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Charlie Munger

Mental Models by Charlie Munger

Simplify Complexity to Better Impact the World

There is immense complexity around us that we intuitively take for granted. We don’t generally consider the fact that any situation that occurs is a product of billions and billions of different variables that come together to produce a sum. We just see the surface-level result.

Naturally, if you could manipulate the variables that influence an outcome, you’d be able to sway the odds of a favorable result. But how would you know what variables to choose?

It would make no sense for you to try to influence every small part of everything. That’d be impossible, and your brain isn’t equipped to handle that. Instead, you’d use mental models.

They give us the ability to filter noise from the signal. No model is an entirely perfect reflection of the world, but they don’t have to be. As long as they present a fairly accurate heuristic for evaluating the complexity around us, they can be used to improve our decisions.

’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.

– Charlie Munger

Sometimes heuristics are good for making decisions, while at other times heuristics are bad for making decisions.

To cope with information and computation overload, humans have developed simple “rules of thumb” called “heuristics” which  allow them to make decisions.  It would be great if people could do what Charlie describes above, but it is just not possible.  Decision making heuristics are sometimes beneficial and sometimes not.  Catching a fly ball in a baseball games involves a heuristic which works very well.
“bias [arises] from the non-mathematical nature of the human brain in its natural state as it deal with probabilities employing crude heuristics, and is often misled”  http://www.rbcpa.com/Mungerspeech_june_95.pdf
“Sometimes heuristics are good for making decisions, while at other times heuristics are bad for making decisions. The reason for this mixed or nuanced answer is namely heuristics act faster than rational deliberation, but precisely because of their speed, heuristics can mislead us into systematic errors in making decisions”.  Huang  http://papers.ssrn.com/sol3/papers.cfm?abstract_id=474661

Mental Models

Liking/Loving Tendency

Munger is pointing out that people tend to ignore or deny the faults of people they love and even distort facts to facilitate that love. There are obviously positive aspects to this tendency for society, but they rarely have place in making investment decisions.  You may like or even love your friend, but that does not mean that you should trust him or her with your money.  I suspect that Charlie is saying that one needs to be particularly careful with decisions when you like/love someone. Rihanna getting back together with Chris Brown seems fraught with risk.

Curiosity Tendency

I have a hard time with Munger’s description on this one when it comes to downside risk.  He describes curiosity as something good for society. There must be some flip side that I he does not reveal along the lines of “curiosity kills the cat.”  Perhaps he is referring to the tycoon who is curious to see whether he or she can finally be the person to make a profit in the airline business. Kingfisher in India is a recent example of a company that is in trouble due to excessive curiosity related to airlines.   Richard Branson may have a very fine airline in Virgin in terms of quality, but profitability is elusive. Buffett himself jokes that he has a 1-800 number he calls which will talk him out of investing in airlines whenever he gets the urge.

​When we stop learning, or we don’t actively pursue knowledge, we cannot expect to grow, succeed, or climb the ladder to success. For every goal that we reach, we set another. -Charlie Munger

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