Mental Model Success Secrets

Charlie Munger in “Poor Charlie’s Almanack” ascribes his success to ‘a lattice of mental models”. He collects mental models about the world works and then uses them to make decisions. The models allow him to see a problem from different viewpoints before deciding.

(Most of you would know who Charlie Munger is. If you don’t, he’s Warren Buffet’s partner).

Here is Charlie’s famous quote in a speech he gave at USC Business School. He had been asked to discuss his investment philosophy. Along the way, he gave us a decision-making structure……

“…..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.”

So, what is a mental model?

It’s a simplification to the essential elements of some aspect of reality.

I love the way NLP puts it: “The map is not the territory”

where the map is our mental model, and the territory is reality. The saying reminds us not to confuse our models with reality. For this reason, we want to view the territory from a variety of maps. That way we are less likely to see the world from one viewpoint. In so doing, we make better decisions.

How?

Because the variety of models avoid some of the more common cognitive biases, like:

• Hindsight bias (prevents improvement)
• Confirmation Bias (blinds us to alternatives)
• Gambler’s Fallacy ( we see connections where they don’t exist)
• Anchoring Effect (we fixate on one or more things, like our entry, and fail to assess the probabilities).

The key to using mental models successfully is to remember they are a bird’s eye view of what is successful and are context driven. For example:

• “The job of an economist is to model a building in their mind, so they can imagine how the economy functions, and make predictions about how changes will affect the …..real economy…
• The job of a mechanic is to hold a model of how a car works in their mind, so they can make any repair necessary to get the car working again after a breakdown.” (Opportunity by Eben Pagan)

The question that comes to mind is what mental models will bring trading success. Let’s look at that question tomorrow……