Mental Models: 349 Models Explained All we want to do is make sense. Make sense of things around us, why we exist, our actions, and the outcomes we face.
Mental Models: 349 Models Explained All we want to do is make sense. Make sense of things around us, why we exist, our actions, and the outcomes we face. Through evolution, the human mind has responded to this need by establishing a quick ability to view things in terms of cause and effect. And that is pretty much how we all start out learning about the world from childhood. Everything children know comes from what they’ve observed and experienced firsthand. How toys and candies are nice. How a hot stove isn’t. Their entire understanding of the world
Everything children know comes from what they’ve observed and experienced firsthand. How toys and candies are nice. How a hot stove isn’t.
when humans don’t understand something, it’s frustrating. Depressing. It’s interesting because you rarely see a depressed child. I want to live happily in a world I don’t understand. Nassim Taleb
Mental scars from bad experiences cause us to either stay completely away from certain endeavors because the past effect makes us not want to cause it again.
Your own thoughts are not really your own thoughts. Everything you think is a product of the people you meet and the experiences you’ve had, both of which are largely outside of your control.
Your own thoughts are not really your own thoughts. Everything you think is a product of the people you meet and the experiences you’ve had, both of which are largely outside of your control. Robert Shiller
The result is intuitions and hunches – or what Daniel Kahneman terms our system 1. And sometimes that is useful for certain decisions. But the result is also that we have a tendency to dismiss the impact of the millions of variables that lead to an outcome and we thus tend to focus on surface-level results – or single outcomes.
Therefore, the most important things usually require one to slow down and think. But learning how to think critically is not easy. Otherwise, everyone would do it. A world filled with huge complexity makes it impossible to carry every detail of it, and how it works, around in our heads. So we can’t know everything. But we can know the big ideas from multiple disciplines in order to face whatever we’re facing with rationality and a non-clobbered mind.
The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—ones that will do most work per unit.
Every person routinely uses mental models, because essentially, they’re tools we use for explaining things. For example, when we cross a road, we mentally assess how matter moves in a particulate manner, the relationship between apparent size and distance, change in size with time and velocity, and so forth.
the first part of making rational decisions is knowing the right models. Looking at a situation using the wrong models, or no model at all, is dangerous in decision making.
Anyone who proposes a policy, law, or course of action is doing so on the basis of the model in which he, at the time, has the greatest confidence.
Combining these models – or ideas – produces a cohesive understanding. Not combining them produces dangerous results.
Those who cultivate the broad view of ideas are well on their way to achieving worldly wisdom.
No idea is true just because someone says so. Test ideas by the evidence gained from observation and experiment! If a favorite idea fails a well-designed test, it’s wrong!
Opportunity Cost
central component of economics is the time value of money which means that money today is worth more than money in the future. Economically, this relationship is entirely based on opportunity costs.
creative destruction is a theory of economic innovation and the business cycle in a free-market economy. It refers to the incessant product and process innovation mechanism by which new production units replace outdated ones – or ones stuck without innovation.
Double-Entry Bookkeeping
Rent-Seeking
decisions that are good for individuals can sometimes be terrible for groups.
Nash Equilibrium
Controlling the Center
In chess, if you don’t control the center squares and let your opponent control them, they will have an easier game than if they have to fight for their control.
the bishop can control the center from afar. In business, controlling the center of a value chain can prove mightily profitable.
By increasing productivity within each field of specialization, the whole system benefits.
Intellectual Property
The most well-known are copyrights, patents, trademarks, and trade secrets.
Adam Smith then proposed the problem known as “the paradox of water and diamonds” which made it very difficult to explain why diamonds should be valued more highly than an essential good such as water.
Elasticity
the supply and demand relationship explains a lot of things in the world.
prices settle at equilibrium when demand equals supply.
it’s important to know that there are blind spots. In some situations, the model is not as rigid as economics presumes when seen in the context of behavioral psychology, incentives, contrast, etc. As Charlie Munger puts it: Suppose that you raise the price and use the extra money to bribe the other guy’s purchasing agent.
Every system is limited by various constraints with some critical and some less critical. No change to the system will result in overall improvement unless that change addresses the bottleneck.
Arbitrage
Mr. Market
But when Mr. Market becomes extremely worked up—either excited or depressed—you can exploit his out-of-boundary prices.
it sounds easy to put into practice. But the truth of the matter is that there’s a collective mass of real people on the other side of every transaction. This group might be better educated, have more capital, have more power, and have more experience. So after a while, one might feel that Mr. Market and these people are all superior.
Cancer Surgery Formula
They look at this mess and they figure out if there’s anything sound left that can live on its own if they cut away everything else.
Of course, if that doesn’t work, they liquidate the business.
Surfing
Porter’s Five Forces
The five undeniable forces are: 1) threat of new entrants, 2) threat of substitutes, 3) bargaining power of customers, 4) bargaining power of suppliers, and 5) competitive rivalry.
Phillips Curve
Search and information costs are costs associated with determining whether the desired good is available in the market, where the lowest price exists, and so on. Bargaining and decisions
Luxury Paradox
Hick’s Law
Cockroach Theory
Paradox of Choice
Unknown unknowns are risks coming from situations that are so out of this world that they are not imagined in advance.
Diversification
-6-3 rule which goes like this: a bank pays 3% on savings accounts, loans out money to businesses with solid financials at 6%, and then the banker leaves the office at 3 p.m. to play golf.
a reward – that gives the agent sufficient incentive to perform the task in accordance with the principal’s wishes. Principal-agent problems are a frequent cause of market failure.
Minsky Moment
Zero to One Theory
the model essentially proposes that agents have two possible responses to a negative outside effect: they can either exit (withdraw from the relationship) or they can voice (attempt to repair or improve the relationship).
So, we make decisions based on what we most easily recall but this undermines our ability to accurately judge frequency and magnitude.
Anchoring
Availability Heuristic
Reciprocity
Envy and Jealousy
The Stoics warned against the consequences of envy, but yet it’s still ingrained in human nature as ever.
Warren Buffett says:Â It is not greed that drives the world, but envy.
Denial
question or situation is framed can determine your response and lead to an action decided based on whether the options are presented with positive or negative connotations.
They derive pleasure not just from an object’s value, but also the quality of the deal – its transaction utility. The phenomenon helps explain why people are willing to spend more when they pay with a credit card than cash.
Pavlovian Association
presence of a bowl of dog food (stimulus) would trigger an unconditioned response (salivation). Pavlov also came to notice that his dogs started to associate his lab assistant with food,
Groupthink
First-Conclusion Bias
Switching Cost
Charles Darwin is said to not have been able to come up with the theory of evolution without applying a constant process of destroying confirmation bias in his studies.
He constantly sought out and noted observations that were opposed to what he thought and made an intense effort to investigate them.
Confirmation Bias
A commonly held belief is that machinery, equipment, and goods manufactured in previous generations often is better built and last longer than comparable items built during present times.
Survivorship Bias
Curse of Knowledge
In short, knowledge itself becomes a barrier to its own propagation.
Narrative Instinct
Bizareness Effect
Baader-Meinhof Phenomenon
once something has recently come to one’s attention, it suddenly seems to appear with improbable frequency shortly afterward,
Closely related to selection and recency bias.
Delhi and so it offered a bounty for every dead cobra. The policy initially appeared successful. Eventually, however, the number of dead cobras being presented for bounty payment began to increase over time and it was discovered that people began to breed cobras for the income.
When the government became aware of this, the reward program was scrapped, causing the cobra breeders to set the now-worthless snakes free. As a result, the wild cobra population further increased. The apparent solution to the problem made the situation even worse.
the Cobra effect is when an attempted solution to a problem makes the very problem worse.
simplistic policies can come back to bite you.
unintended consequence of people being persuaded to do one thing but then turning around to the opposite.
Boomerang Effect
Curiosity Instinct
Envy is a really stupid sin because it’s the only one you could never possibly have any fun at.
Relative Satisfaction
The human psyche is strongly tended towards the idea of fairness. But life isn’t fair and many can’t accept this. Tolerating a little unfairness should be okay if it means greater fairness for all. We want things to balance but balance is not the order of life.
Principle of Least Effort
good developer is a lazy developer
Cognitive Dissonance
When people smoke even though they know it’s pretty bad for them, they experience cognitive dissonance. Primary source: Leon Festinger
Hard-Easy Effect
Daniel Kahneman once said:Â Nothing in life is as important as you think it is, while you are thinking about it.
Planning Fallacy
Reputation Fragility
Depressive Realism
Skill Compensation
Compassion Face
Imposter Syndrome
False-Consensus Effect
Courtesy Bias
Abilene Paradox
Self-Handicapping
Behavioral Inevitability
False Uniqueness Effect
Backfiring Effect
introducing people to negative information about their favored political candidate would often cause them to increase their support for that candidate.
Ironic Process Theory
Robert Aumann, it’s the notion that two rational people in an opposing argument can’t and shouldn’t come to the conclusion of agreeing to disagree if they have common knowledge of each other’s beliefs.
Ostrich Effect
Ruzzia
Bounded Rationality
fluency heuristic is the tendency to believe more in ideas that are easy to explain rather than those that are hard to comprehend.
Persian Messenger Syndrome
The Persians really did kill the messenger who brought the bad news. You think that is dead? I mean you should’ve seen Bill Paley in his last 20 years. He didn’t hear one damn thing he didn’t want to hear. People knew that it was bad for the messenger to bring Bill Paley things he didn’t want to hear.
Putin
German physiologist Karl von Vierordt created this law stating that humans perceive time at different magnitudes over different durations. We underestimate long periods of time and overestimate short periods of time.
Cunningham’s Law
If you constantly express anger in your private conversations, your friends will likely find you tiresome, but when there’s an audience, the payoffs are different; outrage can boost status.
The internet promotes the same dynamic as road rage: once you’re arguing with a computer (or vehicle) rather than a person, social norms tend to vanish.
