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The Top 100 Mental Models Needed To Succeed In Business

Charlie Munger refers to a “latticework of about 100 mental models” that he and Warren Buffett credit for their successful investing. Munger points out that if you don’t master the “multidisciplinary” approach of such “mental constructs”, you will remain in the “middle ranks” or “shallows” in life.

I’m fascinated by these models, and their application to business (not just investing) and life, and decided to keep a list of ones I run across (some are related to Munger and others I’ve learned about elsewhere (but believe Munger might appreciate)).

Warren Buffett's Right-Hand Man Charlie Munger

I haven’t hit 100 mental models yet (sorry for the fib in the headline), but I’m going to keep adding ones until I do…or die trying. I might even exceed 100. Enjoy.

Attribution Theory (aka”Cause Theory”)

AutoCatalysis (aka “Evergreen” or “Self-Breeding”)

Compound Interest

Confirmation Bias (aka Goal Seeking or My Side Bias )

Cumulative Advantage (aka The Matthew Effect or “The rich get richer”)

Incentives (“Perhaps the most important rule in management…”

Inversion — “Invert, always invert”

Law Of Large Numbers (aka The Law of Averages)

Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition

Many of Charlie Munger's mental models can be found in Poor Charlie's Almanack.

Law of Scale

Network Effect

Over-Confidence (aka The Man on a roll” theory)  – Someone winning in gambling produces dopamine which then produces over-confidence in that person who then gambles more (an irrational behavior).

Pareto Principle (aka “The 80/20 Rule”)

Parkinson’s Law — Named after Cyril Northcote Parkinson who stated in an essay in the Economist in 1955 that:

“Work expands so as to fill the time available for its completion.”

You probably recognize this in your day to day life where you might wait until the last moment to return a library book or leave to the airport.

In important version of Parkinson’s Law in business states that “expenditures rise to meet income.”

Pass the Baton (“We All Have to Die”)

Pavlovian Association — When the experience of one thing leads to the effect of another — after repeatedly being paired together — that is called Pavlovian Association (after Ivan Pavlov’s classical conditioning).

Munger says that Paley of CBS was a business example of this: he didn’t want to hear what he didn’t like to hear. Those around him learned that and soon told him only what he wanted to hear.

Eventually that led to a decline in market share for CBS (which was once the only major tv network).

Scarcity – People are motivated by what they stand to lose if they don’t act now. That’s why the QVC countdown clock is so important for sales on television.

Self-Interest — Munger says one of his favorite “human misjudgments”is how the brain subconsciously will decide that what’s good for the holder of the brain is good for everyone else.

Some folks refer to this as people dialing into the WIIFM radio station (as in”What’s In It For Me”)

Social Proof – Munger points to Social Proof as a psychological form of scale. Many people are influenced by what others do and approve — they believe that the more people that use a product the better that product is.

Squelch By Denial – This is related to “Self-Interest” above…humans squelch anything that interferes with their own personal success or income.

Munger: “You squelch by denial what you’ve recognized would make ill of yourself or interfere with your income” (for more on this, check out  1:40 or so into this Stanford/Charlie Munger Q&A video) is the accounting profession — he points out how they “sold out” in such instances as derivatives trading.

Do you know of any mental models you want me to add?

21 Comments

  • Carolyn

    Please keep going!

    What about – the law of 72 for doubling, the Kepner Tregoe method, back-up/redundancy (design for the worst case), bottlenecks, feedback loops, etc.?

  • http://www.robdkelly.com/about/ Rob Kelly

    Thank you, Carolyn! Those are great ideas for additional mental models.

    I’ll add them to the list one ones to research!

  • http://www.facebook.com/kleinrivarola German Klein Rivarola

    This is great, check out http://www.thinkmentalmodels.com/
    this guy offers a pdf with 100 mental models aprox.

  • http://tips-on-how-to-lose-weight-fast.com/ D@tipsto loseweightfast.com

    Look forward to the rest – I use models to type people and understand what motivates them.   Thanks for the great post.

  • http://www.robdkelly.com Rob Kelly

    Cool quote about Mental Models:

    “The world simply can’t be made sense of, facts can’t be organized, unless you have a mental model to begin with. 

    That theory does not have to be the right one, because you can alter it along the way as information comes in. 

    But you can’t begin to learn without some concept that gives you expectations or hypotheses.” 

    (Hampden-Turner, C. Creating Corporate Culture: From Discord to Harmony)

  • Guest

    Unfortunately thinkmentalmodels pdf lacks any originality. Better to read Munger book/articles and buy “Influence” book by Robert Ciadini.

  • Stan

    What the hell are mental models? unless someone can define it in a non-vague crap form then I’ll believe it exists. It reminds me of NLP somehow… a pile of bullshit.

  • http://csinvesting.wordpress.com/2012/08/29/behavioral-finance-pop-quiz-on-bdx/ Behavioral Finance; Pop Quiz on BDX | csinvesting
  • http://deepaknair.com/2012/09/30/laws-mental-models-common-sayings/ Laws, Mental Models & Common Sayings
  • Andrew McVagh

    Great list! You have some I completely missed which is a huge help :)

    One question though: how do you learn them so they are always at the front of your mind when you need them?

    I ask because I find myself in situations where I forget some (or all) of the mental models I’ve collected when I truly need them.

  • Andrew McVagh

    I’m still working on ways to keep my mental models more readily available and I’m starting to think that the key may be the latticework in Charlie’s ‘Latticework of Mental Models’.

    I now think it’s at least as important as the models themselves, a sort of system that helps remind us of the right models in the right situations and how they interact.

    To that end I am experimenting with a couple different systems to see if I can make my models easier to recall and use when I need them:

    http://www.mymentalmodels.info/the-latticework-is-as-important-as-the-models/

    Thoughts?

  • http://www.ongig.com/ Rob Kelly

    Excellent, Andrew! The more Munger/Mental Models info the better!

  • http://www.lifeofmatt.net lifeofmatt

    There’s an entire branch of psychology dedicated to this… Here: http://mentalmodels.princeton.edu/about/what-are-mental-models/

  • http://www.ongig.com/ Rob Kelly

    Thanks for sharing this mental models resource, Stan/LifeofMatt! Awesome.

  • Afamiii

    A few more that jump to mind

    Margin of safety

    Sunk cost

    Five forces

    Agent problem (though one might say it is incorporated in incentives and self interest)

    Supply and demand

    Marginal cost/Marginal utility

    Due process

    Checklists

    Competitive advantage (sources of), Monopoly, Oligopoly

  • http://www.ongig.com/ Rob Kelly

    Thanks for adding a few more mental models, Afamiii!

  • John C

    This is interesting. I’d like to add that very few people use mental models. I got introduced to this via experts like Buffett, Jay Abraham and Jeffrey Manu. There’s also a book by Daniel Kahneman that is particularly interesting. Check out this link as well. http://www.growingstartup.com/the-automated-mental-frameworks-of-a-successful-entrepreneurs/#sthash.9xRSXODR.7sbLbm2r.dpbs

  • http://www.ongig.com/ Rob Kelly

    Great mental model additions, Afamiii! Thank you. +r

  • Brian

    Charlie Munger is brilliant. I had the chance to watch him and Warren Buffet take questions at Berkshire’s shareholder meeting. http://kehmresearch.com/2016/03/17/face-knowledge-vs-deep-understanding/
    He’s also great a story telling and speeches.

  • Afamiii

    A mental model is a way of organising information. Its usefulness is in its ability to reach conclusions about the data faster and more easily.

    An example is the 80/20 principle which is a model that denotes that 80% of the value is normally in 20% of the causes. In getting a list of 50 factors that make customers unhappy with my company, from my research dept. The model guides me to find and focus on the 10 that account for 80% of the impact.

  • http://www.ongig.com/ Rob Kelly

    80/20 is a great additional mental model, Afamiii. Thanks for the addition!