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Make Better Decisions with Charlie Munger's Mental Models

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Charlie Munger and Warren Buffett on CNBC

Warren Buffett (left) and Charlie Munger 


By John Millen

Charlie Munger died this week. He was, according to my (Google) calculations, 99.9176 years old. A great ROI. 

That number is for my finance and investment readers. You’re welcome.

On January 1, 2024 Munger would have turned 100 years old.

If you’re not interested in investing and finance, you might not be familiar with the name Charlie Munger.

And if you only have a surface level understanding of Munger you might know him as the wise-cracking “sidekick” of Warren Buffett as co-chair of Berkshire Hathaway. 

He was much more than that: an attorney, a brilliant investor and billionaire. Since this is not an obituary, I encourage you to learn more about Munger starting on Wikipedia.

Munger did have a gift for concise, insightful observations about business and life, which his cult-followers called Mungerisms, as well as deep, thoughtful essays and talks. 

One example of his quips: “All I want to know is where I’m going to die, so I won’t go there.” (He went there: Santa Barbara, California)

In fact, Munger’s wisdom is captured in a great, recently updated book called Poor Charlie’s Almanac.

All of this made Munger a colorful character, which hid the depth of his thinking. I want to share what made him one of the world’s most unique and interesting thinkers, writers and speakers.

Applying mental models

Munger dedicated his life to reading and learning to understand reality through the use of multidisciplinary mental models.

He described his approach in his 2007 commencement speech at the University of Southern California:

Attain fluency on the big multidisciplinary ideas of the world and use them regularly. 

What I noted is that since the really big ideas carry 95% of the freight, it wasn’t at all hard for me to pick up all the big ideas from all the big disciplines and make them a standard part of my mental routines. 

Once you have the ideas, of course, they are no good if you don’t practice — if you don’t practice you lose it.

So I went through life constantly practicing this model of the multidisciplinary approach. 

Well, I can’t tell you what that’s done for me. It’s made life more fun, it’s made me more constructive, it’s made me more helpful to others, it’s made me enormously rich, you name it, that attitude really helps.

Expanding your mental toolkit

Munger defined mental models as frameworks or cognitive tools that help us understand and interpret the world. His approach involves continuously expanding his mental toolkit by acquiring insights from diverse fields of knowledge.

These mental models are drawn from various disciplines, such as psychology, mathematics, physics, and biology and they serve as thinking devices to aid in problem-solving and decision-making.

To give you a better understanding, here five examples of Munger’s mental models:

1. Invert, always invert

One of Munger's most celebrated mental models is the concept of inversion. "Invert, always invert" was his mantra. Rather than focusing on how to achieve success, he encourages us to think about how to avoid failure. 

This simple yet powerful shift in perspective forces a consideration of potential pitfalls and leads to more robust decision-making.

“I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: ‘Invert, always invert.’ I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes,” Munger said.

2. Learning from the errors of others

In a similar mental model, Munger embraces the idea of learning vicariously from the mistakes of others. This emphasizes the importance of studying the experiences and missteps of those who have gone before us. 

By doing so, we can gain valuable insights without having to endure the consequences of the same errors.

“I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories,” Munger said.

“After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory? 

“Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries.”

3. Circle of competence

Munger advocated staying within one's circle of competence. This mental model underscores the importance of understanding the limits of one's knowledge and expertise. 

By acknowledging what we don't know, we can avoid unnecessary risks and make informed decisions. Munger himself adhered to this principle, consistently investing in areas where he had a deep understanding.

4. Lollapalooza effect

Munger often emphasized the cumulative impact of multiple factors on decision-making. The Lollapalooza Effect, as he called it, occurs when several cognitive biases or tendencies converge to produce a disproportionately powerful outcome. 

Understanding this model helps in identifying and mitigating the combined influence of various psychological factors, enhancing the quality of decision-making.

5. Probability and decision trees

Munger had a keen appreciation for the role of probability in decision-making. By constructing decision trees, he visualized various possible outcomes and assigned probabilities to each. 

This helped Munger to assess the potential risks and rewards associated with different courses of action. It's a methodical way to navigate the uncertainties inherent in business and life.

Munger's approach to using mental models is a masterclass in disciplined thinking. These are just a few of the mental models Munger employed. 

His commitment to continuous learning and his ability to synthesize insights from various disciplines set him apart as a sage in the world of business and life. 

I encourage you to learn more about the intricacies of mental models. Munger has shown us not just a roadmap for better decision-making but a profound philosophy for mastering the game of life.


Image: CNBC

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