How Charlie Munger mental models works like magic

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Charlie Munger Mental models are quite popular among his fans!

In this article, we are going to see the expanded view of it. Stay tuned.

Charlie Munger, the Vice Chairman of Berkshire Hathaway and Warren Buffett’s long-time business partner is known for his emphasis on using mental models to make better decisions.

Charlie Munger Mental models are frameworks or thinking tools that help individuals understand and navigate the complex world.

Munger has talked extensively about the importance of developing a latticework of mental models to improve decision-making.

Charlie Munger credits Mental models for his sharp thinking and rational behavior.

Read more: 30 best Charlie munger quotes that makes you smarter

Charlie Munger Mental Models:

  1. Inversion:

Invert, always invert. As Charlie Munger says ” All I want to know is where I’m going to die, so I will never go there”.

Instead of trying to solve a problem directly, think about the problem in reverse. Consider what you want to avoid, and work backward to achieve your goal.

E.g: If your goal is to reduce body fat percentage Instead of focusing on what food to eat, You should focus on what food needs to be avoided.

But Inversion helps us to think of all the worst possible things that can happen & avoid them. The key is to avoid picking the wrong cards rather than picking the right one.

2. Circle of Competence:

Both Warren Buffett and Charlie Munger known for sticking to their ” Circle of competence” in investing opportunities.

Circle of competence means Focus on what you know and understand. Munger advises investors to stay within their circle of competence and avoid making decisions in areas they don’t understand. Knowing your limitations is crucial.

You have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction that you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.

In simple words, play the game where you have an edge. Never play game where you lose.

3. Multiple Models:

Don’t rely on a single mental model.

Munger suggests building a diverse array of mental models from various disciplines, such as psychology, economics, physics, and biology, to gain a broader perspective on a problem.

Munger explains: “Models have to come from multiple disciplines because all the wisdom in the world is not to be found in one little academic department… Fortunately, it isn’t that tough because 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person.”

That said, Munger points out that there is no ‘master list’ that will work for everyone, rather you will need to build and continually update your list of mental models depending on your challenges, needs and context.

4. Elementary Worldly Wisdom:

This model encourages people to develop a deep understanding of the fundamental principles in various fields. It involves learning the key concepts and ideas that underlie a subject, which can be applied across different situations.

It involved Mathematics, accounting, Grandma’s rule, Management, economics, Psychology, Engineering, Physics, Biology, Microeconomics, Bureaucracy etc.

5.Probability and Statistics:

Charlie Munger is a great admirer of the work of Mathematicians Fermat & Pascal.

The two mathematicians have probably done more for investors than anyone else because they developed the original ideas behind modern-day probability.

In 2008 speech titled by ” Art of stock picking” Munger used the work of Fermat & Pascal to describe how inefficient the market is:

“The model I like to sort of simplify the notion of what goes on in a market for common stocks is the parimutuel system at the racetrack. If you stop to think about it, a parimutuel system is a market. Everybody goes there and bets and the odds change based on what’s bet. That’s what happens in the stock market.

Any damn fool can see that a horse carrying a lightweight with a wonderful win rate and a good post position etc., etc. is way more likely to win than a horse with a terrible record and extra weight and so on and so on. But if you look at the odds, the bad horse pays 100 to 1, whereas the good horse pays 3 to 2. Then it’s not clear which is statistically the best bet using the mathematics of Fermat and Pascal. The prices have changed in such a way that it’s very hard to beat the system.”

“We operate that way ”‘ I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time.

To me, that’s totally insane. The way to win is to work, work, work, work and hope to have a few insights. How many insights do you need? Well, I’d argue that you don’t need many in a lifetime. If you look at Berkshire Hathaway and all of its accumulated billions, the top 10 insights account for most of it. And that’s with a very brilliant man. Warren’s a lot more able than I am and very disciplined, devoting his lifetime to it. I don’t mean to say that he’s only had 10 insights. I’m just saying that most of the money came from 10 insights.”

It is all about waiting for the perfect opportunity when the probability of success is high.

Munger emphasizes the importance of understanding basic probability and statistics to make better decisions, especially in the world of investing.

Charlie Munger’s approach to mental models is about developing a well-rounded and adaptable way of thinking. By incorporating these models into your decision-making process, you can become a more effective problem solver and decision maker in various aspects of your life.

Charlie Munger Books:

Most of the  names mentioned here were written books by Charlie Munger himself, but few books he contributed to it’s writing.

  1. Poor Charlie’s Almanack: The wit & wisdom of Charlie T. Munger
  2. University of Berkshire Hathaway: 30 years of lessons learned from Warren Buffett & charlie Munger at the annual shareholder meeting (Contributor)
  3. The Psychology of Human Misjudgment
  4. On Success
  5. Worldly Wisdom
  6.  The rise of Golfer – Lawyer – Fisherman Taylor Raum amid friends such as are not often found

Charlie Munger book recommendations:

  1. The Selfish Gene

Charlie’s Comment: “I had to read [this book] twice before I fully understood it.”

2. Titan: The Life of John D. Rockefeller, Sr.

Charlie’s Comment: “One of the best business biographies I have ever read.”

3. Andrew Carnegie

Charlie Munger recommended this book in the “Poor Charlie’s Almanack” book.

4. Models of My Life

Charlie Munger recommended this book in the “Poor Charlie’s Almanack” book.

5. Ice Age

Charlie’s Comment: “Best work of science exposition and history that I’ve read in many years!”

6. Deep Simplicity: Bringing Order to Chaos and Complexity

Charlie’s comment: “It’s pretty hard to understand everything, but if you can’t understand it, you can always give it to a more intelligent friend.” –

7. A piece of the action

Charlie’s comment: “Most people here won’t be able to put it down.

8. The Little book of common sense investing

Charlie’s comment: “A useful contribution to fellow citizens.”

9. Benjamin Franklin

Charlie’s Comment: A book I like.

10. Outliers

Charlie’s comment: Perfectly Marvelous Book

11. Faraday, Maxwell and the electromagnetic Field

Charlie’s comment: I Just hugely enjoyed it. Couldn’t put it down.

12. A universe from Nothing

Charlie Munger recommended this book at the Daily Journal meeting in 2013

13. Benjamin Franklin – An American Life

Charlie’s comment: It’s hard to write a bad book on such an interesting subject.

14. Einstein – His Life & Universe

Charlie’s comment: I’ve read all the Einstein biographies, and this is by far the best.

15. Pride in Performance

Charlie’s comment: Will demonstrate shrewd compensation systems in a whole chain of small businesses.

16. Hard drive

Charlie’s comment: You get a feeling for what it took to write and sell software in the software revolution.

17. Getting it done

Charlie’s comment: This book is must reading for those seeking to maximize their contribution to the constructive work of the world.

18. Warren Buffett Portfolio

Charlie’s comment: Not only very well written but a considerable contribution to the synthesis of human thought on the investment process

19. The Outsiders

Charlie’s comment: Details the extraordinary success of CEOs who took a radically different approach to corporate management.

20. The Greatest trader ever

Charlie’s comment: He made a lot of money in entirely legal ways but may have created a lot of trouble for himself in the process.

21. In the Plex

Charlie’s comment: I hate to admit this because I’ve ignored high tech all my life, but I read this book. And I found it a very interesting book.

22. The Martians of science

Charlie’s comment: A hell of a book about five Hungarian physicists, driven to the United States by Hitler, who contributed much to science here.

23. The Language Instinct

Charlie’s comment: Says that human language ability is not just learned, it is deeply buried – to a considerable extent – in the genome.

24. The Years of Lyndon Johnson

Charlie’s comment: I think reading is very important for anyone who wants a view into the human condition

25. Three Scientists and Their Gods: Looking for Meaning in an Age of Information

Charlie Munger recommended this book in the “Poor Charlie’s Almanack” book.

These Charlie Munger book recommendations were sourced from various interviews, articles in Daily Journal, and poor Charlie’s Almanack book.

Charlie Munger mental models is applied to make better decisions not only in investing, but also in life too.

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