In short, an assumption is something you take as true even though you lack good evidence for it. Scientifically, you only have to assume things that you do not know. For example, it is not necessary to assume the value of the Astronomical Unit (radius of Earth's orbit), the speed of light, that air contains about 20% oxygen, or that many diseases are caused by bacteria; these things are known.
You might want to break assumptions down into categories:
Keep in mind one simple fact: It is impossible for you to know everything.
It is certain that, in life and work, you will encounter things you must deal with but which are not familiar. In these cases, lacking knowledge, you must assume something. It happens all the time and many times you are not conscious of it.
You make assumptions for various reasons:
Most people are not accustomed to analyzing their assumptions, but doing it could save a lot of misery. Scientists have to detail their assumptions in their scientific papers. Why shouldn't we do something like that?
When planning some action, do the following:
It seems that failure to answer this question is part of short-term thinking. What will happen if...? Answering this is hard. It often requires predicting human behavior, which is usually difficult. Also - the person who should be asking the question is often focused on the near term and cannot imagine what might happen in the future or on a larger scale. It's sort of like looking at the world through a paper towel tube; your view is constrained so you don't see everything.
It means, among other things, that you just think you can control the world around you. Any action to accomplish one limited purpose will likely produce effects you didn't expect. Some of these effects can be quite unfavorable, in some cases worse than the original problem.
The recent disastrous housing bubble offers a chance to look at a few assumptions that failed.
Consider the apparent fact that median house prices in California tripled in 10 years (1996 through 2006). If you do the math, you find that this is 11.6% annual appreciation. That is a huge rate of appreciation! Once such an appreciation rate gets established, it becomes a mass psychology. Buy a house now and get in on the bonanza before the price goes up again.
What kind of assumptions might be found here? Can you think of any others?
Let's look at the first assumption - the idea that 11% appreciation can go on indefinitely. This is a compound rate of appreciation.
What's wrong with this picture?
Beneath the first assumption lies another one: Enough buyers will appear to buy houses as prices rise. You are assuming (because you DO NOT KNOW) that an ample supply of people can afford the houses and are eager to buy in.
Let's look critically at this idea. We are looking at exponential growth. A number greater than 1 taken to a positive power greater than one produces this. Following the discussion above, we find that 1.11620=9. In 30 years we have 1.11630=27. in 40 years the factor is 81. Over time the factor grows without limit. Here's where the problem lies. The problem is called affordability.
In order for a steady supply of homebuyers to appear, houses must remain affordable. Median incomes must rise at the same 11.6% rate so buyers can afford the mortgage payments as house prices escalate. How might this come about?
Further thinking would allow one to figure out that if the buyer supply drops that the first assumption about 11.6% growth is also wrong, as supply would overtake demand, resulting in price drops. If that happened, then the third assumption above, that you can't lose money in real estate, would also be wrong.
Absent inflation, the only way to keep the price growth going is to keep the buyers coming. History tells us now that this was done by creating a great menagerie of creative mortgage products that featured low monthly payments for several years before resetting to the higher payments required to actually pay off the loans. These were called subprime, adjustable rate and Alt-A loans. A little study of recent history will reveal what happened: the biggest housing bubble crash in well over 150 years.
General lesson here: exponential growth in almost anything you can name is unsustainable in the long term. That's right - unsustainable.