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.
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:
- 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.
The Decision Making Process
- Asking the Who, What, When, Where, Why, and How questions.
- Invert, think about the problem backwards.
- Mean (or average)
- Standard Deviation and Normal Distribution
- Regression to the Mean
- Backup Systems
- Theory of Equilibrium
- Critical Mass
- 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.
- Law of Supply and Demand
- Income and Substitution Effects
- Utility and Rationality
- Classic Conditioning
For example, Coca-cola is deliberately associating happinness with their product through its ad campaigns.
- Instrumental Conditioning
- Operant Conditioning
- Social Proof
- Reciprocation Tendency