A mental model is our brains way of representing how something works by simplifying complexity into manageable chunks of information.
Because we specialize, our mental models are generally limited to our professional field.
Having more models gives you more options to choose from when making decisions.
But how can you build a library of mental models in order to make good decisions?
Here is the basic toolbox from which you can build your toolbox of mental models:
The Map is not the Territory
Maps are not perfect and simplify what they are meant to show.
Circle of Competence
Ego often makes you believe you know more than you do. Understanding your actual level of competence is essential to improving decision making.
First Principles Thinking
Start with the first principles and build your knowledge from there.
Running internal thought experiments help us decide what we want and how to achieve it.
It is important to think ahead to second and third order effects instead of just immediate effects.
Consider the most likely outcomes when making a decision even when they may seem like outliers. Always update your prior odds when you have new information.
Approaching a problem from another angle can be useful in offering new options.
The simplest explanation is the most likely one.
When people make an error, it's usually human error or stupidity not spite.
Physics and Chemistry
Observers are not able to truly see a system when they are also a part of that system.
For every force there is an equal and opposite force interacting on it.
The rules of thermodynamics underlie our understanding of modern physics and the study of energy.
An object at motion tends to stay in motion unless acted upon by an outside force.
Friction is a force opposing the movement of an object.
Viscosity measures the force required to overcome friction between two liquids.
Velocity describes both the speed and direction of an object.
Levers offer great output force with little input force required.
This is the threshold before a chemical reaction between can occur.
Catalysts cause a chemical reaction to require lower activation energy.
Combination of various elements that may have vastly different or better characteristics than their component elements.
Natural selection is the process by which random mutation create characteristics that are advantageous or disadvantageous to survival.
Mutations that increase survival are adaptations, and populations adapt over time.
Ecosystems are groups of organisms coexisting in some space together.
Niches are advantages that help a species compete for limited resources within an ecosystem.
This is the desire to protect oneself from harm in the hopes of passing on DNA.
Replication is the process by which DNA and cells proliferate to create multi-celled organisms and offspring.
This is the opposite of competition.
Cooperation is the phenomenon where species enter mutually beneficial relationships.
These are the underlying structure of the animal kingdom.
Incentives are rewards or harms that help organisms to make decisions about the best course of action.
Tendency to Minimize Energy Output
Organisms do their best not to waste their limited energy.
Maintaining stasis relies on repeated, opposing changes which affect each other.
Bottlenecks and Constraints
Bottlenecks are points at which some flow is stopped or slow due to a limitation.
Homeostasis and Equilibrium
Systems regulate themselves (through feedback loops) in an attempt to maintain equilibrium.
The characteristics of a system may change with its size.
Law of Diminishing Returns
When scale increases, marginal benefits tend to decrease in magnitude.
The continual movement in and out of a system.
Leaders are given preferential treatment. In industries, leaders attract more customers, which solidifies their lead.
There are constraints on systems that make further decreases in time, effort, or resources impossible.
Margin of Safety and Backup Systems
Accounting for potential errors and protecting against them causes systems to fail less over time.
Algorithms are a series of inputs and steps that result in a specific outcome.
This is the point at which a system may change to a different phase.
A behavior may emerge that is exponential than merely the sum of its components.
A mathematical process of using probability to determine the spread of results
The process by which money grows exponentially through the accrual of interest and interest upon this interest.
This has exponential effects.
Law of Large Numbers
The average found from a large sample is likely to be close to the true population average.
Multiplying by Zero
Multiplying anything by zero is still zero.
Algebra lets us use placeholders as symbols to test equivalence.
The natural world is in many ways random. Attributing this randomness to a pattern leads to misconceptions.
Regression to the Mean
Another way to explain the Law of Large Numbers.
Deviations from the average are less likely to affect the average in large samples.
The amount of space on the outside of a three dimensional object.
Global and Local Maxima
These are the largest or smallest values in an entire set or in a subset.
The price of doing something in terms of what is lost by not doing another activity.
Never-ending innovation and creativity leads to the destruction of old technology.
Different individuals have different opportunity costs.
Allowing trading lets individuals specialize and minimizes overall opportunity costs
The ability to focus on one aspect of production and build individual advantages.
Seizing the Middle
Controlling the middle steps in production at the beginning offers the greatest opportunities for later growth (in multiple directions).
Trademarks, Patents, and Copyrights
Incentivize creativity because they ensure that inventors can profit off of their own ideas.
Counting each transaction in terms of income and liabilities prevents accounting error.
A measure for the usefulness or satisfaction that comes with additional units of a good or service.
An underhanded payment that allows an individual to not abide by a rule or norm.
The situation in which an item may have different prices in different markets.
Once an arbitrage is noticed, it usually disappears.
Supply and Demand
These are the basic economic factors that determine what is purchased and sold and at what price.
Describes the natural limits on supply and demand.
Markets can be likened to a grumpy neighbor which fluctuates and requires different investment behaviors according to its “moods.”
Military and War
Seeing the Front
Having a firsthand look rather than using models allows for better decision-making.
Opponents with differing resources employ different tactics (or rules) to create competitive advantages during a conflict.
Fought in two geographical areas.
Could be a problem that has multiple sides or an approach that has multiple facets.
Military tactics to act against insurgents or rebels.
May differ to traditional military tactics.
Mutually Assured Destruction
When opponents both have the capability of destroying each other, neither can act because they will both be destroyed.
Human Nature and Judgment
Humans tend to trust each other, which yields efficiency and cooperation.
Bias from Incentives
Human decision-making is largely influenced by the immediate reward of an action.
Associations with incentives or rewards (and not direct incentives) can also affect decision-making.
Tendency to Feel Envy & Jealousy
Humans often feel jealousy of others due to their sense of fairness.
Tendency to Distort Based on Past Association
Past associations distort current decision-making.
People have the capability of deny the reality to sooth themselves.
It is easiest to remember items that are recent, important, frequent, which is a useful skill.
The representativeness heuristic is a decision-making process that relies on grouping similar objects.
Humans are driven to build societies and seek guidance from these societies for appropriate norms and behavior.
Humans have a drive for storytelling.
Humans are curious animals and seek to explore and understand.
What separates humans from other animals is our ability for language.
Humans generally settle on the first conclusion they reach, whether or not it is actually right.
Tendency to Overgeneralize from Small Samples
Humans treat small samples as representative of larger populations even though small samples are prone to error.
Relative Satisfaction/Misery Tendencies
Current human happiness is directly related to their past happiness or the comparative happiness of their peers.
Commitment & Consistency Bias
People are driven to build and keep habits.
Humans do not trust others who are not consistent.
In hindsight, humans believe they knew more in the past than they actually did.
Sensitivity to Fairness
Similar to the tendency to envy, humans are always taking account of fairness.
Tendency to Overestimate Consistency of Behavior
Humans attribute personality traits to situational behaviors, which leads to misconceptions about future behaviors.
Influence of Stress
Biases worsen when humans are stressed.
Because human history is told by the winners, success is attributed to victors’ behaviors rather than luck or randomness.
Tendency to Want to Do Something
Humans have a tendency away from idleness and toward action.
Because of our biases, we often ignore the aspects of a situation that disagree with these biases.
This means that our biases reaffirm themselves.
Realizing our biases and the ways in which the word around us works is important to building robust mental models that allow for effective decision-making.
First-principles thinking is one of the best ways to reverse-engineer complicated problems and unleash creative possibility.
A first principle is a foundational proposition or assumption that stands alone and can’t be broken down any further.
Cooking as an example
The difference between the cook and the chef: terms often used interchangeably yet have an important nuance.
- The chef is a trailblazer, the person who invents recipes.
- Understands the flavor profiles and combinations at a fundamental level that doesn’t require a recipe
- He has real knowledge vs know-how
- The cook, who reasons by analogy, uses a recipe
- He creates something, perhaps with slight variations, that’s already been created.
- If the cook lost the recipe, he’d be screwed
First-principles reasoning cuts through dogma and removes the blinders. We can see the world as it is and see what is possible.
Techniques for Establishing First Principles
A disciplined questioning process, used to establish truths, reveal underlying assumptions, and separate knowledge from ignorance
The Five Whys
Often employed by children to understand what’s happening in the world
An interrogative technique exploring the cause-and-effect relationship of problems
Employing First Principles in Your Daily Life
Move away from incremental improvement and into possibility
Letting others think for us means that we’re using their analogies, their conventions, and their possibilities. It means we’ve inherited a world that conforms to what they think.
When we step back and cut through the flawed analogies, we see what is possible.
First-principles thinking clears the clutter of what we’ve told ourselves and allows us to rebuild from the ground up.
Human brains mistakenly apply linear thinking to nonlinear phenomena.
Linear Bias in Practice
Managers mistakenly prioritize volume and costs over price, without realizing how much extra volume is needed to recuperate loss in profit.
There also exists nonlinear relationships between attitudes and behavior.
Four Types of Nonlinear Relationships
Increasing gradually, then rising steeply
Decreasing gradually, then dropping quickly
Climbing quickly, then tapering off
Falling sharply, then gradually
How to Limit the Pitfalls of Linear Bias
Increase awareness of linear bias.
Prioritize outcomes and not indicators and metrics that don’t have a linear relationship.
Understand the type of nonlinearity one is dealing with in order to prevent overestimations and fall trap to bias.
Use visualization tools to see how changes in variables can correspond to changes in other variables, especially when dealing with nonlinear relationships.
Linear bias is present everywhere, not just businesses. Thus, people need to be aware of pitfalls and apply disciplines to not fall for bias.
Maintaining and using energy wisely is the most effective way to maximize productivity. Below are tactics used by the most productive people to ensure they are working at maximum levels of productivity.
Types of energy:
Physical Energy: The foundation of everything you do. It's the type of energy that's most easily influenced but most often neglected
Emotional Energy: How you're feeling at any given moment. It dictates more than half of your behavior and decision making.
Mental Energy: The highest order of energy, only achievable when you have the physical and emotional stamina to be observant, perceptive, and focus.
How to increase energy:
Physical Energy: Sleep is paramount and should not be underestimated. To compensate for lack of sleep take naps. And if those aren’t possible, taking 10 minute breaks every 90 minutes to 2 hours becomes a saving grace.
Emotional Energy: A big part of changing your emotions is understanding their triggers. If you know your triggers, you can decide whether to respond to them or not.
Mental energy allows you to have a much fuller view of what’s actually happening within your company and on your team. You hold onto your mental energy by observing yourself inwardly without buying into everything
Ask yourself “Are these thoughts I’m having even true?”