The Power of Mental Models

Mental models are powerful tools that help us organize our thoughts about how the world works and make better decisions. In a speech at USC Business School in 1994, 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."[1]

Munger's point is that the utility of knowing something is in being able to apply it. We can learn from our own experience and that of others, but past events offer no guarantees of the future. By organizing what we've learned into frameworks, we can adapt to new situations and make calculated decisions. Mental models are particularly useful to understanding complex systems and situations in which new and changing information is common.

Many of us have encountered mental models, especially in formal education. Economic models like supply and demand, scientific models like weather forecasts, and mathematical models like the bell curve are examples of frameworks that help us think about the world. Models like these provide a repeatable way of evaluating dynamic information and situations.

Examples of mental models

The Scientific Method is a mental model that has been applied within the scientific community for centuries. It is a repeated process of making observations about a phenomenon, formulating and testing a hypothesis, and updating that hypothesis based on the tests. There are two key takeaways from the process. First, it is empirical, i.e., it involves making non-judgmental observations of actual events. Second, the process is iterative: the hypothesis is continually updated to better represent reality, and each test provides data to make the hypothesis more robust. Derivatives of this important process have been applied throughout history in fields from business to farming, and have yielded many important discoveries.

First Principles thinking is a mental model that reduces a system to its fundamental components. This model traces back to the time of Aristotle, who defined first principles as "the first basis from which a thing is known." First principles thinking strips away how things have been done in the past or ideas that others have had. It looks to the fundamental elements to craft new systems or solutions to problems, free from the influence of what has already been done. Many innovations and paradigm shifts have come from those who have rejected conventional wisdom and come up with a new way to deliver value.

Probabilistic Thinking is a mental model that evaluates potential outcomes on likelihood (a 70% chance), rather than whether something will or will not happen in absolute terms. In her book Thinking in Bets, Annie Duke talks about how thinking probabilistically helps open us to new information to adjust our confidence level. This helps narrow our uncertainty and leads to more accurate beliefs, and is preferable to "having to grossly downgrade from 'right' to wrong.'"[2] When compared to thinking in absolute terms, thinking probabilistically makes our beliefs more resilient in the face of uncertainty.

What if we don't use mental models?

This is a bit of a trick question. Whenever we encounter a situation, we are using some framework to decide how to react and respond. It may be a past experience that we or someone else has had. It might be how we observe others interacting with the situation. Our brains are wired for pattern recognition and to look for similarities to situations we've encountered before, even if current circumstances are very different.

In their paper "Judgment Under Uncertainty"[3], Amos Tversky and Daniel Kahneman address heuristics, which are shortcuts in thinking we use out of habit, or when we're short of information or time. The authors write: "These heuristics are highly economical and usually effective, but they lead to systemic and predictable errors." Being intentional about the mental models we employ makes our decision making more robust and can provide a sanity check for our heuristics.

Other resources

In his 1994 speech, Charlie Munger advises that we have multiple models in multiple fields, so that we can apply that which is most appropriate for the situation. Each mental model is a tool that will help us see the world more clearly and help us make better decisions. Here are some links to other helpful resources that will help you expand your toolbox:

If you're looking for a place to start, both Clear and Parrish have very well-written articles on First Principles thinking.

Jump Start

Imagine yourself 12 months from now, having achieved a significant goal in your life. From there, imagine what happened in the past year to make it happen.

If you'd like to talk and learn more about mental models, and especially if you'd like help applying them in your life or business, please message me on LinkedIn or Twitter.

[1] Munger, C. (1994). A Lesson in Elementary, Worldly Wisdom. [Transcript].

[2] Duke, A. (2019). Thinking in Bets: Making Smarter Decisions When You Don’t Have All the Facts.

[3] Amos Tversky and Daniel Kahneman, Judgment Under Uncertainty: Heuristics and Biases; From Science vol. 185, 1974. Kahneman's Thinking, Fast and Slow, a terrific read, devotes an entire section of the book to heuristics and biases.