Mental models

“To the man with only a hammer, every problem looks like a nail.”

– Charlie Munger, USC Business School 1994

Charlie Munger is a billionaire, value investor and Warren Buffett’s business partner. In his 1994 speech at USC Business School, he outlined some of the mental models that an educated person needs to know: what he describes as “worldly wisdom”.

The general thesis: if you don’t have a broad collection of mental models, then you see everything through a very narrow lens of problem-solving tools. You become the proverbial man with a hammer, to whom every problem looks like a nail. So you need a broad collection of mental models from different disciplines.

Although Munger talks about these models, and lists some of them, he’s never actually published a complete collection of his mental models. Which means that a lot of other people have tried. This is my collection. It’s still a work in progress, so feel free to bookmark and come back later.

Maths and statistics

  • Compound interest
  • Probability
  • Expected value
  • Decision trees
  • Normal distribution
  • Poisson distribution
  • Gaussian distribution
  • Black swan events
  • Power laws

Engineering

  • Margin of safety
  • Points of failure
  • Redundancies
  • Theory of constraints

Physics

  • Critical mass
  • Newton’s laws

Biology

  • Natural selection
  • Homeostasis
  • Symbiotic relationships
  • Minimum effective dose

Microeconomics

  • Supply and demand
  • Utility and marginal utility
  • Specialisation
  • Asymmetric information
  • Perfect competition
  • Monopoly
  • Creative destruction
  • Efficient markets theory

Macroeconomics

  • Comparative advantage
  • National debt and budget deficits
  • Inflation
  • Nominal income, real income and purchasing power

Business

  • Profit and loss
  • Return on equity and return on capital employed
  • Double-entry accounting
  • Goodwill accounting
  • Incentives
  • Advantages of scale
  • Disadvantages of scale
  • Winner-takes-all markets
  • Long-tail markets
  • Crowdsourcing
  • Good strategy, bad strategy
  • Competitive advantage
  • Brand loyalty

Management

  • The Peter Principle
  • Wisdom of the crowds
  • Decentralised management
  • Advantages of co-ordination
  • Circle of competence

Investing

  • Value investing
  • Mr. Market
  • Efficient market theory
  • Graham and Doddsville effect
  • Diversification
  • Asset allocation
  • Cost of capital

Communication

  • Five Whys
  • The Hero’s Journey

List of biases

  • Consistency bias
  • Endowment effect
  • Halo effect
  • Spotlight effect
  • Attribution bias
  • Availability heuristic
  • Confirmation bias
  • Gambler’s fallacy
  • Hindsight bias
  • IKEA effect
  • Planning fallacy
  • Survivorship bias
  • Fundamental attribution error

Other psychology

  • Because principle
  • Reciprocity
  • Foot-in-the-door technique
  • Misdirection
  • Social proof
  • Habit loops
  • Curse of knowledge
  • Dunning-Kruger effect
  • Mental accounting