Latticework of Mental Models

Here is what Charlie Munger said on the importance of mental models in our lives…

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.

Elementary, Worldly Wisdom

In his 1994 speech to business school students, titled Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business”, Charlie Munger said..

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.

Building your latticework is a lifelong project. We’ve collected and summarized the ones we’ve found most useful, and we will keep updating the list.

General Thinking

  • Lollapalooza Effect
  • Complex Adaptive Systems
  • Thought Experiments
  • Second-Order Thinking
  • Probabilistic Thinking
  • The Map is not the Territory
  • Checklists
  • Autocatalytic reaction
  • Kinetics
  • Thermodynamics
  • Critical Mass
  • Equilibrium
  • Momentum
  • Newton’s Laws
  • Evolution

Business

  • Arbitrage
  • Moats
  • Float
  • Porter’s 5 forces
  • Surfing
  • Scalability
  • Distribution
  • Cost
  • Brand & Mind Share
  • Decision trees
  • Network Effect
  • Switching Costs
  • Diminishing Returns

Engineering

  • First Principles Thinking
  • Breakpoint
  • Feedback loops
  • Redundancy

Psychology

  • Anchoring
  • Alternative Histories
  • Association
  • Authority
  • Availability
  • Confirmation Bias
  • Commitment and Consistency
  • Contrast Effect
  • Deprival Super Reaction Syndrome
  • Do Something Bias
  • Framing
  • Pavlovian Conditioning
  • Envy and Jealousy
  • Incentive-Caused Bias
  • Inversion
  • Liking
  • Reciprocation
  • Self Deception and Denial
  • Social Proof
  • Storytelling
  • Variable Reinforcement
  • Status Quo Bias
  • Occam’s Razor
  • Process versus Outcome
  • Agency Problem
  • Seven Deadly Sins
  • Gresham’s Law
  • Red Queen Effect
  • Kantian Fairness Tendency
  • Ulysses Pact
  • Rashomon Effect

Investing

  • Mr. Market
  • Margin of Safety
  • Circle of Competence

Economics

  • Comparative Advantage
  • Diminishing Utility
  • Game Theory
  • Marginal Cost
  • Opportunity Cost
  • Prisoners’ Dilemma
  • Scarcity
  • Supply and Demand
  • Tragedy of the Commons
  • Utility
  • Trade-off
  • Price Discrimination
  • Positive and Negative Externalities
  • Sunk Costs
  • Moral Hazard
  • Bottleneck – Theory of Constraints
  • Time Value of Money
  • Matthew Effect

Mathematics and Statistics

  • Multiplying by Zero
  • Mean Reversion
  • Bayes Theorem
  • Law of large numbers
  • Law of small numbers
  • Permutations & Combinations
  • Power Law
  • Probability
  • Compounding
  • Central Limit Theorem
  • Correlation and Causation
  • Measures Of Central Tendency
  • Regression Analysis