Charlie Munger- a billionaire himself and partner of Warren Buffet, coined this phrase- the latticework of mental model.
Bill Gates considers him “The broadest thinker I have ever encountered.” Warren Buffett once said, “Charlie can analyse and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He is a perfect partner.” “His knowledge – breadth as well as depth- in different areas is breathtaking, so his children call him “A book with a two legs out.”
Charlie has said that to obtain superior return and to succeed in life, one must understand key mental model from different disciplines. Disciplines here means Business, Accounting, Mathematics, Physics, Psychology, Finance, etc.
He realized that instead of collecting all ideas from a particular discipline like Finance, Law, Accounting, he can learn big idea from many disciplines and use/collect them when needed. But merely collecting these ideas was not adequate; they need to catalogue in the mind and available when needed. So he devised a metaphor – Lattice Work of Mental Model.
Wikipedia defines Latticework as
Latticework is a framework consisting of a criss-crossed pattern of strips of building material, typically wood or metal. The design is created by crossing the strips to form a network.Latticework can be purely ornamental, or can be used as a truss structure such as a lattice girder bridge.
Latticework- source flicker.
Mental Model means how the things in the world operate in our own point of view.
Each of these fields is very vast, so one will be swamped if he starts understanding each of the disciplines. The key is, understanding key mental model– not every model- in a specific discipline.
Once we understand a key concept from a different discipline, we can lay them one model upon another – just like a lattice work- hence the phrase latticework of mental models. In short, learn all big ideas and how they interrelate- more rational thinking will naturally follow.
This is what he calls Elementary Worldly Wisdom, and using his system of Mental Models can help you succeed in almost any endeavor.
Charlie has not hinted in some mental model, but he has not specified which one he is referring specifically. This suggests that the path to find these mental model is an important path to better thinking. It is up to us to look for a mental model, which are relevant for superior thinking over the period of time.
Here is brief explanation of few concepts of mental model from Psychology and Mathematics:
Psychology – A person feels, that he thinks rationally, but humans are constantly manipulated by individuals and organisations around (I know you would not believe this, but stay tuned.. I will attempt to cover few psychological tendencies in coming weeks). Savvy marketers and companies manipulate peoples often subconsciously around them into serving their interest. It would be impossible to spot this if you are oblivious to psychology, but armed with few key ideas from psychology, you would be able to understand it better.
A retailer- M&S for example- entice a person to buy clothes with a promise that he can return them after 28 days if he wants to and he happily obliges. His thinking is- I will buy it now and see if I like it. Otherwise, I will return it and get a refund, and it would not cost me anything. However, once you buy it, you own the clothes, and you feel very reluctant to part with something you already own – unless it does not fit or something seriously wrong with it. You end up keeping the clothes. This is called loss aversion tendency.
Daniel Kahneman has demonstrated that we do not respond to loss and gain equally. The pain of losing $100 is two and half time more than the joy of winning $100.
Carl Jacobi was a German Mathematician, who came up with the concept of Invert. Jacobi believed that the solution to many of the difficult problem could be found if the problem were expressed in inverse- by working backward. If I know where I am going to die- I will never go there.
If you want to solve a problem, you have do forward thinking- start to end, along with backward thinking- starting from end and work backwards.
For example- If you are starting a project, you can define what factors will ensure that the project is successful. You also have to think about what would make the project fail and subsequently ensure to avoid reason for failure.
In 2000 Wesco meeting, Charlie Munger has provided a nice example of the multi-disciplinary approach talking about Japanese recession.
“Anyone has to be flabbergasted by Japan’s recession, which has endured for 10 years, despite interest rates below 1% [note- Add 15 years and nothing has changed]. The government is playing all the monetary games, but it’s not working. If you had described this situation to Harvard economists, they would have said it’s impossible. Yet at the same time, there’s an asset bubble in Hong Kong. Why? Because Japan and China are two vastly different cultures. The Chinese are gamblers.
“This is a classic example of why, to be a successful investor, one must draw from many disciplines. Imagine an economist standing up at a meeting of economists and giving my explanation. It wouldn’t be politically correct! But the tools of economics don’t explain what’s going on.”
Here are some of the key mental models, I hope to cover them in future.
- Confirmation Bias
- Self-serving bias
- Availability Heuristic
- Serpico effect
- Hallo effect
- Reciprocatory tendency.
- Hallow Effect
- Prospect Theory and loss aversion.
- Margin of safety
- Critical Mass
- Newton’s law
- Network effect
- Comparative Advantage
- Bubble and Mania
- Return on Invested Capital
- Owner’s earning
- Poor Charlie’s Almanack by Peter Kaufman
- Damn Right- Behind the scene with Berkshire Hathway Billionaire Charlie Munger by Janet Lowe
- Janav blog