Charlie Munger, Mental Models, and Making Better Decisions in Business and Life

Charlie MungerWhat can Charlie Munger, a billionaire, Warren Buffett’s business partner, and vice-chairman of Berkshire Hathaway, teach you about success?

A lot.

He’s spent over 50 years transforming himself into one of the shrewdest men in business. He’s Buffett’s right-hand man. Plenty of people have called him a “learning machine.”

Munger doesn’t just try to lay out a step-by-step blueprint for success. Instead, he shows us something much more valuable: how to become better thinkers.

With more strategic thinking and a rational perspective, it’s easier to weather the inevitable storms in your business and make the most of every opportunity.

Business Success Takes Strategic Thinking, Solving Problems, and Making Good Decisions

No matter how long you’ve been in business, there will always be more decisions to make. Opportunities to assess. Problems to solve.

Sometimes it feels like hard work and technical skills aren’t enough.

After all, what good are those things if we use them on things we should have avoided in the first place?

There’s nothing more frustrating than realizing you’ve wasted your time and effort on something that isn’t good for your business.

But you can’t avoid shying away from solving problems or tough decisions. Not if you want to run a sustainable business.

You might look at titans like Charlie Munger or Warren Buffett and write them off as outliers – strategic geniuses with talents you could never develop yourself.

Not so fast!

While there’s no denying Munger and Buffett’s brilliance, you can take action and learn to think more strategically. You can learn to do what it takes to make sure your business stays around for a long time.

What Separates Billionaires Like Munger and Buffett from the Rest?

The biggest differences between us and business tycoons like Charlie Munger?

Besides billions of dollars, it’s the education they’ve given themselves.

They’ve spent decades learning about disciplines ranging from investing and philosophy, to psychology and economics They’ve pulled out the “big principles,” studied how they are related, and use them to make better decisions.

These principles, known as “mental models,” act like filters that shape the way they interpret the world.

What are Mental Models (and Why They Are Essential)

The image of the world around us, which we carry in our head, is just a model. Nobody imagines all the world, government or country. He has only selected concepts, and relationships between them, and uses those to represent the real system. – Jay Wright Forrester

We are already using mental models every day… even though we might not always be aware of it.

Your reality is different than my reality, just as your neighbor’s reality is different than both of our own. These filters – made up of our unique education and experience (or lack thereof) – determine how we interpret the world.

Mental models don’t just affect our thoughts. They also affect our actions: how we assess opportunities and solve problems both in business and regular life.

With only a few mental models at our disposal, we find ourselves on a familiar path. Whenever challenges arise, we think the same and act the same because “to a man with a hammer, everything looks like a nail.”

Expanding Your “Mental Toolbox”

You have to learn all the big ideas in the key disciplines in a way that they’re in a mental latticework in your head and you automatically use them for the rest of your life. – Charlie Munger

Munger and Buffett recognized that learning “everything” about the world and how it works is impossible. But by relying on the big principles from different fields of knowledge, they developed more mental models (a better framework) to think better and, as a result, make smarter decisions.

They are heads and shoulders above their competitors because they have larger mental toolboxes. This gives them perspective and clarity that their competitors, most of whom stick closely to their niche, don’t have.

When one mental model doesn’t solve a problem or guide them to a decision, Buffett and Munger can simply try another. It’s a recipe for clarity in a confusing world.

Each mental model builds upon all the other because you can layer them and see how they relate. That’s why Munger recommends building a “latticework” of models instead of just a few; each one makes all the others (and the entire system) more effective.

How to Learn Mental Models for Success in Business and Life

It won’t happen overnight, but you can also learn about mental models, see the world more clearly, and make better decisions in your business and personal life!

But learning from all these disciplines – mathematics, law, history, investing, etc. – can seem daunting. You might be wondering where in the world to start.

First, read widely. You’ll want to stay abreast of what’s happening in your niche, but to truly take advantage of new mental models, you need to step outside your comfort zone.

Set aside time every day to explore a topic that interests you – outside your business. It might be biology. Or history or archeology. You’re get more intelligent… and way more interesting at cocktail parties! But you’ll also start to pinpoint big principles and how they connect.

That architecture book you read might help you with a web design challenge, for instance. So could an article about economics.

Take notes when you read and save them somewhere you can go back through them later. The longer you do this, the more your knowledge will compound (“compound interest” also happens to be, yep, you guessed it: a mental model!)

One of the best places to start is to better understand your own psychology and cognitive biases. Read books like Influence to learn the most common thinking pitfalls, and you can notice and avoid them.

It also helps to consciously make connections to what you’ve already learned. With a little thought, you can use a mind map to connect concepts that seem totally unrelated at first blush.

For Munger, this learning is a lifelong process. But it’s also a rewarding one. You’ll end up more curious, interesting, and successful.

Five Mental Models to Get You Started

Munger and Buffett have spent decades accumulating mental models. They’ve even developed a famous checklist they use to assess every investment opportunity.

But finding all of their mental models listed in one place is impossible.

There’s a good reason for that. A huge part of the value of these mental models comes from the process by which you find them. Tools you develop yourself are much more valuable than those that are just given to you. You’re much more likely to use them.

With that said, it’s understandable if you aren’t sure exactly where to start.

Here are five cool mental models I learned about lately to help give you an idea of what a mental model looks like… and how to start applying them.

1. Inversion

inversion mental model

Photo Credit: mediafury

All I want to know is where I’m going to die, so I’ll never go there. – Charlie Munger

The mental model of inversion comes from a German mathematician, Carl Gustav Jacobi. Jacobi, who worked on elliptic functions, urged his students to “invert, always invert.” He thought it was easier to solve difficult problems by looking at them backwards.

According to Munger, many problems can’t be solved “forward” – identifying the ideal outcome and taking steps to achieve it.

Instead, he urges us to think about the things we want to avoid happening. What would cause those negative outcomes? How can you avoid them?

Say you want to be more productive. What are some things that derail your efforts? Not enough sleep? Messing around on social media? Remove the things that lead to bad outcomes, and you move closer to the one you want.

Inversion removes a ton of pressure to run your business “perfectly.” It also acts as a filter to avoid stupid decisions. It’s easier to not be stupid than force yourself to be brilliant every day.

With time, avoiding serious mistakes leads you exactly where you want to go: towards success.

2. Circle of Competence

circle of competence

Photo Credit: Joybot

Circle of competence is a mental model which Warren Buffett and Charlie Munger use to screen investments.

The idea?

You don’t have to be an expert on every company, or even many. You can succeed just by sticking to things within your circle of competence. There’s no need for a former professional athlete, for example, to invest in a biotech startup.

Your circle of competence is all the useful knowledge you’ve built up through studying and experience. The size of the circle is much less important than knowing its boundaries!

In business, this translates into knowing what you do well (your unique selling proposition) and sticking to it. It’s being willing to outsource or bring in outside help for the rest.

You don’t have to use the boundaries of your circle to keep you from learning new things. You just have to use them to filter out which projects to get involved in right now.

So many entrepreneurs get into trouble by being afraid to say, “I don’t know.” They try to do it all, end up driving themselves crazy, and leave tons of money on the table.

3. Prisoner’s Dilemma

prisoners dilemma

Photo Credit: giulia.forsythe

The Prisoner’s Dilemma, which comes from game theory, explores how greed and fear can influence our behavior.

The gist of it: what’s best for you as an individual might not be best for society or a larger group.

The Prisoner’s Dilemma is a hypothetical thought exercise. Say you and an accomplice both get arrested for burglary. The police decide to question you one at a time, but there isn’t enough evidence to convict you for a serious offense… unless one of you confesses.

The cops give you a chance to cooperate:

  • If you and your partner don’t say a word, you both go to jail for a year
  • If you both confess, you both go to jail for three years
  • If you confess but your partner stays quiet, you go free and they go to jail for 10 years
  • If you stay quiet but your partner confesses, your partner walks and you go to jail for 10 years

What do you do?

Keeping your mouth shut makes the most sense from an outside perspective. But there’s a problem: you don’t know what your partner will do. Because you don’t know if they’ll keep quiet or confess, your best move becomes to confess yourself… even though it would have been better for both of you if you’d just cooperated.

This model shows the vital importance of trust in business relationships. It can mean the difference between acting rationally (and making more money), or missing out on valuable opportunities.

4. “Do Something” Bias

do something bias

Photo Credit: Alexis Martin

It seems like there’s always more to do when running a business. We obsess about being productive, so we force ourselves to always stay busy with some task.

But sometimes the best option is not to act. Maybe it makes more sense to think and wait.

We struggle with a psychological bias to always “do something.” But we have to remind ourselves that results, not effort, are the only things that matter. What’s the point of doing a great job if you shouldn’t have done the job in the first place?

Starting up a killer company blog might sound nice, though it’s worthless if your target customers never read blogs. It pulls you away from what really matters.

What if you tried to make fewer, better decisions instead of lots of hurried ones?

Be patient. Trust in your ability to create opportunities, and you’ll have more energy and resources to take them on.

5. The Matthew Effect

matthew effect

Photo Credit: Joe the Goat Farmer

The “Matthew Effect” mental model comes from a passage in the Bible: “For unto every one that hath shall be given, and he shall have abundance: but from him that hath not shall be taken even that which he hath.” It’s also called the “Principle of Cumulative Advantage.”

The idea is the rich get richer, and the poor get poorer. It’s been around since Robert Merton, a sociologist, coined the term in the 1960s.

Your resources and reputation give you more advantages to build even more resources and reputation. Basically, it’s easier for people who already have a little more to get much more.

How can you apply this in the business world?

Focus not so much on dominating your competition, but finding a small advantage and turning it into a larger one. Guard your reputation and your resources with your life!

The Matthew Effect will also help you acquire knowledge. The more you’ve already learned – the greater your intelligence and knowledge base – the more you’ll gain from each new thing you read.

Think Smarter, Act Smarter, and Win

You’re working hard to develop your skills and build your reputation in your niche.

How can you take your business to the next level?

It comes down to better thinking. Knowing how to handle problems, make tough decisions, and recognize which opportunities to take will separate you from your competitors because they’re stuck with a single mental model: businessperson.

That takes not being afraid to explore new disciplines and their principles. Understanding these deeply – seeing how they relate – expands your mental toolbox. You’ll gain confidence in your abilities to handle adversity and the unknown… and you’ll become much more successful.

Have you ever heard of Charlie Munger’s mental models? Do you think they could help you become more effective in your business? Leave a comment below and share your experience!

About Corey Pemberton


Corey Pemberton is a freelance copywriter and blogger who helps small businesses and software startups get more traffic and conversions online. You can find him on his website or follow him on Twitter.

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Mike Feuer

I’ve found tremendous value in the inversion model. Avoiding bad decisions is often a better use of time than looking feverishly for the perfect solution (which usually does not exist)

For our video clients I’ve found if I can offer to avert a negative outcome or problem (especially one they’ve had before), then that effectively provides a positive outcome/solution for them!

In the end we always looking for the path to the ‘brilliant solution’ but altering our path in this way generally leads us to a better solution than we would have otherwise found.

Walter Lewis

Lewis Media Group is my newly launched digital marketing firm. I am always attempting to up-sale my current client companies on our various menu of services, but it always seems to irritate the client, although the solutions I offer are better than what they had thought.

I guess I am suffering from the “Do Something Bias”. I always have felt that I needed to be of service to my clients, but I just as often fail to realize that I do not have to try so hard. Value sells itself, not me. After reading this article, I realize I don’t have to oversell myself, my services, or my company.

Thanks for the insights. I am beginning to study across multiple channels, multiple disciplines, and multiple mental models.

Wally

This was quite something Corey. Very helpful and its actionable. Thank you so much

Corey Pemberton

@Mike,

That’s great to hear you’ve gotten so much out of the inversion model. It’s actually one of my favorites as well. What I would give to get back all that time I spent searching for perfect solutions!

You’re absolutely right: perfection doesn’t exist. And if you keep looking for it, you’ll end up in analysis paralysis mode and won’t get anything done at all.

Thanks so much for your comment.

Corey Pemberton

@Walter

Yes, the “do something” bias is a tough one to overcome. I think it’s even harder for entrepreneurs and self-employed freelancers because it’s that drive which is largely responsible for them deciding to get into business for themselves in the first place.

Sometimes the best option is to save your energy and resources until better opportunities come around. Figuring out when to wait and when to act boldly is an art (one that I think develops with time).

Thanks for your comment. Best of luck with your digital marketing firm!

Corey Pemberton

@Wally

My pleasure. I’m glad you got value from the article!

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