Hi there 👋🏽

I have been always curious about different mental models, and this is an attempt to read and write about some of them that seem interesting enough to give it a try!

So the next time I/you come across a problem, let us try to use some of them!

PS - This is not the final list - will keep adding as I find more.

Circle of Competence

From Buffet’s letter to shareholders (1996):

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.

Well, it’s not just limited to investing. Charlie Munger further describes

If you want to be the best tennis player in the world, you may start out trying and soon find out that it’s hopeless—that other people blow right by you. However, if you want to become the best plumbing contractor in Bemidji, that is probably doable by two-thirds of you. It takes a will. It takes the intelligence. But after a while, you’d gradually know all about the plumbing business in Bemidji and master the art.

So confine to your circle of competence and work towards expanding this circle!

First Principles Thinking

We all know what it is, but it’s still very difficult to follow it. Some of the strategies that can help out here - Challenge assumptions and question them. Use 5 whys.

One of the funny story that always comes to my mind -

A new camp commander was appointed and while inspecting the place, he saw 2 soldiers guarding a bench. He went over there and asked them why do they guard it.”We don’t know. The last commander told us to do so, and so we did. It is some sort of regimental tradition!” He searched for last commander’s phone number and called him to ask him why did he want guards in this particular bench. “I don’t know. The previous commander had guards, and I kept the tradition.” Going back another 3 commanders, he found a now 100-year old retired General. “Excuse me sir. I’m now the CO of your camp you commanded 60 years ago. I’ve found 2 men assigned to guard a bench. Could you please tell me more about the bench?” “What? Is the paint still wet ?!?”

Second-Order Thinking

“And then what’’?

This is not limited to just one direction, so let us say it is a business-related decision then how would the customers respond? Suppliers? Media? Employees? Regulators? And many more!

Pareto Principle

Most of you will be familiar with the Pareto Principle or the 80/20 Rule. The principle famously states that most phenomena fall on a power-law distribution (i.e. one quantity varies as a power of the other).

You can see here that, generally, 80% of the results can be achieved with 20% of the effort… this is not groundbreaking. The takeaway here is hidden in the curve. If you move further down the curve you will find that 50% of the results can be achieved with less than 10% of the effort.

The Pareto Principle - How The 80-20 Rule Affects Your Life image


How and when can it succeed?

It is easy to reject new ideas. The natural instinct is to find holes in any new idea and criticise it. Best investors force themselves to see the opposite. Trick is to ask ourselves, “how and when can it succeed?”

The Savvy Gambler Model

You want to expose yourself to scenarios where the payoff is potentially huge and the downside is limited. Some people call this antifragility.

There’s a great book called The Dhando Investor that basically talks about The Low-Risk Value Method to High Returns.

Hanlon’s Razor

Do not assume the worst intention in the actions of others.

It is common for people to damage relationships by believing other people are intentionally trying to cause problems for them, or behaving in a way intended to be annoying. In most cases, these situations are the result of inability or accidental mistakes.

While writing this, I came across a bunch of others, which did not seem so helpful or maybe I did not understand them. Adding them here with Wikipedia link and a short summary in case you’re interested to explore more -

  1. The Map is not the Territory - The map is not the reality; what applied/worked under certain situations might not work under others.
  2. Thought Experiment - To explore often impossible situations and predict their implications and outcomes, examples include Schrödinger’s cat, Infinite Monkey Theorem, Trolley Problem, etc.
  3. Occam’s Razor - Among competing hypotheses, the one with the fewest assumptions should be selected. The simplest explanation is preferable to one that is more complex.