Abstract The term ‘hydrophobic effect’ refers to the poor solubility of nonpolar substances in water compared to organic solvents or to polar substances. The transfer of small nonpolar molecules from the gas phase or organic solvents to water has a characteristic thermodynamic signature: positive free energy, negative enthalpy, large negative entropy and positive heat capacity. This thermodynamic signature can be explained by considering the structure of water around nonpolar substances, which depends on the size and shape of the nonpolar solute. The poor solubility of nonpolar groups in water leads to aggregation of these groups (hydrophobic interaction) and the formation of self‐assembled structures such as miscelles and lipid bilayers. The hydrophobic interaction is also the major contributor to protein folding. The origin of the hydrophobic effect lies in the fact that water interacts with itself much more strongly than it does with nonpolar groups. Key Concepts: The origin of hydrophobicity lies in the strong water–water interactions. The hydrophobic effect is entropic or enthalpic depending on temperature and the geometry of the associating solutes. The characteristics of hydrophobic hydration differ depending on the length scale of the solute. The hydrophobic effect is responsible for the formation of lipid bilayers and the folding of proteins. Interaction between small hydrophobic solutes is in many ways different from transfer to a bulk phase. Most studies find anticooperativity in the interaction between three small nonpolar solutes. Very long‐range attractions between hydrophobic surfaces are probably due to macroscopic phenomena, such as air bubbles.