29th March 2018

Mental Models

I read once that one of the reasons that Charlie Munger is considered to be so wise and has such good judgement is that he has a range of ‘mental models’ that he can and will apply to any problem or situation. Mental models can be simple assumptions or complex theories about how the world works. We don’t so much learn these mental models through education as gather them as we grow, often vicariously, usually unconsciously and probably, too frequently, unquestioningly.

If you don’t know who Charlie Munger is, he is perhaps best known as the Vice Chairman of the world’s greatest compound interest machine: Berkshire Hathaway, Inc. the company that Warren Buffet heads. In the time of his and Warren Buffett’s reign as the leaders of Berkshire, the company has returned roughly 2,000,000% on its initial value, or 20,000 to 1. This was accomplished in the adult lifetime of two men, simply by investing the capital of the company in an increasing number of prosperous enterprises and without dangerous amounts of borrowing. It is a story for the ages.

It seems that the wisest people make great decisions by having access to relevant mental models which informs their decisions. Conversely it seems that very often poor decisions are based upon erroneous or misapplied and unexamined mental models. In my experience I have witnessed and I have committed countless poor decisions simply because someone either didn’t understand how things really worked or was applying the wrong mental model in the context.

It follows then, that if making good decisions is important to us, acquiring the relevant mental models would be a good place to start. I have discovered a blog and website called ‘Farnam Street’ which talks in a very informed way about Charlie Munger and mental models. It has reprinted Munger’s famous 1994 talk to USC Business School called A Lesson on Elementary Worldly Wisdom. Well worth reading! It transpires that one of the secrets is to have access to a good number of mental models. What Munger calls a lattice work of mental models. Having too few is dangerous because we try to make the world fit our limited knowledge. Inevitably in the digital age someone has compiled a list of 113 mental models ranging from general principles to the natural world to mathematics. Take a look at I was surprised at how many I was aware of and also how many I didn’t really know and yet I thought I did.

Peter Senge has a chapter on mental models in his book ‘The Fifth Discipline’ (this should be in your library) stating that often new ideas fail because of mental models, “More specifically,” he writes “new insights fail to get put into practice because they conflict with deeply held internal images of how the world works”. Maybe this is a signal for all of us to do some deep work on our repertoire of mental models. To examine, reassess, reconfirm some and perhaps reject others and learn a few more.

Mark Twain probably said it best when he observed “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so”.