By Sumay and Aila McPhail
Hello, my sister and I have been working on summarizing Charlie Mungers Mental Models. We think that our hard work has paid off to give a wider audience the understanding of these very important lessons. We will keep on adding to our list as we uncover more Mental Models to guide us through life. We hope you enjoy it.
Model limitations - Our Map is not the Territory
Maps and models are simplifications of reality. Remember that our understanding of reality is far from perfect and that we should listen to others because they may know things that we don’t know (i.e. their map is not our map...people should cooperate because more maps is better than one). Beware of unknown unknowns.
We all have Mental Models/Maps based on our own experience. They are our cognitive maps of reality. They drive the decisions we make. They are also wrong, and without conscious effort our mental models are unlikely to improve upon our often skewed and unrepresentative experiences of our past. We call these Biased Models.
Biased Models stem from our unique emotional experiences...life lessons that made us happy, sad, envious, angry, lustful, resentful, and any other emotion strong enough to burn the experience into our neurons. Our default decisions are heavily influenced by the culture and household we grew up in. As a result, we all have Biased Models... maps that do not reflect the territory of human systems.
For this reason, we need to enhance our maps with timeless MMs from great thinkers of all disciplines. We call these Universal Models of human systems. As we uncover them we will add them to the list.
Circle of Competence
Know when you don’t know or you will make a fool of yourself. We need to know what we don’t know. You should constantly be on the lookout for blind spots. Seek out experts. Where experts studying the same thing disagree interesting questions can pop up.
A closely related concept is the intersection of humble confidence. These two apparent antonyms are fully compatible if we embrace a simple truth: Everything we do is far from perfect.
We never see perfection, and so we can only guess at what perfect decisions look like. Parents can get a glimpse of this concept by comparing their experienced actions to that of a child. Experts can see this also when comparing their decisions within their circle of competence to that of a novice beginner.
We can all be confident while remaining humble by carefully acting within our circle of competence while remaining humble to the vast areas of our ignorance.
Second order effects are consequences of our actions. Say you’re in a chess game and you make a move. Your move is the first order effect. Your opponents reaction to your move is a second order effect. You can anticipate their move by identifying moves that will give them an advantage. In chess, there is always just one second order effect because your opponent can only make one move, but real life consequences to actions are often numerous and difficult to identify beforehand. Consequences don’t stop at the second order. In chess, your next move is the third order effect...illustrating that your actions often effect your future actions. Good decisions require thinking about the consequences of our actions. What second order effect is going to come back at you. Or fourth or sixth or eighth or tenth or twelfth…
Probability over Determinism
We all should recognize that all human systems live in the world of uncertainty. There are no absolutes. Nothing is certain. Remove deterministic words like “must”, “can’t” and “certainly” from your vocabulary and mental thought process. Understand and internalize common distributions found in human systems. We discuss these in our related piece, “Mental Models of Human Systems”.
Principles Vs Precedent
Principles are the rules that govern a system or problem. Solutions based on the rules governing a system might be quite different from solutions based on past experience. The opposite of first principles thinking might be learning by example. This is limiting because we are restricted to actions that others have done before.
Take the Mighty Ducks movie from 1996 as an example. They win their final game using a formation called the “Flying V”...which confused the opposing team because the formation was something they hadn’t seen before. Legal moves that differ from past experience might confuse your opponent or surprise friends.
Principal analogies to sports are common because the rules are easily understood. However, the real value of first principle thinking comes from real life. Understanding the rules that govern complex human systems like friendships and economies is the first step. For example, we would argue that the book “How to Win Friends and Influence People” provides a reasonable approximation for the rules that govern relationships.
Principles tell us why. Precedent only tells us what happened. When operating under a precedent model you have no idea why something worked or didn’t only.
Principles allow us to uncover creative strategies that tie directly to the building blocks that govern a system.
Principles provide a theory for explaining how a system works. This makes it possible to change strategy in concert with changing circumstances instead of waiting until old strategies based on precedent fail.
Principles provide maps of systems so we can see ahead. Precedent relies on driving forward while looking through the rear-view mirror.
Any rational analysis of cause and effect is a Thought Experiment.
Thought experiments allow us to imagine impossible or unprecedented situations. Often times we lack the data to run empirical simulations. When we lack data, thought experiments are often the best way to wrap one’s head around the potential consequences of an action.
X: Senario #1
Y: Senario #2
Z: Future State
Here are some types of thought experiments:
Counterfactual – If X happens instead of the expected scenario Y, how will this change our expected future state Z? Evaluating the consequences of an unexpected outcome, or an outcome that contradicts known facts.
Prefactual – If you take action X, what are the likely outcomes Y? Examining consequences of a specific action.
Semi-factual – If Y had happened in the past instead of X, what would have changed? Evaluating how a different past outcome could have changed the present.
Prediction – If the current state X continues in the future, what are all the potential future consequences for Z? To do this, gather existing facts about the current situation and consider all potential scenarios in the future that are consistent with these facts.
Hindcasting– Given the outcome Z, what historical facts/circumstances could have caused Z? This is an inversion of a “prediction” thought experiment.
Root Cause Analysis (Retrodiction) – What caused negative outcome Z? Start with the negative result and work backward to determine its cause. What circumstances or failures in a system led to the negative outcome?
Backcasting – What causes X would lead to a specific future state Z? Identify a specific future state in the future. Then think through its likely causes.
Bayesian Updating is a process developed by Thomas Bayes in which one incrementally incorporates new information to update prior beliefs. People often fail to do this...seeking instead to confirm prior beliefs and avoiding new conflicting information. So either they have to change their minds or the world has to change for them.
Many problems we face can be reversed. Inversion suggests that reversing a problem can often help us identify new perspectives. Here are some common problems asked in the reverse:
Raising kids: “How can I screw up my kids?”
Marriage: “How can I ruin my marriage?”
Career: “How can I damage my career?”
Relationships: “How could I frustrate my friends?”
Investing: “How can I quickly lose a lot of money?”
After you have the list you just try to avoid those things.
A state is said to be Pareto Optimal if it is impossible to reallocate resources in a way that makes anyone better without making someone else worse off. Such a state is also called Pareto Efficient because it represents a form of efficiency. One helpful strategy when making decisions is to look first for Pareto Optimal solutions because they are easier to implement.
Pareto optimality is often during wealth inequality debates. Redistribution is not a Pareto Optimal solution because it involves taking away from some and giving to others. Helping those in need may very well be “optimal” in some people's opinion, but it is not Pareto Optimal in a way that is relatively uncontroversial because it still involves improving one groups position at the expense of another
Simple explanations are more likely to be correct. This is the essence of Occam’s Razor. We are often confronted with many competing explanations for why something occurred or how things work. Occam suggests we cut out the more complex explanations using his razor because more complex explanations tend to require more assumptions.
Do not attribute to malice that which is more easily explained by stupidity.
Human systems are complex and everyone is far from perfect. As a result, we all inevitably find ourselves in less than ideal situations. Bad situations are usually not the fault of a bad person (although they may be) but are more likely the result of difficult circumstances and/or a lack of experience. Hanlon’s Razor suggests that we can avoid making bad situations worse by assuming the best in others.
Thank you for reading our Mental Models. Remember to check back for more Mental Models and discover them with us!