Charlie Munger's Top Mental Models
Charlie Munger's Top Mental Models

Charlie Munger's Top Mental Models

Cognitive Biases

Quick Summary

We humans have evolved over tens of thousands of years in an environment that is very different than the one we live in now. During this evolution process, we developed unconscious biases, which helped us survive in those tough environments, but can hinder us in today’s modern society.

By recognizing those biases and applying them to our decision-making, we can make infinitely better decisions.  Over his 70-year career, Charlie Munger (Warren Buffett’s long-time business partner) has done exactly this. The end result are the biases below, which we excerpted and condensed from several of Munger’s speeches.

Understanding these biases has helped Charlie and Warren in several ways:

  • Avoiding Smart People Mistakes. There are certain types of mistakes that people who are smart and ambitious are particularly prone to. In his book, Poor Charlie’s Almanack, Charlie talks about the colossal failure of the hedge fund, Long-Term Capital Management in the late 1990s. Led by some of the smartest people in the world including Nobel Laureates, it ultimately went bankrupt and destroyed the net worths and reputation of its leaders. If they had used Charlie’s model, they would have seen the colossal risk they were taking and the fact that they were already extremely successful and had built up reputations, so the risk was particularly not worth it.
  • Making Critical Decisions. They have made the biases actionable by turning them into checklists and using them when making investment decisions. These biases uniquely help them understand behaviors and predict the future better than their competitors.
  • Protecting Themselves From Manipulation. The biases below occur at a subconscious level. Therefore, its hard to identify when people are using these to influence your behavior. Knowing these biases and having a checklist to protect against them helps.

Biases Covered

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Inversion Mental Model

All I want to know is where I'm going to die, so I'll never go there.—one of self-made billionaire Charlie Munger’s favorite quotes

Taking the negative of any mental model is also known as inversion, and it's one of Charlie Munger’s top mental models. It automatically doubles the value of every mental model you learn, because you’ll be able to think of twice as many applications.

In 1986, Munger gave a speech at Harvard, which was essentially about what not to do in life. It’s a gem, and it shows how he uses inversion. The speech was inspired by a Johnny Carson talk. Here is a relevant excerpt that I thought you’d enjoy:

What Carson said was that he couldn’t tell the graduating class how to be happy, but he could tell them from personal experience how to guarantee misery. Carson’s prescriptions for sure misery included: 1. Ingesting chemicals in an effort to alter mood or perception; 2. Envy; 3. Resentment. I can still recall Carson’s absolute conviction as he told how he had tried these things on occasion after occasion and had become miserable every time. It is easy to understand Carson’s first prescription for misery -ingesting chemicals. I add my voice. The four closest friends of my youth were highly intelligent, ethical, humorous types, favoured in person and background. Two are long dead, with alcohol a contributing factor, and a third is a living alcoholic -if you call that living. While susceptibility varies, addiction can happen to any of us, through a subtle process where the bonds of degradation are too light to be felt until they are too strong to be broken. And I have yet to meet anyone, in over six decades of life, whose life was worsened by overfear and overavoidance of such a deceptive pathway to destruction. Envy, of course, joins chemicals in winning some sort of quantity price for causing misery. It was wreaking havoc long before it got a bad press in the laws of Moses. If you wish to retain the contribution of envy to misery, I recommend that you never read any of the biographies of that good Christian, Samuel Johnson, because his life demonstrates in an enticing way the possibility and advantage of transcending envy. Resentment has always worked for me exactly as it worked for Carson. I cannot recommend it highly enough to you if you desire misery. Johnson spoke well when he said that life is hard enough to swallow without squeezing in the bitter rind of resentment. For those of you who want misery, I also recommend refraining from practice of the Disraeli compromise, designed for people who find it impossible to quit resentment cold turkey. Disraeli, as he rose to become one of the greatest Prime Ministers, learned to give up vengeance as a motivation for action, but he did retain some outlet for resentment by putting the names of people who wronged him on pieces of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in noting the way the world had taken his enemies down without his assistance.
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Recommended Resources: 7 Ways to Maximize Misery [Video] and the full 1986 Charlie Munger talk transcript.

Action Step

Systematically study why people who follow the necessary, but not sufficient conditions fail. In other words, study the mistakes that people who set goals and work really hard, but never make it.

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