How the $1 Billion Man Thinks

According to this billionaire, there are several “mental models” or frameworks he has consistently and reliably used for his business decisions. He has honed his mental models such that huge and important decisions are decided upon swiftly and more importantly, correctly.


His name is Charlie Munger and the name wouldn’t ring a bell for most, except that he’s Warren Buffet’s partner in Berkshire Hathaway, with a net worth of $1 Billion.

On a speech he gave at the USC Business School in 1994, he outlined some elementary worldly wisdom he learned throughout the years and how these are important to being successful.

The idea of mental models is based on the concept that problem solving should be approached coming from different mental perspectives.

Here are the mental models that Charles have outlined:

Mathematics

  • Probability Theory
    This theory helps explain random phenomena and helps us manage risk.
  • Decision Trees
    These are great for laying out all the possible scenarios and possibilities on the table and choosing the best course of action with the expected consequences.
  • Law of Large Numbers
    The larger the business, the slower it can grow.

Accounting

Legal System

The Decision Making Process

  • Asking the Who, What, When, Where, Why, and How questions.
  • Invert, think about the problem backwards.
Statistics
  • Mean (or average)
  • Standard Deviation and Normal Distribution
  • Regression to the Mean
Engineering
  • Backup Systems
  • Breakpoints
Physics
  • Theory of Equilibrium
  • Critical Mass

Economics

  • People face tradeoffs.
  • The cost of something is what you give up to get it.
  • Rational people think at the margin.
  • People respond to incentives.
  • Trade can make everyone better off.
  • Markets are usually a good way to organize economic activity.
Key Economic Concepts
  • Law of Supply and Demand
  • Income and Substitution Effects
  • Scarcity
  • Utility and Rationality
  • Elasticity
  • Monopolies
  • Oligopolies
Economies of Scale
Pavlovian Conditioning
  • Classic Conditioning
    For example, Coca-cola is deliberately associating happinness with their product through its ad campaigns.
  • Instrumental Conditioning
  • Operant Conditioning
Competitive Destruction
Surfing
The Stock Pari-Mutuel System
Psychology of Investing
  • Social Proof
  • Denial
  • Consistency
  • Reciprocation Tendency
  • Authority
  • Scarcity
Chemistry and Autocatalysis
Biology
  • Natural Selection
  • Survival by Differentiation

Sources:

A Lesson on Elementary, Worldly Wisdom As It Relates To Investment Management & Business

The Munger Network of Mental Models

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