16: My mental models
Greetings friends, hope the day finds you well.
The topic of today is inspired by the book, Poor Charlie’s Alamanack, about the life and story of Charlie Munger.
In the section about Charlie’s approach to life, investing, and Learning, Charlie talks about the principal reason behind his immeasurable success: Mental models. The question Charlie gets asked often is How can i get rich and wise? The success of Berkshire’s Hathaway is mainly the result of a collaboration of the two great minds of Charlie Munger and Warren Buffet, but our focus here is how Charlie’s brain works. Charlie’s operating system runs on mental models that are updated constantly( Charlie argues that even at an old age one can still acquire new mental models). Charlie uses the hammer/nail analogy to scold narrow specializers( mainly economists), and thinks that it is crucial that one integrates the big ideas in the various different fields outside of theirs into their mental models. For instance, one should understand at least the big ideas in physics, chemistry, engineering, art…etc. The purpose of this integration is to have access to different perspectives when solving a certain black swany/ unexpected problem, or any other problem for that matter.
Charlie advices that one should derive his own mental models and live life according to them. There is no such thing as a list of things I can tell you to apply so that you become rich and wise, Charlie retorts.
Reading this, I realized that I too should write down a list of my mental models or what I think are good programs to run for a better life.
My mental models
1- Assume you’re stupid/wrong and work on being less stupid and less wrong everyday. ( Credits to Elon)
2-In a world hurling a blizzard of things at you everyday, it is important that you know not what to take in but what to ignore. What’s more, you should think of what not to do, what not to become, what to avoid, instead of the reverse. Speaking of avoiding things, avoid jail, debt, and legal but expedient means of acquiring wealth and status.( Credits on this one goes to Nassim Taleb)
3- Realize that you’re in a fierce competition with your younger self. Strive to be a little wiser everyday. Whenever you wake up in the morning( thankful to be alive for another day and all that jazz) assume that today’s 24 hours are more precious than those of the previous day and act accordingly.
4- When making decisions, assume second and third order consequences. The reason why creating good habits is hard and creating bad habits is easy is because good habits incurs pain in the short term( 1st order consequences),but pays long term dividends( 2nd and 3rd order consequences), whereas bad habits give immediate reward in the form of chemicals going bananas in the brain, but alas have long term bad consequences. Speaking of decisions, don’t forget the expected value return calculation( probability of success x Rate of return) when making a decision. Always weigh the cost of waiting for more information to make a decision against making it at the time. Some decisions don’t wait. ( Learned this from Ray Dalio).
5- Be radically open minded. But, don’t listen to people with no believability/skin in the game. It is important you be open minded, but only to people who have a track record of achieving things, solving problems, and building useful stuff. If those people disagree with you, then you better listen to what they have to say. Incidentally, put the ideas that are dear to your heart on a a shelf, and whenever you get better ideas, put the ideas on the shelf in a sandbox and annihilate them. Your goal is to find ideas that work and make your life better, not to cling dogmatically/emotionally to what you think works but doesn’t in reality.
6- You need to be an optimist. what kind of optimism are we talkin’ about here? you’re not a polyannistic blind optimist, assuming everything is gonna be alright, or a blind pessimist with a precautionary principle where you stagnate and fear that everything is going to hell. Our kind of optimism is the one where you assume that the future will be better when we create the knowledge necessary to deal with the problems ahead( obstacles= problems and problems are soluble). We assume that our current situation is derived from a lack of knowledge( and resources?) and we strive to acquire that knowledge. ( Credits go to David Deutsh)
7- Look at life as 20 different slots of opportunities that yield the highest returns on investment. To seize those handful opportunities, you need to have a prepared mind, say No to a lot of things, and choose things that are low risks high rewards, aka obvious to you, high risks to others. You need to build your circle of competence and demarcate it to determine where risks lay. ( Learned this from Warren Buffet)
8- According to Daniel Kahneman, we have two selves, the remembering self, and the experiencing self. The remembering self spends long periods of times visiting past experiences created by the experiencing self. The remembering self can feel jubilant going down memory lane if the memory is pleasant, but feels remorseful and unsatisfied if the memory is unpleasant.
To reconcile the two selves, one should seek a life full of exciting moment-to-moment experiences that make the remembering self proud, fulfilled, and satisfied with the life he or she’s led.
9- See the world in streams of probabilities and bets and make the best bet you can make to the best of your knowledge. Otherwise, ask how what can I do to increase the probability of a desired outcome to happen? (Learned this from Annie Duke)
10- Befriend dead people( or alive) and put in the effort to see the world from their perspective. It is hard but worth the try. How? Learn everything you can about people you admire from the past or the present, and then have constant conversations with them in your head whenever you’re stuck. ( I learned this heuristic from Marc Anderseen).
11- Don’t do things for money; don’t do things to satisfy others; don’t do things you don’t believe in. Ask yourself instead, what would you do if you had a billion dollars at your disposal; how would you spend it to provide the maximum value to the world. Raising capital and reaching out to top-tier people is not that difficult when you have a good idea.
The above list will be updated constantly whenever a useful mental model is found.
Principles: book review
A leading company that manages investments for other companies and corporations, Bridgewater has achieved incredible milestones and attracted the attention of world media in the 42 years since its foundation, thanks to the principles its founder,Ray Dalio, had put in place. Ray Dalio looks at himself and his organization as "The machine", a term he coined in an effort to approximate his approach to life. The machine is akin to the process/operating system,with inputs and outputs. The machine( you,the organization) is expected to act as a bridge to the other side of what you aim to accomplish. Idealy, The machine feeds on principles one develops through a constant loop of pain/outcomes followed by reflection on what works and what doesn't.
Two main components of the machine are people and culture( in case of an organization, or the design as it pertains to one's own life). For optimal functioning of the machine, the people and the right culture/design should be calibrated in a way that ensures the best outcomes. You choose the right people for the job that needs to be done,not vice versa. One should be able to distinguish abilities from skills/training, from values in people. The first two can be acquired but the last is sort of hard to change. People should be accountable and held responsible for the outcomes they produce. People you include in your machine obviously priortize the best outcomes for your machine. As for the culture, it is important that the culture underwhich you operate is a culture that promotes transparency, honesty, growth and alignement of values, and goals. It is not enough to get the machine running,you need to oversee things constantly from the top down to the granular details. To opimize for this,you use tools that monitor people's outcomes, you detect cause-effect relationships, you find root causes of the problems, and how the goals are affected( aka the 5 step process). The design and the people can change but the principles are stable mostly. Ray Dalio's principles are the following:
-Radical open mindedness
- Dealing with reality as is
-Radical honesty
- Transparency
- Making decisions based on idea meritocracy( Believability weighted system)
Ray Dalio emphasizes several terms in this book: the necessity of "getting in sync" with the people, meaning being on the same page in terms of knowing where the ship is heading and what's at stake; thinking in systems, idea meritocracy, and the outsourcing of making decisions to compouter algorithms based on fed principles and values.
When Ray Dalio talks about making good decisions he underlines expected value return, which is a method of making decisions whereby you look at alternatives as probabilities and you multiply those probabilities by the expected ratio of their return: let's say you're faced with two decisions,buying shares in company A, buying shares in company B. The shares of company A has a probability of 80% appreciating in the next 90 days, where you make 3× return, whereas shares at company B has a probability of 20% appreciating but with a return of 10×. In this case the expected value return for A is 0.8×3(X) vs 0.2×10(X) for company B. Sometimes you want to take high risks but what strikes me from other readings as well is that people like Ray Dalio, Charlie Munger, and warren Buffet, Nassim Taleb( take lower risks with high returns) is that none of them takes uncalculated risks; what's more,they choose the paths of least resistance mostly,where the win is almost guaranteed. Back at the shares we're trying to buy. The wiser choise is to choose buying shares in company B for, its expected value return is higher. So that's nice to keep in mind.
At Bridge water, since metrics, meeting tapes, and track records of every employee are available, decisions are made according to a believebility wieghted system aka idea meritocracy, depending on your expertise and your believability( determined by your past performances and the problems you've solved), and the culture of welcoming disagreements( at Bridgewater, even the CEO get emails from employees shining the light on areas where he made mistakes or can improve things), the best idea win,and thus the best decision is made.
One of the core causes of Bridgewater's success is owed to their computers. Ray Dalio, even at an earlier time,has grasped the insdispensability of computers for optimal performance. Although big on understanding things deeply, he still saw it fit to integrate algorithms to his decision making. He is not super worried about AI taking over but rather, emphasizes how crucial it is to know how to work with them.
The book has three parts: Dalio's life, life principals, and work principles. I enjoyed the first two parts the most and had a hard time leafing through the last part. For me, it is always enlightening to have access to the minds of veterans like Dalio and see how they operate. If someone who's had skin in the game all their lives and chose to compress it all in a book like this, then it is definitely a book worth studying.