The Mental Models of Charlie Munger – Invert, Always Invert…And more

Perhaps my favourite mental model from Charlie Munger is – Invert, Always Invert.

It is tricky to plan for success, there are too many factors and unknowns. Often it’s easier and more definite to avoid failure. Turn the problem upside down, that is, to invert it.

Charlie Munger is famous for saying “All I want to know is where I’m going to die, so I’ll never go there.” Inspired by the German mathematician Carl Gustav Jacob Jacobi.

Inverting some ideas:

  • Don’t try to make money, avoid losing it.
  • Don’t try to gain customers, keep your existing ones happy to prevent them from leaving.
  • Don’t try and have a successful relationship, avoid the pitfalls of a bad one.

More mental models from Charlie Munger

  • The Swiss Army Knife Approach – You need multiple models to cope with a complex world
  • Make Friends with the Eminent Dead – There is a reason their ideas persist, even in a noisy world
  • Invert, always invert – Problems are easier to solve if you turn them upside down
  • Compounding – Things grow on top of each other, exponentially, if you don’t mess things up
  • Crush your Cherished Beliefs – Learn to unlearn
  • Opportunity costs – Chosing something (including nothing), means forgoing something else
  • Parimutuel Betting – Consider the quality and the price you are paying. You are looking for a mispriced gamble.
  • Survival of the Fittest – Organisms that are better adjusted to their environment, are the strongest. Specialisation in a niche is key.
  • Margin of Safety – Or redundancy. Built into everything that lasts over time.
  • The Superpower of Incentives – Reward and Punishment superresponse tendency. Think about the underlying incentives and how they will be gamed. Do not only think of what incentives are needed to drive certain behaviour, invert it, what behaviour will those incentives drive.
  • Independent Thinking – Like asking a barber if you need a head-cut. There are the experts, know more, but also peverse incentives.
  • Simplicity – No difference in reward. Take simple ideas, seriously. Use the Fat pitch strategy – No need to be active all the time (to become a successful [investor]). Swing when confident.
  • Technology As A Problem – Requires too much weight on predicting the future, not enough of the now (Ben Felix has a great video on this). More likely to be using chairs in 2040 or Tik Tok?
  • The World’s Most Intelligent Question – Why? Why are things happening? Why are things not happening? – Examine the outliers.
  • Circle of Competence – Stay within your circle’s edges. Know it’s boundaries.
  • Filters – Elimninate, before selecting. For example, my default when investing is to Vanguard, USD and Ben Felix’s opinions. I then deviate when the filters do not yield what I am seeking. Google is a form of a filter.
  • The Fat-Pitch Strategy – Only swing when it’s in your optimum zone or sit on your ass investing. Make fewer selections.
  • Because you are worth it – Be deserving of what you want. The best way to get what you want, is to deserve what you want.
  • Probability Mindset – Think of likely outcome (balanced against impact if adverse). What do you need to stack the probabilities in your favour.
  • The Bell Curve – Data will hover around the average and become increasingly improbable as we deviate.
  • Physics Envy – We try to distil human behaviour into simple formulas. This doesn’t work.
  • Vaguely Right Beats Precisely Wrong – We overwigh the factors that are easy to quantify.
  • Secondary and Tertiary Effects – Actions have secondary, tertiary and so effects.
  • The Cancer Surgery Formula – Remove what is dangerous and bad, to preserve what is healthy and vibrant. Noise can disguise the core.
  • Scale – What will the industry of the company look like in ten years from now. Winner can take all, costs come down; Experience; Social proof;… can cause inefficiencies.
  • Limits – There limits to any system. Growth cannot continue beyond these limits.
  • Non-linerality – One amount of input, doesn’t equal one amount of output. Breaking points; Critical mass; Concavity and convexity.
  • Manage Expectations – Happiness is any actual outcome > expected outcome; Unhapiness is any expected outcome > actual outcome. More joy to be obtained by reducing expectations.
  • The Iron Prescription – You cannot feel sorry for yourself, or think the world is mistreating you. “Every time you think some person or some unfairness is ruining your life, it is you who are ruining your life.”
  • The 5 Ws – Who, what, where, when and why. Always include a Why.
  • The Two-track Analysis – What is going on here, rationally speaking. What is influencing us subconciously or what irrational forces are at play.
  • Psychology of Human Misjudgement
    • Reward and punishment
    • Liking/Loving – ignore faults
    • Dislike/hating – amplify faults
    • Doubt avoidance – We come to conclusions too quickly
    • Inconsistency avoidance – Difficult to change habits and beliefs
    • Curiosity – We want answers and seek them
    • Kantian fairness – We expect others to behave in ways that are best for everyone.
    • Envy/jealously
    • Recipratcation
    • Influence from mere association
    • Pain avoiding denial
    • Excessive self-regard
    • Overoptimism
    • Deprival
    • Social proof
    • Contrast
    • Stress
    • Availability misweighing
    • Use it or lose it
    • Drug misinfluence
    • Senescence
    • Authority
    • Twaddle
    • Reason Respecting
    • Lollapalooza
  • Checklists – With high stakes, you must minimize the risk of failure by making sure that you do not forget something essential
  • Lollapalooza Effect – When multiple forces act in the same direction – Huge Opportunity or Danger. Forces compound on each other.
  • Chauffer Knowledge – Can repeat informatino, but does not understand its meaning.

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