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Mental Models: The Best Way to Make Intelligent Decisions

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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: 

General

  • 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.
  • Thought Experiment
    • Running internal thought experiments help us decide what we want and how to achieve it.
  • Second-Order Thinking
    • It is important to think ahead to second and third order effects instead of just immediate effects.
  • Probabilistic Thinking
    • 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.
  • Inversion
    • Approaching a problem from another angle can be useful in offering new options.
  • Occam’s Razor
    • The simplest explanation is the most likely one.
  • Hanlon’s Razor
    • When people make an error, it's usually human error or stupidity not spite.

Physics and Chemistry

  • Relativity
    • Observers are not able to truly see a system when they are also a part of that system. 
  • Reciprocity
    • For every force there is an equal and opposite force interacting on it.
  • Thermodynamics
    • The rules of thermodynamics underlie our understanding of modern physics and the study of energy.
  • Inertia
    • An object at motion tends to stay in motion unless acted upon by an outside force. 
  • Friction
    • Friction is a force opposing the movement of an object.
  • Viscosity
    • Viscosity measures the force required to overcome friction between two liquids. 
  • Velocity
    • Velocity describes both the speed and direction of an object.
  • Leverage
    • Levers offer great output force with little input force required.
  • Activation Energy
    • This is the threshold before a chemical reaction between can occur. 
  • Catalysts
    • Catalysts cause a chemical reaction to require lower activation energy.
  • Alloying
    • Combination of various elements that may have vastly different or better characteristics than their component elements. 

Biology

  • Evolution
    • 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
    • Ecosystems are groups of organisms coexisting in some space together.
  • Niches
    • Niches are advantages that help a species compete for limited resources within an ecosystem. 
  • Self-Preservation
    • This is the desire to protect oneself from harm in the hopes of passing on DNA.
  • Replication
    • Replication is the process by which DNA and cells proliferate to create multi-celled organisms and offspring.
  • Cooperation
    • This is the opposite of competition.
    • Cooperation is the phenomenon where species enter mutually beneficial relationships. 
  • Hierarchical Organization
    • These are the underlying structure of the animal kingdom. 
  • Incentives
    • 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. 

Systems

  • Feedback Loops
    • 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.
  • Scale
    • The characteristics of a system may change with its size.
  • Law of Diminishing Returns
    • When scale increases, marginal benefits tend to decrease in magnitude.
  • Churn
    • The continual movement in and out of a system.
  • Preferential Attachment
    • Leaders are given preferential treatment. In industries, leaders attract more customers, which solidifies their lead.
  • Irreducibility
    • 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
    • Algorithms are a series of inputs and steps that result in a specific outcome.
  • Criticality
    • This is the point at which a system may change to a different phase.
  • Emergence
    • A behavior may emerge that is exponential than merely the sum of its components.

Numeracy

  • Distribution
    • A mathematical process of using probability to determine the spread of results 
  • Compounding
    • 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.
  • Algebraic Equivalence
    • Algebra lets us use placeholders as symbols to test equivalence.
  • Randomness
    • 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. 
  • Surface Area
    • 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.

Microeconomics

  • Opportunity Costs
    • The price of doing something in terms of what is lost by not doing another activity.
  • Creative Destruction
    • Never-ending innovation and creativity leads to the destruction of old technology.
  • Comparative Advantage
    • Different individuals have different opportunity costs.
    • Allowing trading lets individuals specialize and minimizes overall opportunity costs
  • Specialization
    • 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.
  • Double-Entry Bookkeeping
    • Counting each transaction in terms of income and liabilities prevents accounting error. 
  • Utility
    • A measure for the usefulness or satisfaction that comes with additional units of a good or service. 
  • Bribery
    • An underhanded payment that allows an individual to not abide by a rule or norm.
  • Arbitrage
    • 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.
  • Scarcity
    • Describes the natural limits on supply and demand.
  • Mr. Market
    • 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.
  • Asymmetric Warfare
    • Opponents with differing resources employ different tactics (or rules) to create competitive advantages during a conflict.
  • Two-Front War
    • Fought in two geographical areas.
    • Could be a problem that has multiple sides or an approach that has multiple facets. 
  • Counterinsurgency
    • 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

  • Trust
    • 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.
  • Pavlovian Association
    • 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.
  • Denial
    • People have the capability of deny the reality to sooth themselves.
  • Availability Heuristic
    • It is easiest to remember items that are recent, important, frequent, which is a useful skill.
  • Representativeness Heuristic
    • The representativeness heuristic is a decision-making process that relies on grouping similar objects.
  • Social Proof
    • Humans are driven to build societies and seek guidance from these societies for appropriate norms and behavior.
  • Narrative Instinct
    • Humans have a drive for storytelling.
  • Curiosity Instinct
    • Humans are curious animals and seek to explore and understand.
  • Language Instinct
    • What separates humans from other animals is our ability for language.
  • First-Conclusion Bias
    • 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.
  • Hindsight Bias
    • 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.
  • Survivorship Bias
    • 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.
  • Falsification/Confirmation Bias
    • 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.
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