Warren Buffett is the most successful investor in history, but he didn’t get there without help.1
The public doesn’t know much about Charlie Munger, Buffett’s partner in crime at Berkshire Hathaway, and Munger prefers it that way. Outside of the occasional lecture, he is relatively media-shy, and he tends to spend his time reading and working even at the age of 93.
The day the two men met in the mid-20th century changed both their lives. Buffett has repeatedly admitted that he’d be nowhere as successful were it not for Munger’s influence.
Fortunately, his few public appearances are quite accessible, and they provide a wealth of insight into the minds of these two business titans and how they have built their vast empire.
In 1994, Munger gave a famous speech at USC Business School where he was supposed to discuss his investment and business philosophy. He did do that, but in the process, he also gave us a general framework for thinking about making wise decisions in the world.2
He has always attributed much of his own and Buffett’s success to the fact that they are, as he calls it, learning machines. They collect mental models about how the world works, and they use this collection to attack problems in a variety of ways before arriving at a solution.
Any rule of thumb that yields a generally accepted truth can be viewed as a mental model. No one model alone is entirely perfect, but together, a good collection allows us to:
• Simplify complexity to better impact the world
• Remove blind-spots to improve problem-solving
• See reality more clearly through a multidisciplinary lens
The world is highly uncertain, but mental models help us reduce some of that uncertainty.
Simplify Complexity to Better Impact the World
There is immense complexity around us that we intuitively take for granted. We don’t generally consider the fact that any situation that occurs is a product of billions and billions of different variables that come together to produce a sum. We just see the surface-level result.
Naturally, if you could manipulate the variables that influence an outcome, you’d be able to sway the odds of a favorable result. But how would you know what variables to choose?
It would make no sense for you to try to influence every small part of everything. That’d be impossible, and your brain isn’t equipped to handle that. Instead, you’d use mental models.
They give us the ability to filter noise from the signal. No model is an entirely perfect reflection of the world, but they don’t have to be. As long as they present a fairly accurate heuristic for evaluating the complexity around us, they can be used to improve our decisions.
A good example is Pareto’s Principle or the power law as it’s known in statistics. Most people have heard of it, and it essentially states that a very small number of key variables have a greater impact on the result than all of the rest of the variables combined.
For example, when making investment decisions, Munger and Buffett don’t just buy any stock. They have a system in place, and they use it to evaluate whether or not a company is undervalued relative to the market. They’re looking for a few gems that will provide outsized returns. Even in their portfolio, the vast majority of the profits come from a very small section.
This is a very elementary and intuitive example, but being aware of that model, you can use it in other situations where your judgment alone would have fallen short. It gives you a filter for choosing which of the infinite number of variables to focus on and which ones to ignore.
Similarly, other models provide different frameworks that can be used to zone in on the right details. Either way, they do the hard work for us. They help simplify complexity.
Remove Blind-Spots to Improve Problem-Solving
One of the strengths and weaknesses of the human mind is that it’s very quick to establish cause and effect. That’s why we don’t intuitively think about the impact of the billions and billions of variables that lead to an outcome, and it’s why we only see surface-level results.
The good part about this is that it kind of works as a mental model itself. It allows us to order everything in a way that makes sense, and it gives us a shortcut for understanding the world. The bad part about it is that, precisely because it’s a shortcut, the connection is often wrong.
One thing that Munger repeatedly advocates is the idea that it’s better to limit downside by avoiding mistakes than it is to be brilliant. His reasoning is that, if you are doing stuff that exposes you to harm, you will eventually run out of luck no matter how great you are, and given that humans have natural blind-spots, we are always exposing ourselves to harm.
We know from the work done in behavioral economics that we don’t understand the world rationally. We all have our biases, and these biases are more powerful than we think. That said, by using mental models to make yourself aware of such biases, you can be better.
If you know that you suffer from loss-aversion, which tells us that humans irrationally respond about twice as harshly to losses than they do gains, or confirmation bias, which shows our tendency to favor evidence that supports us regardless of the truth, then you can think twice before you make a decision where these biases show up.3
By building a toolkit of mental models that account for your biases, you can have a checklist in place when making big choices to ensure that you aren’t leaving anything on the table. And by doing that, you significantly reduce the chance of judgment errors and losses.
It’s not only more optimal to limit downside, but it’s also easier than being brilliant.
See Reality More Clearly Through a Multidisciplinary Lens
When building a collection of mental models, diversity matters. Munger said it best himself:
“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..
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.”
We live in a world of specialization, and most of us tend to view much of life through whatever lens we wear in our daily occupation. If you think about it, you’ll notice that.
If you’re a businessperson, you likely evaluate many of the other decisions in your life using principles that have been imbedded into your mind at work. Similarly, if you’re a scientist or a researcher, there’s a good chance you think in terms of hypothesis and experiments.
That’s not necessarily a bad thing in itself, but it is limiting. The world has more dimensions than just the ones that we learn through our habits, education systems, and occupations.
For the mental models in your toolkit to be effective, they need to challenge one another, and they need to attack the world from as many different angles as possible. All individual models are partially wrong, but a good collection comes together to mitigate those wrongs.
This doesn’t mean that you have to be an expert economist, psychologist, and physicist all at the same time, but it does mean that you should seek to grasp the fundamentals of a wide variety of disciplines and use those fundamentals to make decisions in your day to day life.
It might sound intimidating, but once you’ve done the work to find what works for you, it’ll be something that’ll stick with you, and you’ll be far better equipped to solve problems.
All You Need to Know
Many of us tend to use the status quo to dictate how we live our lives. We reason based on common convention rather than accounting for our unique situation with our own mind.
That’s not only a very limited way to live, but it’s also damaging to our goals and our pursuits.
Charlie Munger may be media-shy, but when he speaks, people listen, and his wisdom on using mental models provides a far superior tool for making decisions and solving problems.4
To get the most out of a collection of models, there are three things worth understanding:
I. We live in an incredibly complex world built on the interactions of billions of variables. Although we can sway the odds of success in our favor by manipulating these variables, our brain has a hard time intuitively figuring out which ones are relevant and which ones aren’t. Mental models close this gap by simplifying complexity.
II. We are programmed to understand the world through cause and effect. This creates many blind-spots in our thinking, and it exposes us to potential harm. A good collection of models can target these blind-spots and their biases to ensure that we aren’t making any judgment errors. Limiting downside is better than being brilliant.
III. For a collection of mental models to be effective, it needs to be diverse. The best way to dissect the world is by taking a multidisciplinary approach. It’s by understanding the key ideas in some of the core subjects that shape reality and using them to reduce the possibility of our reliance on any single wrong idea or concept.
There are many different ways to collect and use mental models to improve your life. You can use checklists, create frameworks, or even just educate yourself with awareness.
Either way, your brain needs a toolkit, and having a collection of good models provides one.
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