Welcome to the blog post #32! Click here to read more from previous posts.
What's the biggest factor that decides how well someone does in life?
It's their choices, right? But here's the real kicker: what affects the quality of those choices the most?
Is it intelligence, education, profession, social status, or family background? Depending on who you are, where you stand, and what you do, the same issue can be viewed from various perspectives.
The fable of the five blind fortune tellers comes to mind - each feeling a different part of an elephant, from trunk to tail, ivory to leg. Each description was accurate, yet none recognized the whole elephant. The root of their mistake? A lack of diverse and expansive viewpoints.
That's where mental models come in – these are like cheat sheets for understanding the world and making smarter choices.
Think about it: there's the "give-and-take" model that helps you be good to others, the "supply and demand" model that explains how economy works, and the "risk-reward" model for evaluating investment opportunities.
In a nutshell, a mental model is a simplified and organized way of thinking to help you understand and navigate the world by providing a framework to interpret information, make decisions and solve problems.
In this article, we're going to show you 5 mental models that are super simple but super powerful. Lots of successful people use them, and now you can too. They're like weapons for your brain to help you sharpen your thinking and make better choices. Ready to dive in?
1. Occam's Razor: Keeping It Simple
"Simplicity is the ultimate sophistication." - Leonardo da Vinci
It’s the problem-solving principle that focuses to find solutions which are simple to explain to others. The more easily you can explain for an idea, the more clearly you understand it and the more likely it is the right solution.
Warren Buffet has widely applied this principle in his investments. Instead of getting tangled in complicated businesses, Buffett looked for ones with straightforward models. Coca-Cola was a prime example. It sold a timeless product – drinks. People always want refreshments, and that's not going out of style. No complex gadgets or fads – just a basic, easy-to-understand business. It helps him cut through complexities and make the investment in Coca-Cola Company be one of his most successful and enduring investments.
2. Pareto Principle (80/20 Rule): Maximizing Impact
"Focus on the vital few, not the trivial many." - Tim Ferriss
It is the principle that states roughly 80% of outcomes are resulted from 20% of efforts, which are applicable for all aspects of life or in business.
By understanding this principle, you can identify the vital tasks contributing to your personal growth or better performance delivery. Therefore, it is neccessary to dedicate the majority of your time to these high-impact activities, whether it's learning new skills or building meaningful connections.
Jeff Bezos was well known to apply the 80/20 Rule, the Pareto Principle, at Amazon by concentrating on core product categories that drove the majority of revenue. Starting with books, he focused on the vital few – those categories that delivered the most impact. This strategic approach allowed Amazon to establish a strong customer base and efficient operations. As Amazon expanded, Bezos extended this focus to electronics and toys, capitalizing on seasonal trends. By emphasizing the key revenue drivers, Bezos harnessed the power of the 80/20 Rule, propelling Amazon's transformation from an online bookstore to the e-commerce giant we know today.
3. First Principle Thinking: Building from the Ground Up
"I think it is important to reason from first principles rather than by analogy." - Elon Musk
It is the way of thinking that requires you to break down a problem into its most basic parts and thinking creatively to find a new way solutions. It starts with “Why” questions, requires to start from scratch, to understand things deeply and build up solutions with fresh ideas.
Elon Musk is well known as the master of First Principle Thinking in creating innovative solutions for big and difficult problems. Let’s take SpaceX as the example.
Elon Musk has the ambition to enable humanity to become a multi-planetary species by establishing a human settlement on Mars in the future. But the big problem is the traditional space travel is too expensive to realize this ambition. To solve it, he asked why the space travel was too expensive. The reason found out was the rockets were built from costly materials and discarded after each use.
Instead of accepting this issue, he broke down it into basic components by continuing asking: What are the rockets made of? The answer was materials like aluminum. Then the next question is: Can we make rockets reusable? These questions gradually led to his groundbreaking solutions to find cheaper and reusable materials in making spacecraft, which drastically reducing the cost of space travel.
4. Inversion: Preventing Mistakes
"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." - Charlie Munger
It is the way of thinking that requires you to look at a problem or desire from the opposite point of view. It means that you consider the opposite scenarios to gain more insights and avoid pitfalls. It’s the powerful thinking tool that many great thinkers use very frequently. How does it work?
Let’s take some examples. If you want to have a successful career, instead of asking what to do, inquire about what you shouldn’t do. If you want to have a prosperous business, instead of thinking how to make it successful, anticipate potential setbacks and strategize to prevent them.
Charlie Munger, trusted partner of Warren Buffett and vice chairman of Berkshire Hathaway, is known for his application of this mental model.
Normal Approach: Many investors focus on finding reasons to invest in a company. They look for positive indicators and potential growth factors.
Inversion Approach: Charlie Munger looks for reasons NOT to invest in a company. Instead of seeking out the positives, he seeks out the negatives. If he can't find compelling reasons to avoid the investment, it might be a good opportunity.
By focusing on avoiding mistakes and identifying risks, Munger reduces the chance of making impulsive or ill-informed investment decisions. This approach aligns with his above famous quote.
5. Circle of Competence: Staying Within Your Expertise
"Risk comes from not knowing what you're doing." - Warren Buffett
This concept is well known as Warren Buffet’s investment philosophy and appeared in his 1996 Shareholder Letter. For a simple understanding, circle of competence is like knowing what you are really good at. Imagine you have a circle that shows all the things you understand and can do well. It's like your superpower zone. When you stay inside that circle and do what you're best at, you're more likely to succeed.
However, it's crucial not to confuse competence with complacency. The core idea is to prioritize your well-understood domains, avoiding mistakes arising from venturing beyond your knowledge. While growth demands a continuous learning process to expand your circle, acknowledging the answer "I don't know" remains pivotal.
In investing, Warren Buffett highlighted the significance of the circle of competence:
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.”
Warren Buffet has only invested in industries he is knowledgeable about. His investment success with Coca-Cola and Dairy Queen demonstrates the power of leveraging the circle of competence. He is familiar with beverage and fast-food sectors and has in-depth understanding on the business models of these companies, their brand power and competitive advantages.
By mastering this principle, Warren Buffet refused to invest in technology companies, particularly during the dot-com boom of the late 1990s and early 2000s. This decision was based on his admission that he didn't fully understand the rapidly changing landscape of technology and the valuation metrics that were being applied to many tech stocks at that time. While his decision to avoid technology investments during the dot-com bubble resulted in some missed opportunities for short-term gains, it ultimately aligned with his commitment to staying within his circle of competence.
As you wrap up this journey through the landscape of mental models, remember that each insight has the potential to reshape how you perceive the world. The wise embrace of these models can elevate your thinking, propelling you towards wiser choices, deeper understanding, and ultimately, a more fulfilling life. So, go ahead with these mental tools and make decisions with a clear mind.
It’s an interesting topic and there are many more models I haven’t covered yet. So I’ll continue to discuss about this topic in future posts.
That’s all for today. Till next week!
Cheers,
Do Thi Dieu Thuong