Mental Models: The Complete List

This is a list of mental models I find repeatedly useful.

According to billionaire investor Charlie Munger,

“80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person. And, of those, only a mere handful really carry very heavy freight.”

Before the list, a quick look at mental models and why they matter.

What is a Mental Model?

Put simply, a mental model is a tool to help us understand the world.

The world is too complex for our brains to deal with. Every second, we are bombarded with millions of bits of information in the form of sights, sounds, tastes and thoughts. We can’t process it all, so our brains simplify. Some of this happens automatically, some of it can be trained.

Humans aren’t perfect. When we simplify, we take shortcuts. These shortcuts lead to mistakes.

It isn’t hard to imagine how these mistakes can cause problems. You might blow your life savings on something you don’t understand. You might say something you don’t mean and ruin a relationship.

Mental models help calibrate us to reality. By assembling different ways of looking at the world, we are less likely to get stuck in a single form of biased thinking. By understanding the ways people make mistakes, we can use that knowledge to make fewer mistakes ourselves.

It’s no wonder Charlies Munger calls mental models the key to “elementary, worldly wisdom”.

How to Use This List

Just skimming through this list won’t do you much good.

To get the real benefit of mental models, they must become a part of you. That happens through practice—you must use these models on a daily or near-daily basis.

Use the points in this list as a jumping point for your own research.

Note: This list is, and always will be, a work in progress. If something is missing on incorrect, please contact me at: charles {at} marketmeditations {dot} com.

Mental Models from Mathematics

General Mathematics

  • Basic Algebra.
  • Extrapolation.

Elementary Probability & Statistics

Related Reading: How to Lie With Statistics, Fooled by Randomness.

  • Power laws. Winner-take-all effects. A few books will make up 80% of the sales in a year. A few people own 80% of the wealth in the world. (Related: Pareto principle, 80-20 rule, long tail)
  • Normal distribution. (Related: standard deviation)
  • Fat-tailed distributions. 
  • Correlation vs causation. Overweight people seem to eat more meat. Does that mean meat causes obesity?
  • Reversion to the mean. 
  • Outliers.
  • Bayes rule.

Accounting and Finance

  • Compound Interest.
  • Depreciation. 
  • Interest.

Mental Models From Hard Sciences

Models from physics, chemistry and engineering.

  • Autocatalysis. Munger: “If you get a certain kind of process going in chemistry, it speeds up on its own. So you get this marvelous boost in what you’re trying to do that runs on and on. Now, the laws of physics are such that it doesn’t run on forever. […] You accomplish A—and, all of a sudden, you’re getting A + B + C for a while.” (Related: momentum, inertia, critical mass )
  • Activation energy. The minimum amount of energy you need to start a reaction. Useful for thinking about startup costs in business, jumpstarting behavioral change, going viral on the internet, etc. (Related: MED, critical mass)
  • Half life. The time it takes for a value to reach half of it’s original.
  • Equilibrium.
  • Backup system. Insurance. Generators. 
  • Breakpoints.
  • Heisenberg Uncertainty Principle.
  • Feedback loops.

Mental Models From Biology and Physiology

  • Hormesis. Nothing is inherently bad or good. In small enough doses, something “toxic” is actually beneficial. Examples include exercise, vegetables, alcohol, radiation, etc. (Related: antifragility)
  • Supercompensation. Periods of stress followed by rest can accelerate growth. (Related: progressive overload, post-traumatic growth)
  • Homeostasis. (Related: set point)
  • Evolution. (Related: competition, creative destruction)
  • Atrophy. Use it or lose it. (Related: memory, generation effect, aging)
  • Acute vs chronic stressors.

Mental Models from Psychology

These are mental models for the psychology of individuals.

Charlie Munger:

“The psychology of misjudgment is a terribly important thing to learn. **There are about 20 little principles.** And they interact, so it gets slightly complicated. But the guts of it is unbelievably important.”

How the Mind Works

  • The elephant and the rider.

Influence

In his book Influence, Robert Cialdini has 6 main ways that our psychology is influenced.

  • Reciprocation.“You scratch my back, I scratch yours.” Tit for tat. If someone feels like you’ve done them a favor, they get the urge to pay you back.
  • Commitment and consistency. “That’s just not who I am.” People want to look like they are consistent in their actions and choices. They also like to see this in other people. (Related: confirmation bias, sunken cost fallacy, choice-supportive bias)
  • Social proof. Monkey see, monkey do. Keeping up with a Joneses. “But all my friends are doing it.” People will do what people around them are doing.
  • Liking. “But he told me he loved me.” It is easier to manipulate or convince somebody if they like you first.
  • Authority. “A Harvard PhD said it, so it must be true.” We may blindly follow authority figures without thinking for ourselves. (Examples: holocaust, Milgram experiment)
  • Scarcity.“On sale for the next 24 hours!” We value scarce things more. Examples: banned books, limited edition items, 24 hour sales, etc.

Other models:

  • Overconfidence effect. 93% of drivers think they are better than average. We believe we are better than we actually are.
  • Availability heuristic. “I am more likely to die from a terrorist attack than a car accident”  The more easily we imagine or remember something, the higher we will value its importance. This makes us biased to sensationalism and recent news. (Related: Illusion-of-truth effect)
  • Survivorship bias. “He made a lot of money, so he must be doing something right.” 
  • Sunken cost fallacy. “But baby, we’ve come so far already.”
  • Temporal discounting.
  • Anchoring
  • Bias blind spot.
  • Confirmation bias. “I spent all day on Google trying to prove my point.”
  • Fundamental attribution error.
  • Projection bias.
  • Representativeness.
  • Hindsight bias. “I knew it all along”

Logical Fallacies

  • Ad hominem. “John says one plus one equals three.” “Well, John is wrong because he’s an asshole.”
  • Ad ignorantiam. (Argument from ignorance) “Nobody can explain that light strange light in the sky! It MUST be a UFO!” The belief that something is true because there isn’t evidence proving it to be false.
  • Argument from authority. “Well, Professor X has a PhD, so he’s right and you’re wrong.”
  • Argument from final consequences. 
  • Argument from personal incredulity.
  • Begging the question. “Have you stopped beating your wife yet?” The question makes an assumption. 
  • Circular reasoning.
  • Straw man.
  • Post-hoc ergo propter hoc. “I was sick. I took medicine and got better. Therefore, the medicine made me better.” “I was sick. I ate some jelly beans and got better. Therefore, the jellybeans made me better.” Just because A comes before B does not mean A caused B.

 

Mental Models From Philosophy

  • Precautionary Principle.
  • Paradigm shift.
  • Skin in the game.
  • Optionality.
  • The expert problem.
  • Logical positivism.

Mental Models From Management

Mental Models From Business

  • Blue ocean vs. red ocean.
  • Disruptive technologies.
  • Reverse engineering.
  • MVP.
  • Agile development.

Mental Models From Science

  • Falsifiability. Statements that can be proven false called “falsifiable”. Only these statements can be considered scientific. Note: This is the OPPOSITE of what we learn in school. (Related: Karl Popper, demarcation problem)

Mental Models From Economics

  • Opportunity cost.
  • Arbitrage.
  • Supply and demand.
  • Comparative advantage.
  • Zero sum.

Behavioral Economics

  • Groupthink.
  • Economies of scale.
  • Diseconomies of scale.

Dealing With Uncertainty

  • The Lucretius Problem

Mental Models From Complex Systems

  • The Minority Rule. “All it takes is a small number of intolerant virtuous people with skin in the game, in the form of courage, for society to function properly.” Examples include halal or organic food, Christianity, language, etc.
  • Emergence. Molecules are not alive but organisms are. In complex systems, bigger parts can take on traits that the smaller parts don’t have.
  • Spontaneous order. Nobody tells my local coffee shop how many donuts to stock in the morning. Complex systems to take on structure without top-down central planning. Examples: markets, cities, anarchy, etc.
  • Wisdom of the crowd. The collected judgments of a group can be more accurate than the judgment of an individual.
  • Second order effects.
  • Butterfly effect.

Other Mental Models

  • Misinterpretation of p-values.
  • Misunderstanding of randomness.
  • Curse of knowledge.
  • Ludic fallacy.
  • Lucifer effect.
  • Porter’s five forces analysis.
  • Top down vs bottom up.

 

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