10 Powerful Mental Models: How To Make Better Decisions And Gain Clarity In Thinking
Have you ever wondered how the most eminent of this world think and make decisions? They use mental models. Using mental models is a powerful and practical tool in dealing with problems and improving decision-making process.
Mentals models are frameworks within which you explain the way you think and perceive the world. Mental models could be ideas or beliefs, unconsious or councious, form by experience, observations or simply by thinking scheme. You can use them in every aspect of your life - from investing to understanding biology.
I have always been curious about how we perceive the world, how we experience, and I was curious if we would ever manage to create something like a universal brain so we could operate within the same principles and truths to make better decisions.
I definitely encourage you to add mental models to your toolbox. To think better. Make better decisions. Have mental clarity.
Here is what said Charlie Munger - outstanding investor and Warren Buffett’s role model.
“You need a different checklist and different mental models for different companies. I can never make it easy by saying, 'Here are three things.' You have to derive it yourself to ingrain it in your head for the rest of your life.”
Here there are mental models that I use the most and consider effective when it comes to decision making and thinking in general:
1. First Principles Thinking
This is my first mental model that I started applying conciously in my life after learning philosophy in high school. First Principles Thinking sometimes called “reasoning from first principle” is about seeking the most fundamental truth. Known since antiquity, practiced by such philosophers as Socrates and Aristotle. Currently, the most famous practitioner of this mental model is Elon Musk.
The essence of this reasoning principle is to break down a complicated problem into smaller elements until it comes to the root of the problem. I like to give the example of Socrates very often. The Philosopher of the Big Three in Greek Philosophy to get to the bottom of the issue was constantly asking himself questions (lots of whys) to come to the fundamental truth, to find a real cause of problem. How to apply this principle in practice?
Discover the root cause of problem that you face. Let’s take an example:
You want to create very innovative and technology-advanced smartphone, but at a low price. So, You start to break down complexity into smaller elements. You wonder what the smartphone is made of and what technologies are used. Ok, so there is motherboard, it contains the most important components - the processor and RAM memory. Also the battery is directly connected to the motherboard. Then, since we already have these elements, we need to consider what they consist of. Okay, so there are chemical elements like: copper, cobalt, iron, tin and others. Which chemical element is most used? It’s copper, necessary to create processors. Ok, so maybe the high price of innovative smartphones has its place in the price of copper. Maybe there are some things that can be done cheaper. You start to watch what regions is copper extracted from, how is it transported, etc. And you make it until you discover the root cause.
Obviosly this is a very complicated and multi-faceted problem, I just wanted to show the how the reasoning from First Principle works.
2. Inversion principle
This mental model I took from Charlie Munger (as well as many others). This principle of thinking draws on Carl Gustav Jacob Jacobi method, who famously said: “Invert, always invert”.
When I'm not sure which solution to choose, I use inversion which allows me to eliminate solutions that certainly won't work. This principle is easy to apply in everyday life and its application helps to avoid stupid mistakes. And a big part of success is not making mistakes that can have dire consequences. Avoiding bad decisions is easier than making brillant decisions.
How to apply this principle in practice?
Approach the problem backwards. Let’s take an example:
You started investing in the stock market and you look the best way to make a lot of money. So, your question is: “How to earn tremendously amount of money in the stock market?” Instead of answering directly (invest in stock A or B) visualize the worst-case scenerio and pose a question: "How can I lose huge amounts of money by investing?" When you answer this question, you will know what to avoid and certainly what not to invest in. Just avoid mistakes.
3. Compound interest
“The elementary mathematics of compound interest is one of the most important models there is on earth” - Charlie Munger
A powerful model that can take you to new heights. Reportedly, Albert Einstein compared compound interest to the eighth wonder of the world.
Most people associate compounding with money, but all things can be subject to this law - our health or even creativity. I wrote a little about it in my article on How to Overcome the Creative Block. In short, the more dots you connect (ideas), the more creative you become.
Compound interest works in every area - health, passion, business or finance, whatever. However, it is important to understand the importance of long-term perspective.
How to apply this principle in practice?
Let's say that you are interested in learning new skill. You decide that you will be better by 1 percent every day, what's happen then? In one year you become over 37 times better, which means you have a 37 better chance to succeed. Powerful. 
4. Occam’s Razor
A principle that was based on the philosophy of the medieval thinker William Ockham. Occam's Razor assumes that in explaining phenomena one should strive for simplicity, choosing such explanations that are based on as few concepts and assumptions as possible. Famous qoute said: "Entities are not to be multiplied without necessity".
This principle is helpful when you don’t see a full picture of given situation. It helps you eliminate improbable options, so you could focus more on dealing with what you have in a difficult situation.
This rule can serve as a kind of signpost when you don’t see the full road. You start to follow the simplest possible path, because as this principle states, simples explanations are generally better the complex one.
How to apply this principle in practice?
Let's take an example that you run a large company that carries out the recruitment process. You want to get the best candidate, so you conducted a lot of improvements and new stages in the recruitment process, which were supposed to improve the quality of recruitment and select the best employee. Unfortunately, it turned out that this made the recruitment process ineffective, it is too complicated, which makes the process longer, and both sides lose. You and your potential candidates become impatient.
At this point, you can apply the Occam’s razor. Throw away unnecessary recruitment stages (entities) and simplify the process itself as much as possible so that it becomes effective and much faster. Then it is easier for you to get the right candidate in the shortest possible time. As you can see by empirical testing that simpler solutions are generally better than more complicated ones.
5. Circle of competence
I found that mental model through Warren Buffett. Circle of competence helps you find the best way to make improvments and what’s important in which areas they need to be taken. Because circle of competence is about knowing your strengths and virtues. Grasp the boundaries of our knowdlege is crucial.
“What an investor needs is the ability to correctly evaluate selected businesses. Note that word “selected”: You don’t have to be an expert on every company, or even many. You only have to be able to evaluate companies within your circle of competence. The size of that circle is not very important; knowing its boundaries, however, is vital.” - Waren Buffett
How to apply this principle in practice?
To improve the odds of success and make better decisions you have to indetify your circle of competence and operate within. Find your strong spots and stick to them. Accurately identifying your strengths is half the battle, now take advantage of them to the fullest potential. Developing your strengths will give you more than creating new ones.
6. Map-theritory
This principle is based on the thoughts of my compatriot, the polish philosopher Alfred Korzybski. The problem of map and theritory describes the relationship between the object and represantation of object (material things vs abstract concepts). It is about the operating between reality and its representation. Korzybski argued thet people wrongly equated the theritory with the map, which means that they confused reality with some representation of it. 
Models represents things, but they don’t identical and they’re imperfect. Even the map of perfection (model) is imperfect. Firstly, it’s the attempt of reduced capture of what they represent, Secondly, it’s complex abstraction that requires interpretation. Every model has a limitations. The map is reduction of an actual things, which means it could lose important informations.
The further the model gets from physical reality, the less understandable it becomes.
How to apply this principle in practice?
Firstly, start with understanding, that every model has a limitations. It could apply to using mental models as well. Understand that every model you use, has a limitantions that you couldn’t be aware of.
Secondly, use some-kind-of-razor and when the object (reality) and model (abstracted reduction of model) differ, remove the model and follow the object. Take an example, you are on the road and you follow the route that GPS shows you, but you see something isn’t working, you turn into some strange, empty alleys, the trip is extended and so on. Just follow the route, not the GPS. It gets you to the right place.
7. Second and third order consequences
This mental model touches upon a similar problem to compound interest, which is about long-term perspective. Sometimes we’re blind by short-term vision and we unintentionally end up even in worse place than before made decision because we didn't see the consequences that these decision entails.
We are tempted to make a decision on the basis of the first consequence. This often leads us astray. In order to achieve great things, we must to see a bigger picture.
In my case, having a long-term lens on my eyes always helps me make better, intelligent decisions. Future is getting more predictable and calculated like compound interest.
Before we make any decision, there are eight words that we should ask ourselves consist of “What are the second and third order consequences?”
This powerful mental model is strictly followed by Ray Dalio. Here is how he describe the importance of understanding the long-term consequences.
“By recognizing the higher-level consequences nature optimizes for, I've come to see that people who overweigh the first-order consequences of their decisions and ignore the effects of second- and subsequent-order consequences rarely reach their goals. This is because first-order consequences often have opposite desirabilities from second-order consequences, resulting in big mistakes in decision making. For example, the first-order consequences of exercise (pain and time spent) are commonly considered undesirable, while the second-order consequences (better health and more attractive appearance) are desirable. Similarly, food that tastes good is often bad for you and vice versa.” - Ray Dalio
How to apply this principle in practice?
We often say that life is a marathon, not a sprint. And basically it's about this principle. Work on your long-term investor’s mentality. For example, the effects of a healthy lifestyle are often visible after a few yers or even decades. To broaden the spectrum, it may applies to eating fast-food. At first It tastes so good, we feel happy and may not experience energy drops and everything seems to be ok, but in the end we may end up being diagnosed with type II diabetes or even worse, a heart attack.
8. Hard-Choice Model
Extremely useful mental model that will help you make intelligent decisions. Before making a decision, first think about what kind of decision you have in front of you - analyze it and put it in context. When you even loosely grasp what kind of decision it is, it becomes easier to deal with.
There are two important factors you should consider when analyzing decisions, i.e. options and impact and this should dictate how much time you should spend on decision making.
Here are types of decisions:
https://dropbox.design/ by: Wes O'Haire, product designer
1) If the decision has a low-impact and multiple options that are easy to compare, just go with the flow, it’s “No-Brainer”.
2) If the decision has a low-impact and multiple options that are hard to compare, you should reduce the options to what’s really important for you and refine in order to optimise for.
3) If the decision has a big-impact and multiple options that are easy to compare, you should focus on gaining confidence and simply executing.
4) If the decision has a big-impact and multiple options that are hard to compare, you should focus on getting feedback, mitigating risk and boldy executing
How to apply this principle in practice?
If you have a low confidence in problem, focus on speed. If your confidence is high in problem, but low in solution, focus equally on speed and quality. But if you have a high confidence in both, just focus on quality.
9. The Eisenhower Matrix
“I have two kinds of problems: the urgent and the important. The urgent are not important and the important are never urgent.” - Dwight Eisenhower, 34th president of the United States of America
Dwight Eisenhower before the period of presidency, was a five-star general in the Army, who was responsible for executing many crucial episodes during World War II, such as the Invasion of Normandy. Einsenhower was renowned for his incredible work ethic that he sustained over a long period of time.
Eisenhower Matrix is simple decision-making tool that divides tasks into four parts and depending on what part of the matrix the task is in, you decide what next steps should be taken.
4 parts of the matrix:
Important, but not urgent - decide when you will do it
Urgent and important - do it immediately
Urgent but not important - delegate to somebody else
Not important and not urgent - do it later
The key to use this tool effectively is to adequately breaking tasks down and properly prioritize them. The most important thing is to distinguish urgent and important tasks. This tool helps you to sustain productivity on higher level by cutting unnesecary noise and being full concentrated on urgent and important things
How to apply this principle in practice?
Gather your tasks that you need to do and once you’ve collected them all, begin by thinking which ones are really important and urgent. When you describe something as important, but not urgent, decide when is appropriate time to complete the task. The common example of “important, but not urgent” for most people is exercising, unless you’re professional athlete.
Avoid the urgency trap. We as humans have this unproductive tendency to label everything we have to do as an urgent. When you master art of labeling things, it becomes easier to take work in your stride. 10. The Principal–Agent problem
A lot of the mental models I have taken are from game theory and economics, this is one of them. It’s been said that Benjamin Franklim famously said, "If you want it done - go, if not - send”. I think that this quote accurately describes the essence of the Principal-Agent Problem. It grasp the notion of desire-goal conflict.
When you’re owner you want to do a great job, but sometimes you can’t. So, there’s a solution - hire somebody to do a things for you. But it could easily face the problem. Firstly, the agent might want to do things differently than you. Secondly, he's working on your behalf, so he can do a poor job, he just doesn’t care. You’re on the opposite side and as an owner you’re focused on optimizing work.
How to apply this principle in practice?
The easiest way to avoid the Principal-Agent Problem is to aligned the goals and desires between two parties. Work with people with simillar attitude and approach to risk-managment, the way of doing things and so on.
Your main goal that you should aim for is to making the other side feels more like an owner and less like an agent because the more you feel like an owner, the better job you’re supposedly going to do.
Summary
First of all, since you’ve come to this point, I’d like to thank you wholeheartedly for taking your time to read my post.
I’ve listed 10 powerful mental models that I think will greatly improve your process of decision-making and give you clarity in your thinking-process. Of course there are many more models out there, however I found myself content with writing ten that I consider fundamental. However, I encourage you to look for more and more of them, especially in the field of philosophy, mathematics, game theory and economics. Because as it said Charlie Munger:
“What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine”
The other mental models that I think you could or should get familiar with:
Pareto Principle
Black Swan
Hanlon’s Razor
Probabilistic Thinking
Zero-sum vs Non-Zero sum
Feedback loops
In closing, I’d like to leave you with two quotes from the book “Poor Charlie's Almanack” that I think could be your basis principles of thought process and decision making. They also significantly relate to First Principles and Inversion.
“His models supply the analytical structure that enables him to reduce the inherent chaos and confusion of a complex investment problem into a clarifed set of fundamentals”
“Often, as in this case, Charlie generally focuses first on what to avoid - that is, on what NOT to do—before he considers the affirmative steps he will take in a given situation. “All I want to know is where I’m going to die, so I’ll never go there is one of his favourite quips”
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