THINK MENTAL MODELS

I remember when I was a bigger fan of Warren Buffett and Charlie Munger and read the graduation speech Munger made outlining how students should have a "latticework of mental models" I was so smitten by the brilliance and simplicity of the concept that I kept repeating the words in my head over and over.

You get an PhD. in the game of life if you can learn the concepts and models outlined in this site.

A neat illustrative story at the end demonstrates how these models blend together in how you are talking about playing bridge or playing baseball. Interesting parallels in terms of mind-set.


Think Mental Models website:
http://www.thinkmentalmodels.com/

“The better decision maker has at his/her disposal repertoires of possible actions; checklists of things to think about before he acts; and he has mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decision arise.”
(Herbert Simon, Nobel Laureate)

How the exceptional mind works

According to Warren Buffett, his business partner, Charlie Munger has ‘the best 30-second mind in the world. He goes from A to Z in one move. He sees the essence of everything before you even finish the sentence’ (Forbes, January 22, 1996).

How does he do it?

Well, fortunately, Mr. Munger has explained his approach in lectures and books. Essentially, he thinks by using the BIG IDEAS from disciplines as diverse as physics and psychology. He has a list of these ideas (mental models) in his mind and quickly picks the one(s) applicable to the given situation, much as a pilot automatically goes through a checklist prior to take-off.

This website, inspired by the work of Charles Munger, provides over 100 models that can be brought consciously to mind to aid the thinking process.

Each model is described by at least one distinguished user. Examples include Warren Buffett, Richard Feynman, Robert Rubin and Peter Drucker, among others.

Wikipedia defines it as follows:
http://en.wikipedia.org/wiki/Mental_model

A mental model is an explanation of someone's thought process about how something works in the real world. It is a representation of the surrounding world, the relationships between its various parts and a person's intuitive perception about their own acts and their consequences. Our mental models help shape our behaviour and define our approach to solving problems (akin to a personal algorithm) and carrying out tasks.

A mental model is a kind of internal symbol or representation of external reality, hypothesized to play a major role in cognition, reasoning and decision-making. Kenneth Craik suggested in 1943 that the mind constructs "small-scale models" of reality that it uses to anticipate events.

FROM CAPITALISMMAGAZINE.COM:
http://www.capitalismmagazine.com/culture/books-non-fiction/4669-Latticework-Mental-Models.html

Excerpt from Chapter I of "Investing: The Last Liberal Art" by Robert G. Hagstrom

A Latticework of Mental Models

How does one achieve worldly wisdom? To state the matter concisely, it is an
ongoing process of, first, acquiring the significant concepts--the models--from
many areas of knowledge and then, second, learning to recognize patterns of
similarity among them. The first is a matter of educating yourself; the second
is a matter of learning to think and see differently.

He challenged the students to broaden their vision of the market, of finance, and of economics in general; to see them not as separate disciplines but as part of a larger body of knowledge, one that also incorporates psychology, engineering, mathematics, physics, and the humanities.
In this broader view, he suggested, each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom, that solid mental foundation without which success in the market--or anywhere else--is merely a short-lived fluke.

To drive his point home, Charlie used a memorable metaphor to describe this interlocking structure of ideas: a latticework of models. "You've got to have models in your head," he explained, "and you've got to array your experience-both vicarious and direct-on this latticework of models." So immediate is this visual image that latticework has become something of a shorthand term in the investment world, a quick and easily recognized reference to Munger's approach.

from the book: Poor Charlie's Almanack: The Wit and Wisdom of Charles T. Munger
http://www.poorcharliesalmanack.com/intro3.html

The quotes, talks, and speeches presented here are rooted in the old-fashioned Midwestern values for which Charlie has become known: lifelong learning, intellectual curiosity, sobriety, avoidance of envy and resentment, reliability, learning from the mistakes of others, perseverance, objectivity, willingness to test one’s own beliefs, and many more. But his advice comes not in the form of stentorian admonishments; instead, Charlie uses humor, inversions (following the directive of the great algebraist, Jacobi, to “Invert, always invert”), and paradox, to provide sage counsel about life’s toughest challenges.

Charlie also employs historical and business case studies to great effect. In these presentations, he makes his points with subtlety and texture, often using a story-like context instead of abstract statements of theory. He regales his audience with humorous anecdotes and poignant tales, rather than with a blizzard of facts and figures. He well knows, and wisely exploits, the traditional role of the storyteller as purveyor of complex and detailed information. As a result, his lessons hang together in a coherent “latticework” of knowledge, available for recall and use when needed.

It is clear throughout these talks and speeches that Charlie places a premium on life decisions over investment decisions. His mental models, drawn from every discipline imaginable, recur repeatedly and, in no way, focus on “business portfolio strategy” or “beta” or “Cap M.” Rather, they center on fundamental truth, human accomplishment, human foibles, and the arduous path to wisdom. Charlie once said, “I wanted to get rich so I could be independent, like Lord John Maynard Keynes.” Independence is the end that wealth serves for Charlie, not the other way around.

HANDLING LOSSES IN AN ENVIRONMENT WHERE WINNING IS IMPORTANT:

"After all is said and done, learning to handle losses will be your greatest triumph." -- Robert Prechter.

More from Prechter:

There are many denials of reality which automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that "pools," "manipulators," "insiders," "they," "the big boys" or "program trading" (known today as "high-frequency trading" -- Ed.) are to blame for one's losses is a common fault.

Anyone who utters such a conviction is doomed before he starts. [My] observation, after eleven years "in the business," is that the biggest obstacle to successful speculation is the failure merely even to recognize and accept the simple fact that losses are part of the game, and that they must be accommodated.

The perfect trading system does not exist. Expecting, or even hoping for, perfection is a guarantee of failure. Speculation is akin to batting in baseball. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit 60% of the time! He even strikes out often. But he still earns six figures a year, because although not perfect, he has approached the best that can be achieved. You don't have to be perfect to win in the markets, either; you "merely" have to be better than almost everybody else, and that's hard enough.

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I read an investment article recently from the Hussman Funds titled "Why Warren Buffet Plays Bridge" and it is especially appropriate to the craft of hitting in baseball in addition to long-term success in investing.

FROM HUSSMAN.NET:
http://www.hussman.net/wmc/wmc061127.htm

The reason relates to the story Buffet's mentor the legendary investor Benjamin Graham tells about the game of bridge. Focus on the process not the results.

"I recall to those of you who are bridge players the emphasis that bridge experts place on playing a hand right rather than on playing it successfully, Because as you know, if you play it right you are going to make money an d if you play it wrong you lose money - in the long run.

There is a beautiful little story about the man who was the weaker bridge player of the husband-and-wife team. It seems he bid a grand slam, and at the end he said very triumphantly to his wife 'I saw you making faces at me all the time, but you notice I not only bid this grand slam but I made it. What can you say about that?' And his wife replied very dourly, 'If you had played it right you would have lost it."

The author rightly observes that it takes restraint to play the game " the right way", with an established "discipline" or approach and let the law of averages work out in your favor. You don't try to win every hand. He describes having the right "temperament" to execute the "approach" and not deviate from it.

The same temperament and approach leads to success in baseball.

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"Anytime you and I question the schemes of the do-gooders, we're denounced as being against their humanitarian goals. They say we're always "against" things — we're never "for" anything. Well, the trouble with our liberal friends is not that they're ignorant; it's just that they know so much that isn't so." - Ronald Reagan