Charlie Munger on Mental Models, Wisdom, and Human Psychology

charlie munger mental models

Your brain is a roughly million-year-old piece of hardware – designed and built to operate in the world of hunting and gathering – where a dangerous animal may lurk behind the nearest bush. While our society has changed massively in the last 10,000 years (or even the last 500 years) – our brains have not had time to catch up.

You and I are equipped with a tool that – while wonderfully sculpted by evolution to thrive and reproduce in the world of hunter-gatherers – is riddled with shortcuts and processing errors that can manifest in mistakes, calamities, and all around terrible decisions.

Over the last year or so I have spent much time studying Charlie Munger – the billionaire “right hand man” of Warren Buffett. Charlie developed a rather unique worldview on human behavior and problem solving (that he dubs “worldly wisdom”) rooted in the idea fundamentally that you need a wide range of tools (what he calls mental models) to solve the many problems that life throws at you.

Among one of Charlie’s greatest insights were the combined notions that  (1) all academic disciplines must respect each other in order to be true and (2) that psychology underpins nearly all of them because it impacts and shapes human decisions.

What this means is that to think more effectively and achieve your goals you need to both master psychology and understand the mental models that underpin reality.

One of the most powerful things that you must understand about everything that I’m sharing with you here – these are not anecdotal observations or opinions – the decisions, mistakes, and behavior patterns that human engage in again and again, to their own determinant, are rooted fundamentally in science and proven repeatedly by numerous psychological studies.

Learning More About Charlie Munger’s Mental Models

As a starting point for that journey, I wanted to share with you several resources that I have learned from along the way.

I would absolutely start by watching (or listening to) this Youtube Video of Charlie Munger on “The Psychology of Human Misjudgment.” The video is priceless and I’ve listened to it 10+ times. Some of the examples are a bit dated because the speech is from 1995, but the message is timeless.

From there, I would recommend digging into a few books. I’ve put these in a particular order and suggest sticking to it – this will slowly introduce you to the topic and layer in key pieces of knowledge to build a more comprehensive understanding of Charlie Munger’s Mental Models and the Psychology of Misjudgment. [Click the titles for a link to Amazon]

Predictably Irrational by Dan Ariely

Predictably Irrational is absolutely the best starting place to dip your toes into this subject. It’s a quick read that is easy to grasp and has some great examples that will stick with you. I would compare this to Freakonomics in the sense it’s aimed at a popular audience and does a great job making the subject very approachable.

Influence by Robert Cialdini

In many ways the “bible” of this school of thought – Charlie Munger even mentions it several times in his speech on the psychology of human misjudgment. More technical than Predictably Irrational but a critical next step to go deeper on the topic.

Poor Charlie’s Alamanc by Peter Kaufman

Once you’ve completed your necessary psychology prerequisites – now its time to dig into the meaty stuff. This is a big book, I’m not gonna lie to you. Read every word. This is where Charlie Munger really starts laying out his framework for Worldly Wisdom and explaining in detail how to use psychology as well as mental models to think about the world. This book will explain how and why “worldly wisdom” and “mental models” are important, but does not go deep into actually explaining every mental model that governs reality.

Seeking Wisdom by Peter Bevelin

WARNING: DO NOT READ THIS FIRST. That said, wow. This book. I have never in my life underlined more phrases in a single book. This is probably the most information dense book I have ever read. It’s a treasure trove of information and can serve as a vital reference book for the rest of your life. You absolutely have to read the other books first or this will be like reading something written in Mandarin. This fills out an extremely detailed checklist of both the “Psychology of Misjudgment” and the “Psychics and Mathematics of Misjudgment” – replete with pages and pages of detail, studies, and information on a huge array of mental models.

Thinking Fast & Slow by Daniel Kahneman

Kahneman is a titan among research psychologists and in many ways the godfather behind many of these concepts – including being one of the founders of Prospect Theory, which uncovered many of these mental models and how they shape the world. This book is BIG and full of tough and often counter-intuitive mental models and psychological concepts, but this is the book you want to read to really dig into the core research that underpins much of these other books.

Podcasts on Mental Models

I wanted to share a few links to two Science of Success Podcast episodes where we also dig into these topics.

The Psychology of Making Better Decisions with Michael Mauboussin

How to Build a Toolbox of Mental Models to Understand Reality with Shane Parrish

Blog Posts on Mental Models

I also wanted to share a few links to two blogs that I particularly enjoy that both have wonderful and deep sections focusing on mental models.  Each of these are filled with dozens of mental models as well as examples and explanations to help better understand them.

Farnam Street – Mental Models

Joshua Kennon – Mental Models

Mental Model Checklist – Human Misjudgement

As a bonus for you – I’ve also included Charlie Munger’s (updated as per Seeking Wisdom) checklist of the standard causes of human misjudgment.

1)     Bias from mere association

2)     Underestimating the power of rewards and punishment

3)     Underestimating bias from own self-interest and incentives

4)     Self-serving bias

5)     Self-deception and denial  – distortion of reality to reduce pain or increase pleasure.

6)     Bias from consistency tendency – includes confirmation bias – looking for evidence that confirms our actions and beliefs and ignoring or distorting disconfirming evidence.

7)     Bias from deprival syndrome

8)     Status quo bias and do-nothing syndrome

9)     Impatience

10)     Bias from envy and jealousy

11)     Distortion by contrast comparison – also underestimating the consequences over time of gradual changes.

12)     Bias from anchoring – over-weighing certain initial information

13)     Over-influence from vivid or most recent information

14)     Omission and abstract blindness

15)     Bias from reciprocation tendency

16)     Bias from over-influence by liking tendency – includes bias from over-desire for liking and social acceptance

17)     Bias from over-influence by social proof

18)     Bias from over-influence by authority

19)     Sense making – construction explanations that fit an outcome – being too quick to draw conclusion, also thinking events that have happened were more predictable than they were

20)     Reason-respecting – complying with requests merely because we’ve been given a reason. Includes underestimating the power of giving people reasons.

21)     Believing first and doubting later

22)     Memory limitations

23)     Do-something syndrome – acting without a sensible reason

24)     Mental confusion from say-something syndrome

25)     Emotional arousal – hasty judgments under the influence of intense emotions. Exaggerating the emotional impact of future events.

26)     Mental confusion from stress

27)     Mental confusion from physical or psychological pain

28)     Bias from over-influence by the combined effect of many psychological tendencies operating together [lollapalooza]

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Matt Bodnar

Matt loves to focus on making deals and big picture strategy. He sets out each day to give more than he takes from every interaction and produce as much value as possible for his partners and the people he works with. As a partner at Fresh Hospitality Matt invests in and operates businesses across the restaurant value chain including agriculture, production, retail distribution, real estate, technology and restaurant operations. Matt previously worked as an import/export consultant in Nanjing, China and spent several years on the Interest Rates Desk at Goldman Sachs before returning to his family roots in Nashville.

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