Mental Models

By the WEquil Family

Dear Reader,

We 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.

Our Map is not the Territory

Maps are simplifications of reality. We all have a map in our head of reality. But that map is far from perfect. In order to improve our map need to be open-minded and willing to listen to others who may know things that we don’t know. That's because their map is not our map...people should cooperate and share perspectives because differences in our maps can help us identify potential flaws in how we see reality.

A map of a city is different from a map of reality. City maps have only two dimensions...North vs South and East vs West. Maps of reality have potentially infinite dimensions! There are our emotions, experiences, relationships, preferences, personalities, cultures...the list goes on and on. That' because life is infinitely complex!

How can we mere humans wrap our heads around something as infinitely complex as life?

Said another way...

How can we build a map of reality?

Mental Models

We use "Mental Models" to help us construct maps of reality. For the purposes of this article, we define a "model" as "an informative representation of an object, person or system." For example, the previous section titled "Our Map is not the Territory" described how we each have a unique perspective (map) on life (territory) drawing a distinction between the two. This is a mental model because it provides an "informative representation" of how people attempt to better see the world by sharing perspectives.

This article contains many "Mental Models" with easy to remember names like "Circle of Competence" and "Hamburger Model" so that you can easily recall and apply these models in your life. In this way, you can use Mental Models to improve your mental "Map of Reality" so your perception of life can be more accurate ... thus reducing the probability of making mistakes or getting blind-sided by unexpected surprises!

Like maps...all models are wrong, but some are useful. When you look at a street map you see a lot of lines with different colors and dots with city names. When you look up from a street map you don't see any of these things. That's because technically speaking maps are "wrong" in the sense that they are not perfect. They are "simplifications" of the reality of the cities and streets that connect them. That's good! Because if they were exactly the same as our reality it would be very hard to read a map! In the same way, mental models are wrong because they are simplifications of reality, but we hope to share models that are useful to navigate the roads of life.

What models do you have in your head now?

That's a useful questions ... because we all have them. You used it when you decided to read this article. You are using it now to determine if reading this article is worth your time...and whether it would make more sense to simply skip all this mumbo-jumbo and get to the models!

The key point here is that you already have models built upon experiences and knowledge accumulated over the course of your own life. To make this most of this article you should recognize that everyone's Mental Models are skewed by their unique life experiences. This is good because we have a unique perspective to offer, but can be bad if we think our map map of the territory is "accurate". Without effort, our Mental Models based purely on our life experience will not be representative of reality. In other words, our Mental Models without an education will be "biased" and thus at times take us in the wrong direction.

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 Mental Models from great thinkers of all disciplines.

So without further ado ... we give you ... our favorite Mental Models!

Circle of Competence

Know when you don’t know or you will make a fool of yourself.

We all have different levels of competence in various aspects of life. For example, some people are better at writing, public speaking, or building an app.

The things we are good at doing define our "Circle of Competence" ... the set of skills and strengths that when applied create real value. The opinions of other people matter. We may feel that we are competent, but if others in the same area of study or discipline disagree then perhaps we should evaluate how competent we truly are.

In our article on "Not Knowing" we describe a girls lost in the woods. To find her way out she needs to accurately account for what she knows!

There are four categories of knowing...

1. I know.

2. I don’t know.

3. I did not know!

4. I thought I knew!

The "I Know" category is where we all want to be. Perhaps that's why we often times believe our "Circle of Competence" is bigger than it really is. Accepting the second category "I Don't Know" is hard which is also why the wise do it so easily often.

The third and fourth categories are where things get tricky.

As we move through life we hopefully discover things that we did not know. These discoveries come in two flavors...things we knew we did not know...and things we thought we knew. Discovering something we didn't know can be surprising and potentially problematic...but usually its not so bad.

For example, we did not know that we liked basketball until after our house burned down and we were forced into a new routine. Before that we just did a lot of Tae Kwon Do. We had heard of basketball of course...even played it a few times, but we "did not know" that we actually LOVED playing!

Discovering something you didn't know can actually be fun! Especially if you are humble about what you know going in. The problems really show up when you discover that you thought you knew something, but you actually don't.

For example, we didn't how quickly a house made of bricks could catch fire and destroy everything inside. Turns out that it's about four minutes. We thought we knew a lot about fires and how to protect ourselves. We thought that our house was reasonably safe. Buy were we mistaken.

So how do learn to expand our Circle of Influence?

Here are five strategies:

1. Be slow to thinking you know

2. Get lots of diverse and competent feedback

3. Recognize where experts disagree

4. Apply your knowledge

5. Asses your absolute and comparative advantages

Be slow to thinking you know means leaning against the all to human temptation to assume that we are right, good, smart, awesome, super-duper ... you get the picture. We all want to believe these things, so just know that you should questions your instincts when you think you are right.

Getting lots of diverse and competent feedback means listening ... especially to those that have experience in the area of interest. Just one teacher or boss judge your performance can create problems for you because no one has a perfect Map of the Territory. If the area is simple like how to make great sandwiches, then you probably don't need a lot of diversity...just some great YouTube videos on how to make sandwiches. But if the area is creative or novel like most real world problems, like how to succeed as an entrepreneur ... you might need an entire Innovators Playlist. And yes, you probably want to seek out opinions that are not exclusively on our YouTube channels 😂

Recognizing where experts disagree takes a ton of work, but can lead to very interesting questions worth exploring. For example, when our parents published this paper on Machine Learning they read a lot of papers on Artificial General Intelligence (AGI) to see if robots were really going to become self-aware and take over the planet. What they found is that experts like Elon Musk and Kai-Fu Lee disagree. Our parents studied data science and advanced statistical modeling their whole careers so they were starting from a place of competence. So after thousands of hours they felt comfortable making the bold claim that we don't really understand the threat of AGI as a human species.

Apply your knowledge means create things of value. Don't simply read books and watch TED talks without writing, teaching, or having a discussion. We mentioned this in our "Principles of Learning" project. In this project we noted that Elon Musk started a school for his kids because school's "teach tools" when humans really learn better by doing real things like solving problems. Learn with the goal of doing something and you will learn a lot faster and retain more of what you learn.

Finally, you want to asses your absolute and comparative advantages. Truly competent people in a particular area can tell how good they are on both an absolute level, and in comparison to others. But rather than dive into that here...lets create another Mental Model!

Absolute vs Comparative Advantage

WIP

Second-Order Effects

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.

Thought Experiments

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

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.

Inversion

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.

Pareto Optimal

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

Occam’s Razor

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.

Hanlon’s Razor

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!