To The Moon

Mental models are especially important when we are faced with complex problems because it gives us the ability to see the world from multiple perspectives. Unfortunately, however, we often tend to view reality through a single lens and divide it into discrete topics. This point is well illustrated in The Great Mental Models: Most of us are learning something, rather than being exposed to other disciplines at the same time to develop a more macro view. We don't have a multidisciplinary mindset, so we can only see things from one perspective. To better navigate the complexity of stock market, we need what Charlie Munger calls a 'mental model grid' (shown below). Grids are a great way to conceptualize mental models because they show the interconnectedness of knowledge. Once we have learned something, we need to put it back into a system that produces interconnections. Only then can we begin to build an understanding of the whole. As Shane points out, it's about translating the knowledge contained in the mental models into the value of the grid. 4 Mental Models You can also establish mental models by starting with the following 4 suggestions. 1. Reverse Thinking Reverse thinking is one of the most powerful mental models. As a thinking tool, it can help us to identify and remove obstacles from the other end of the starting point in reverse. For example, say you are going to dive into the stock market. Instead of asking yourself "What three things should I do to make money? You should ask yourself "What five things make me lose money?" The idea is, don't think about what you want, think about what you want to avoid. Charlie Munger once said I just want to know where I'm going to die so I never have to go there. Thinking backwards doesn't give you the answers to all your questions, but it always improves the way you think. 2. First principle thinking It's confusing to you? Let's look at how Elon Musk explained this principle: Well, I do think there’s a good framework for thinking. It is physics. You know, the sort of first principles reasoning. Generally I think there are — what I mean by that is, boil things down to their fundamental truths and reason up from there, as opposed to reasoning by analogy. First principles as the most basic assumptions can be derived by separating the basic ideas from any possible assumptions on which they are based. In the early days of Space X, Musk was told that batteries were really expensive and would always be this expensive. However, instead of settling for that answer, he broke the problem down into a few basic parts. First, he determined the material composition of the battery. Then he priced these materials at the London Metal Exchange and calculated the cost of building them. It turned out that building the battery himself cost only 13.3% of the original price. By reasoning through the fundamentals, Musk was able to break the mold and identify opportunities that others missed. 3. Second-order thinking Each action leads to a result, and each result leads to further results, which is known as the second-order effect. Second-order thinking means taking these second-order effects into account when considering a problem. In other words, it means considering the possible effects of these effects. Second-order thinking is a powerful thinking tool because things don't always go as they seem to. When we solve a problem, we often inadvertently create an even worse one. Second-order thinking allows us to examine the possible long-term consequences of a decision before we make a bad one. For example, you bought a stock just because a news and sold an excellent stock you previously held. Later you found that you bought the stock at high and the stock you held before went up. So you can ask yourself several questions beyond the news to think about the second order consequences: Is this stock worth investing so much? Is this stock better than the one you hold? What's the possible result after buying this stock? 4. 80/20 Principle The Law of Two and Eight (also known as Pareto Principle) is named after the Italian scholar Vilfredo Pareto, who pointed out that 80% of Italy's land is owned by 20% of the population. There are many similar examples, such as: 80% of the harvest comes from 20% of the effort. 80% of the profits come from 20% of the customers. 80% of the happiness comes from 20% of the sources. So, the key is to realize that most things in life are not evenly distributed. Therefore, to get better results, you should focus on the 20% of things that deliver 80% of the benefits. In other words, you need to find the excellent stocks and put more capital on it. It should also be noted that mental models are not evenly distributed. There are thousands of mental models - some of them more useful than others - so you can use the 80/20 principle to find the 20% that works best for you. Do you think the 4 mental models are useful? Share your thoughts in the comment section~