number of piano tuners in the city of
Chicago is the classical example of a Fermi Problem. A problem-solver
guesstimates the total population of Chicago, then the fraction of
families in Chicago that may own a piano, and the frequency of piano-
tuning, the time it takes to tune a piano, and so on. This sequence of
thinking, accompanied by a few conversion factors, can lead to an
adequate assessment of the number of piano tuners in Chicago.

Back-of-Envelope Calculations for Fermi Problems

The Fermi technique is so popular that math buffs

organize competitions in Fermi’s honor. Contestants are asked to
estimate unusual assessments (the fraction of the surface area of the
United States that’s covered by automobiles, the number of cells in the
human body, the number of pizzas ordered this year in the state of
California, for example) as closely as they can.

One distinctive feature of Fermi problems is that precision is impossible

to achieve quickly, but it’s easier to arrive at a fast estimate of the range
for the right answer. Before investing a big effort to measure
something with precision, problem-solvers can estimate the answer
approximately—and only then determine if it’s sensible to do the extra
steps to calculate the accurate answers.

The Ability to Guesstimate: A Key Problem-Solving Aptitude

The ability to reach first-order estimations is an important skill in daily

life. In a world where we are continuously bombarded with qualitative
and quantitative information (and disinformation,) acquiring a solid
grounding in numeric literacy has almost become an important
intellectual obligation.

Many problems are too complicated for

you to come up with an accurate answer
immediate. In analyzing such problems,
precision may be impossible, but you can
quickly estimate a range for the right
answer. Guesstimation enables anyone
with basic math and science skills to estimate virtually anything quickly
using realistic assumptions and elementary mathematics.

Microsoft, McKinsey Consulting, Google, Goldman Sachs, and many

leading businesses use guesstimate questions in job interviews to judge
the ability of the applicants’ intelligence, their flexibility to think on their
feet, and to apply their numerical skills to real-world problems.

Idea for Impact: Use Effective Guesstimation Techniques Before Undertaking a

More Complete and Formal Investigation

Learn to do a first approximation of value and then, if the problem

merits, refine your estimate further for much nuanced decision-making.
Before putting much effort into calculating anything with precision,
make a rough estimate of the answer, then decide whether it’s worth
investigating further.

In my line of work as an investor, for example, I use fund manager Eddy

Elfenbein’s “simple stock valuation measure”:

Growth Rate/2 + 8 = PE Ratio

Let me emphasize that this is simply a quick-and-dirty valuation tool and it

shouldn’t be used as a precise measure of a stock’s value. But when I’m first
looking at a stock and want to see roughly how it’s priced, this is what I’ll
use.

For example, let’s look at Pfizer ($PFE). Wall Street expects the company to
earn $2.34 per share next year. They also see the company’s 5-year growth
rate at 2.79%. If we take half the growth rate and add 8, that gives us a fair
value P/E Ratio of 9.40. Multiplying that by the $2.34 estimate gives us a fair
price for Pfizer of $21.98. The current price for Pfizer is $22.98, so it’s about
fairly priced.

Let’s look at IBM ($IBM) which has a higher growth rate. Wall Street sees
IBM earning $16.61 next year. They peg the five-year growth rate at 10.58%.
Our formula gives us a fair value multiple of 13.29, and that multiplied by
$16.61 works out to a value of $220.75. IBM is currently at $201.71.

Recommended Resources for Guesstimation

If you’re interviewing with one of those companies that use guesstimate

questions in job interviews, or if you’re interested in developing your
ability to make rough, common-sense estimates starting from just a few
basic facts, I recommend the following learning resources:

 Guesstimation: Solving the World’s Problems on the Back of

a Cocktail Napkin by Lawrence Weinstein and John A. Adam
is a fun introduction to guesstimation.
 Sanjoy Mahajan teaches a course on “down-and-dirty,
opportunistic problem solving” at MIT. His Art of
Approximation in Science and Engineering course is accessible
free of charge on OpenCourseWare. Mahajan has also
written the resourceful textbook Street-Fighting
Mathematics: The Art of Educated Guessing and
Opportunistic Problem Solving.

In general, the best way to solve such problems is to start from something you know.
Since every problem is a little different, it's hard to give an exact formula; using your
example I would think something like this:

1. The number of TVs in Baltimore would be the product of households and average TVs
per household. I arrive at this line of reasoning because it allows me to use two pieces of
information I can estimate (population of Baltimore, average TVs per household).I'm
going to omit commercial TVs for brevity.

2. First I'd estimate Baltimore's population. Remember that we are trying for an
estimation in the same order of magnitude, so our estimation can be forgiven a little
inaccuracy. I live in Oakland with a population of about 300,000 and near San jose with a
population just around a million. I know Baltimore is larger than Oakland but smaller
than San Jose, so I can split the difference and say 650,000 (by chance, this is very close).
I also think big cities in the U.S. are often around 500,000 to 1.5 million so this seems
reasonable.

3. Now I'd estimate households. I add this step because TVs are situated in houses and
not everyone has their own house (kids, spouses). A very strong estimation might require
significant work here, but I'm going to just estimate that there is one house for every 2.5
people. I arrive at this because it accounts for married couples (2) with kids (2+) and
single people (1), many of whom have roommates (2+). I'll admit this is the weak link in
the chain so far, but remember we are really interested in an order of magnitude of
correctness (Fermi's original boast).

4. So now we have to estimate the number of TVs in a house. For this I use my personal
experience as someone who has lived in a family, lived alone, and lived with roommates.
The family will probably have 1 TV in the living room, 1 in a master bed, and 1-2 more on
average dispersed throughout the house. The single person might have only 1 TV. The
roommates maybe somewhere in between one and three. Let's say 2.5 because I'd guess
most of the population will be living in family homes (and we allowed that assumption to
bias our household estimation, so this seems consistent).

5. So we have 650,000/(2.5*2.5) =104,000. Fermi problems often require some mental

math skills-I cheated since I just woke up.

How correct is this answer? Google tells us the U.S. has around 750 TVs per 1000 people.
This means Baltimore would have about 622,104*.75 = 466,578 TVs. I could have been
closer (and I cut some corners) but I'm within the bounds of correctness (at least as
expressed by Fermi).

Now your question seems to be about the use of this type of question for interviews. In
my experience, the prevelence of this type of question is exaggerated. This type of
question was originally known as a "Microsoft question" (although not all Microsoft
questions were numeric). More recently I've heard them called "Google questions". I've
interviewed with both companies and I can tell you these questions are not their
standard practice. In fact, my understanding is that Google doesn't ask them at all. The
current trend is towards more domain specific knowledge questions like programming
questions. The original idea behind these questions as interview questions is that they
allowed the interviewer to see the thought process of the interviewee. As you can see,
these questions do require some degree of general knowledge as well, which I think is
why they're being phased out. Knowing the population of San Jose shouldn't realistically
be a requirement for working there.