Mental Models

“You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models.”

“I believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”

“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model – economics, for example – and try to solve all problems in one way. You know the old saying: ‘To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.”

“l’ve long believed that a certain system which almost any intelligent person can learn – works way better than the systems that most people use. What you need is a latticework of mental models in your head. And, with that system, things gradually get to fit together in a way that enhances cognition. However, my particular approach seldom seems to get through, even to people of immense ability. Things usually die after going to the ‘Too-Hard’ pile.”

—Charlie Munger

“A checklist is no substitute for thinking.”

—Warren Buffett

A Latticework of Mental Models

In his talktalk at USC Business School in 1994 entitled A Lesson on Elementary Worldly Wisdom Charlie discusses the subject of wordly wisdom, mental models, and why you need a latticework of models in your head.

«What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.

You’ve got to have models in your head. And you’ve got to array your experience—both vicarious and direct—on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.

What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.

It’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models.

And the models have to come from multiple disciplines—because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads. So you’ve got to have models across a fair array of disciplines.

You may say, “My God, this is already getting way too tough.” But, fortunately, it isn’t that tough—because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.»

Herbert Simon, the Nobel Laureate, once emphasized that:

«The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decision arise.»

A Collection of Mental Models

Accounting

• The Basic Accounting Equation (also called the Balance Sheet Equation)
• Generally Accepted Accounting Principles (GAAP)
• Accounting (GAAP) Earnings
• Economic Earnings
• Free Cash Flow
• Depreciation
• Maintenance Capital Expenditures
• Growth Capital Expenditures
• Sunk Cost

Biology

• Natural Selection
• Survival by Differentiation
• Genetics
• Physiology

Business

• Gresham’s Law
• Intrinsic Value
• Operating Leverage
• Opportunity Cost
• Five Forces
• Brand

Chemistry

• Autocatalytic reactions
• Bohr Model
• Kinetics
• Thermodynamics
• Uncertainty Principle
• Viscosity

Economics

• Agent Problem
• Asymmetric Information
• Behavioral Economics
• Comparative Advantage
• Creative Destruction
• Cumulative Advantage
• Diminishing Utility
• Economies of Scale
• Economies of Scope
• Economic Moat / Sustainable Competitive Advantage
• Elasticity
• Externalities
• Incentives
• Income and Substitution Effects
• Markets
• Marginal Costs
• Marginal Utility
• Monopoly
• Network Effect
• Oligopoly
• Opportunity Cost
• Price Discrimination
• Prisoner’s Dilemma
• Public and Private Goods
• Scarcity
• Specialization
• Supply and Demand
• Switching Costs
• Time Value of Money
• Tradeoffs
• Tragedy of the Commons
• Transactions Costs
• Utility

Engineering

• Abstractions
• Algorithms
• If-statements
• Recursion
• Margin of Safety (Backup System)
• Breakpoints

Legal System 

• Burden of Proof
• Common law
• Due Process
• Duty of care
• Good Faith
• Negligence
• Presumption of Innocence
• Reasonable doubt

Management Science

• Occam’s razor
• Parkinson’s Law
• Process versus Outcome

Mathematics

• Compound Interest
• Decision Trees
• Law of Large Numbers
• Probability Theory

Philosophy

• Abduction
• Metaphors
• Pragmatism
• Realism
• Reductionism
• Similes

Physics

• Agent Based Models
• Bayes Theorem
• Central Limit Theorem
• Combinations
• Complex Adaptive Systems
• Compounding
• Correlation versus Causation
• Critical Mass
• Decision Trees
• Electromagnetism
• Equilibrium
• Inertia
• Inversion
• Kelly Optimization Model
• Law of Large Numbers
• Mean, Median, Mode
• Momentum
• Newton’s Laws
• Normal Distribution
• Permutations
• Power Law
• Quantum Mechanics
• Regression Analysis
• Return to the Mean
• Relativity
• Shannon’s Law
• Thermodynamics
• Scaling
• Sensitivity Analysis

Psychology

• Action Bias
• Actor-Observer Bias
• Adverse Selection
• Affect Heuristic
• Akerlof’s Lemons
• Alternative Blindness
• Alternative Paths
• Ambiguity Aversion
• Anchoring Bias
• Arbitrary Coherence
• Association Bias
• Attentional Bias
• Attraction Effect
• Attribution Theory (aka Cause Theory)
• Authority-Misinfluence Tendency
• Automation Bias
• Auto Catalysis (aka Evergreen or Self-Breeding)
• Availability Bias
• Availability-Misweighing Tendency
• Babe Ruth Effect
• Backfire Effect
• Bandwagon Effect
• Barnum Effect
• Base-Rate Neglect
• Beaty Effect
• ‘Because’ Justification
• Beginner’s Luck
• Belief Bias
• Benford’s Law
• Bias Blind Spot
• Bird in the Hand Fallacy
• Bizarreness Effect
• Bystander Effect
• Change Bias
• Chauffeur Knowledge
• Cheerleader Effect
• Childhood Amnesia
• Choice-Supportive Bias
• Choice Deferral (Procrastination)
• Cherry-picking
• Choice Overload
• Clever Hans Effect
• Clustering Illusion
• Cocktail Party Effect
• Cognitive Depletion
• Cognitive Dissonance
• Coincidence
• Commitment Bias
• Compound Interest
• Complex Adaptive Systems
• Confirmation Bias
• Conjunction Fallacy
• Congruence Bias
• Conjunction Fallacy
• Conservatism (Bayesian)
• Conservatism (or Regressive Bias)
• Consistency Bias
• Contagion Bias
• Context Effect
• Contrast-Miscreation Tendency
• Conversational Bias
• Cross-Race Effect
• Cryptomnesia
• Cumulative Advantage (The Matthew Effect or The Rich Get Richer)
• Curiosity Tendency
• Curse of Knowledge
• Data Mining Error
• Data Snooping Bias
• Decision Fatigue
• Decoy Effect
• Default Effect
• Defensive Attribution Hypothesis
• Defensive Decision Making
• Déformation Professionnelle
• Denomination Effect
• Deprival Superreaction Tendency
• Disaster Myopia
• Disappointment Aversion
• Dislike/Loving Tendency
• Disposition Effect
• Domain Dependence
• Doubt-Avoidance Tendency
• Dread Risk
• Drug-Misinfluence Tendency
• Dunning-Kruger Effect
• Duration Neglect
• Economic Refelxivity
• Easterlin Paradox
• Effort Justification
• Ego Depletion
• Egocentric Bias
• Empathy Gap
• Eperor’s New Clothes Syndrome
• Endowment Effect
• Envy/Jealousy Tendency
• Envy
• Escalation of Commitment
• Essentialism
• Evaluability Bias
• Exaggerated Expectation
• Excessive Self-Regard Tendency
• Expectations
• Experimenter’s or Expectation Bias
• Exponential Growth
• Extrinsic Incentives Bias
• Fading Affect Bias
• Fallacy of Composition
• Fallacy of Frequency
• Fallacy of the Single Cause
• False Causality
• False-Consensus Effect
• False Memory
• Falsification of History
• Familiarity Heuristic
• Fear of Regret
• Feature-Positive Effect
• Fluency Heuristic
• Focusing Effect
• Forecast Illusion
• Forer Effect (or Barnum Effect)
• Framing Effect
• Frequency Illusion
• Functional Fixedness
• Fundamental Attribution Error
• Gambler’s Fallacy
• Galatea Effect
• Gaze Heuristic
• Generation Effect (Self-Generation Effect)
• Google Effect
• Groupthink
• Group Attribution Error
• Group Polarization
• Halo Effect
• Handicap Principle
• Hard-Easy Effect
• Hawthorne Effect
• Hedonic Treadmill
• Herding
• Hindsight Bias
• Home Bias
• Hostile Media Effect
• Hot-Hand Fallacy
• House-Money Effect
• Humor Effect
• Hyperbolic Discounting
• Ideomotor Effect
• Identifiable Victim Effect
• IKEA Effect
• Illusion of Attention
• Illusion of Assymetric Insight
• Illusion of Control
• Illusion of External Agency
• Illusion of Skill
• Illusion of Transparency
• Illusion of Truth Effect
• Illusion of Validity
• Illusionary Correlation
• Illusory Correlation
• Illusory Pattern Recognition
• Illusory Superiority
• Inability to Close Doors
• Incentive-Caused Bias
• Incentive Super-Response Tendency
• Inconsistency-Avoidance Tendency
• Induction
• Influence-from-Mere Association Tendency
• Information Bias
• Informational Overload
• In-Group Bias
• In-Group Out-Group Bias
• Insensitivity to Sample Size
• Instant History Bias
• Intention-To-Treat Error
• Internet Filter Bubble
• Introspection Illusion
• Inversion
• Irrational Escalation
• January Effect
• Jevon’s Paradox
• Just-World Hypothesis
• Kantian Fairness Tendency
• Lag Effect
• Lake Wobegone Effect (see Overconfidence)
• Law of Large Numbers
• Law of Scale
• Law of Small Numbers
• Less-is-Better Effect
• Leveling and Sharpening Effect
• Liking/Loving Tendency
• Liking Bias
• Limit Order Effect
• Linda Problem (see Conjunction Fallacy)
• List-Length Effect
• Longshot-Favorite Bias
• Lollapalooza Tendency
• Loss Aversion
• Low Volatility Anomaly
• Man With A Hammer Syndrome
• Mental Accounting
• Mere Exposure Effect
• Mindlessness
• Minsky Moment
• Misinformation Effect
• Modality Effect
• Money Illusion
• Monty Hall Problem
• Mood-Congruent Memory Bias
• Motivation Crowding
• Moral Hazard
• Moral Licensing
• Moral Luck
• Motivation Crowding Out Effect (see Undermining Effect)
• Myopic Loss Aversion
• Naive Cynicism
• Naive Diversification
• Naive Realism
• Negativity Bias
• Negativity Effect
• Neglect of Probability
• Network Effect
• Next-in-Line Effect
• Noice Trading
• Normalcy Bias
• Not-Invented-Here Syndrome
• Neomania
• News Illusion
• Observer Bias
• Observer-Expectancy Effect
• Occam’s Razor
• Omission Bias
• Outcome Bias
• Outgroup Homogenity Bias
• Overconfidence Bias
• Overoptimism Tendency
• Overthinking
• Parkinson’s Law
• Pareidolla
• Pareto Principle (The 80/20 Rule)
• Part-List Cueing Effect
• Pass the Baton (We All Have To Die)
• Pavlovian Association
• Peak-End Rule
• Persistence
• Personification
• Persuasion Bias
• Pessimism Bias
• Picture Superiority Effect
• Placebo Effect
• Planning Fallacy
• Pluralistic Ignorance
• Post-Purchase Rationalization
• Priming
• Primacy and Recency Effects
• Procrastination
• Pro-Innovation Bias
• Projection Bias
• Pseudocertainty Effect
• Pygmalion Effect
• Reactance
• Reactive Devaluation
• Reason-Respecting Tendency
• Recency Bias
• Reciprocation Tendency
• Recognition Heuristic
• Reflection Effect
• Regret
• Representative Heuristic
• Resource Depletion
• Restraint Bias
• Reward and Punishment Superresponse Tendency
• Regression to Mean
• Representativeness Heuristic
• Rhyme as Reason Effect
• Risk Aversion
• Risk Compensation (Peltzman Effect)
• Risky Shift
• Round Number Effect
• Sailing-Ship Effect
• Salience Effect
• Satisficing
• Seersucker Illusion
• Scarcity Error
• Second-Level Thinking
• Selection Bias
• Selective Perception
• Self-Control
• Self-Enhancing Transmission Bias
• Self-Interest
• Self-Selection Bias
• Self-Serving Bias
• Self-Serving Attribution Bias (see Self-Serving Bias)
• Semmelweis Effect
• Senescene-Misinfluence Tendency
• Shared Information Bias
• Sharpshooter Effect
• Similarity Heuristic
• Simple Logic
• Simple, Pain-Avoiding Psychological Denial
• Simulation Heuristic
• Sleeper Effect
• Social Comparison Bias
• Social Desirability Bias
• Social Loafing
• Social Intelligence Hypothesis
• Social-Proof Tendency
• Squelch by Denial
• Status Quo Bias
• Stereotyping
• Subadditivity Effect
• Subjective Validation
• Sunk Cost Fallacy
• Superbowl Effect
• Superstition
• Survivorship Bias
• Story Bias
• Strategic Misrepresentation
• Stress-Influence Tendency
• Swimmer’s Body Illusion
• System Justification
• Take-the-Best Heuristic
• Texas Sharpshooter Effect (see Sharpshooter Effect)
• Time-Saving Bias
• Titanic Effect
• The Black Swan
• The It’ll-Get-Worse-Before-It-Gets-Better Fallacy
• The Law of Small Numbers
• The Paradox of Choice
• The Problem with Averages
• Tragedy of the Commons
• Trait Ascription Bias
• Turkey Illsuion
• Twaddle Tendency
• Ultimate Attribution Error
• Unit Bias
• Use-It-or-Lose-It Tendency
• Volunteer’s Folly
• Well Travelled Road Effect
• Will Rogers Phenomenon
• Winner’s Curse
• Worse-than-Average Effect
• Zeigarnik Effect
• Zero-Risk Bias
• Zero-Sum Heuristic

Statistics

• Mean
• Standard Deviation and Normal Distribution
• Regression to the Mean

The Decision-Making Process

• Asking the Who, What, When, Where, and Why Questions
• Invert

None of the ideas and models presented above are my own.

Additional Resources

Books

• Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger by Peter Kaufman
• Damn Right: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe
• Think Twice: Harnessing the Power of Counterintuition by Michael J. Mauboussin
• More More Than You Know: Finding Financial Wisdom in Unconventional Places by Michael J. Mauboussin
• Seeking Wisdom: From Darwin to Munger by Peter Bevelin
• Investing: The Last Liberal Art by Robert Hagstrom
• Influence: The Psychology of Persuasion by Robert Cialdini
• The Checklist Manifesto: How to Get Things Right by Atul Gawande
• The Essays of Warren Buffett: Lessons for Corporate America by Warren E. Buffett and Lawrence A. Cunningham
• Charlie Munger: The Complete Investor by Tren Griffin
• Psychology of Intelligence Analysis by Richards J. Heuer, Jr. [Free Download]

Articles

• An Introduction to Mental Models by Farnam Street
• A Dozen Things I’ve Learned from Charlie Munger about Mental Models and Worldly Wisdom by Tren Griffin
• An Investing Principles Checklist from Charlie Munger by Hurricane Capital
• In the Footsteps of Charlie Munger: Accumulating Wordly Wisdom by Hurricane Capital
• A List of Top 100 Mental Models for Business by Rob D. Kelly
• Latticework of Mental Models by Safal Niveshak
• First Principles: Elon Musk and Bill Thurston on the Power of Thinking for Yourself
• Mental Models: How Intelligent People Solve Unsolvable Problems
• Two Powerful Mental Models: Network Effects and Critical Mass by Tren Griffin
• Wordly Wisdom in an Equation by Sanjay Bakshi

Speeches 

• The Psychology of Human Misjudgment by Charles T. Munger
• A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business by Charles T. Munger
• Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs by Charles T. Munger

Papers

• New Mauboussin Paper: What’s Going On in Your Brain? by Michael J. Mauboussin

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