Tag Archives: Mental Models

Don’t Think of an Elephant!: Know Your Values and Frame the Debate by George Lakoff


  1. Lakoff describes how and why to frame things, mostly in a liberal vs. conservative sense. Frames are automatic, effortless, everyday modes of understanding

Key Takeaways

  1. Frames
    1. Frames are mental structures that shape the way we see the world. As a result, they shape the goals we seek, the plans we make, the way we act, and what counts as a good or bad outcome of our actions.
    2. You can’t see or hear frames. They are part of what we cognitive scientists call the “cognitive unconscious”—structures in our brains that we cannot consciously access, but know by their consequences. What we call “common sense” is made up of unconscious, automatic, effortless inferences that follow from our unconscious frames.
    3. Not only does negating a frame activate that frame, but the more it is activated, the stronger it gets. The moral for political discourse is clear: When you argue against someone on the other side using their language and their frames, you are activating their frames, strengthening their frames in those who hear you, and undermining your own views. For progressives, this means avoiding the use of conservative language and the frames that the language activates.
    4. Because language activates frames, new language is required for new frames. Thinking differently requires speaking differently. Reframing is not easy or simple. It is not a matter of finding some magic words. Frames are ideas, not slogans. Reframing is more a matter of accessing what we and like-minded others already believe unconsciously, making it conscious, and repeating it till it enters normal public discourse. It doesn’t happen overnight. It is an ongoing process. It requires repetition and focus and dedication.
    5. Reframing without a system of communication accomplishes nothing. Reframing, as we discuss it in this book, is about honesty and integrity. It is the opposite of spin and manipulation. It is about bringing to consciousness the deepest of our beliefs and our modes of understanding. It is about learning to express what we really believe in a way that will allow those who share our beliefs to understand what they most deeply believe and to act on those beliefs.
    6. Framing is also about understanding those we disagree with most.
    7. Facts matter enormously, but to be meaningful they must be framed in terms of their moral importance. Remember, you can only understand what the frames in your brain allow you to understand. If the facts don’t fit the frames in your brain, the frames in your brain stay and the facts are ignored or challenged or belittled.
    8. This gives us a basic principle of framing: When you are arguing against the other side, do not use their language. Their language picks out a frame—and it won’t be the frame you want.
    9. When you think you just lack words, what you really lack are ideas. Ideas come in the form of frames. When the frames are there, the words come readily. There’s a way you can tell when you lack the right frames. There’s a phenomenon you have probably noticed. A conservative on TV uses two words, like tax relief. And the progressive has to go into a paragraph-long discussion of his own view. The conservative can appeal to an established frame, that taxation is an affliction or burden, which allows for the two-word phrase tax relief. But there is no established frame on the other side. You can talk about it, but it takes some doing because there is no established frame, no fixed idea already out there.
    10. The first mistake is believing that framing is a matter of coming up with clever slogans, like “death tax” or “partial-birth abortion,” that resonate with a significant segment of the population. Those slogans only work when there has been a long—often decades-long—campaign of framing issues like taxation and abortion conceptually, so that the brains of many people are prepared to accept those phrases.
    11. The second mistake is believing that, if only we could present the facts about a certain reality in some effective way, then people would “wake up“ to that reality, change their personal opinion, and start acting politically to change society. “Why can’t people wake up?” is the complaint—as if people are “asleep” and just have to be aroused to see and comprehend the world around them. But the reality is that certain ideas have to be ingrained in us—developed over time consistently and precisely enough to create an accurate frame for our understanding.
    12. Spin is the manipulative use of a frame. Spin is used when something embarrassing has happened or has been said, and it’s an attempt to put an innocent frame on it—that is, to make the embarrassing occurrence sound normal or good.
    13. Propaganda is another manipulative use of framing. Propaganda is an attempt to get the public to adopt a frame that is not true and is known not to be true, for the purpose of gaining or maintaining political control.
    14. If you remember nothing else about framing, remember this: Once your frame is accepted into the discourse, everything you say is just common sense. Why? Because that’s what common sense is: reasoning within a commonplace, accepted frame.
    15. A useful thing to do is to use rhetorical questions: Wouldn’t it be better if . . . ? Such a question should be chosen to presuppose your frame. Examples: Wouldn’t it be better if we could fix the potholes in the roads and the bridges that are crumbling? Or, wouldn’t we all be better off if everybody with diseases and illnesses could be treated so that diseases and illnesses wouldn’t spread? Or, wouldn’t it be better if all kids were ready for school when they went to kindergarten?
    16. Always start with values, preferably values all Americans share such as security, prosperity, opportunity, freedom, and so on. Pick the values most relevant to the frame you want to shift to. Try to win the argument at the values level.
    17. Those are a lot of guidelines. But there are only four really important ones: Show respect, Respond by reframing, Think and talk at the level of values, Say what you believe
  2. Other
    1. In fact, about 98 percent of what our brains are doing is below the level of consciousness. As a result, we may not know all, or even most, of what in our brains determines our deepest moral, social, and political beliefs. And yet we act on the basis of those largely unconscious beliefs.
    2. People do not necessarily vote in their self-interest. They vote their identity. They vote their values. They vote for who they identify with. This is very important to understand. The goal is to activate your model in the people in the “middle.” The people who are in the middle have both models, used regularly in different parts of their lives. What you want to do is to get them to use your model for politics—to activate your worldview and moral system in their political decisions. You do that by talking to people using frames based on your worldview.
    3. Orwellian language points to weakness—Orwellian weakness. When you hear Orwellian language, note where it is, because it is a guide to where they are vulnerable. They do not use it everywhere. It is very important to notice this and use their weakness to your advantage.
    4. Levy addressed the question of why there were so many suicides in Tahiti, and discovered that Tahitians did not have a concept of grief. They felt grief. They experienced it. But they did not have a concept for it or a name for it. They did not see it as a normal emotion. There were no rituals around grief. No grief counseling, nothing like it. They lacked a concept they needed—and wound up committing suicide all too often.
    5. The truth alone will not set you free. Just speaking truth to power doesn’t work. You need to frame the truths effectively from your perspective.
    6. Accordingly, the frame-inherent world, structured by our framed actions, reinforces those frames and recreates those frames in others as they are born, grow, and mature in such a world. This phenomenon is called reflexivity. The world reflects our understandings through our actions, and our understandings reflect the world shaped by the frame-informed actions of ourselves and others. To function effectively in the world it helps to be aware of reflexivity. It helps to be aware of what frames have shaped and are still shaping reality if you are going to intervene to make the world a better place.
    7. Studying cognitive linguistics has its uses. Every language in the world has in its grammar a way to express direct causation. No language in the world has in its grammar a way to express systemic causation.
    8. Systemic causation has a structure—four possible elements that can exist alone or in combination.
      1. A network of direct causes.
      2. Feedback loops.
      3. Multiple causes.
      4. Probabilistic causation.
    9. Empathy and sympathy both involve the capacity to know what others are feeling. But unlike empathy, sympathy involves distancing, overriding personal emotional feeling. Someone who is sympathetic may well act to relieve the pain of others but not feel the pain themselves. The word “compassion” can be used for either empathy or sympathy, depending on who is using the word.
    10. Colin Powell had always argued that no troops should be committed without specific objectives, a clear and achievable definition of victory, and a clear exit strategy, and that open-ended commitments should not be used.
    11. Tell a story. Find stories where your frame is built into the story. Build up a stock of effective stories.

What I got out of it

  1. Didn’t realize it was a political book, but some of the core ideas about how and why to effectively frame things was helpful

Super Thinking: The Big Book of Mental Models by Gabriel Weinberg and Lauren McCann


  1. Mental models help you become a more effective thinker and decision-maker and this book is a great compilation of some of the more well known and effective models

Key Takeaways

  1. Some of my favorite mental models discussed include:
    1. Arguing from first principles – you must understand the core, fundamental principles if you are going to be an effective thinker. A first principle is an assumption that cannot be deduced any further 
    2. De-risking – what steps can you take, what can you think through and control that would lower the risk?
    3. Premature optimization – it is better to iterate, take small steps and adapt and evolve as the situation unfolds rather than come up with grand plans and rigid blueprints
    4. The top idea in your mind – be very aware of what you’re thinking about since this shapes and colors what you see and how you behave. Paul Graham talks about this best
    5. Opportunity cost – the value you’re giving up by pursuing one thing rather than another
    6. Local vs. Global optimum – your mindset and time horizon very much determine how you act. Something that makes sense locally can be harmful globally
    7. Consequence-Conviction Matrix – how small/large are the consequences and how much conviction do you have? Large consequences and low conviction, take your time
    8. Resonant Frequency – a phenomenon that only occurs when the frequency at which a force is periodically applied is equal or near equal to one of the natural frequencies on which it acts. As leaders and teammates, we try to get on the same frequency as our team, lowering friction and getting better results
    9. OODA Loop – John Boyd’s assessment protocol – Observe, Orient, Decide, Act
    10. Heat-seeking missiles – leaders should learn from heat-seeking missiles and aim to be in the “hottest” areas – the areas with the most friction

What I got out of it

  1. A great overview of mental models in a fun and comprehensive fashion. Not too many new or unexpected models but the examples given and how they tied them together was helpful

Deep Work: Rules for Focused Success in a Distracted World by Cal Newport


  1. Deep work – professional activities performed in a state free of distractions which push your cognitive abilities to their limit. These efforts create new value, improve your skill and are hard to replicate. This state is totally necessary to maximize your potential 

If you’d prefer to listen to this article, use the player below.

You can also find more of my articles in audio version at Listle

  Key Takeaways

  1. A commitment to deep work usually entails short term sacrifice for long term outperformance and is found in nearly all great accomplishments
  2. Montaigne, Jung, Woody Allen, Bill Gates and others took deliberate time out to chunk, think deeply and about big things. This is especially important today with so many distractions. Chunks of time with no distractions is vital in any line of work. Those who recognize the importance of this depth of thinking have a humongous competitive advantage – it is becoming rarer just as it is becoming more vital. This tactic allows you to learn faster, think deeper, make more connections than shallow, distraction filled thinking does
  3. Add friction to people accessing you – less social media, don’t give out email freely, no spam…
  4. This type of work allows you to compress and accelerate your productivity – 4-6 hours per day, 5-6 days per week can accomplish extraordinary things
  5. Helps you be totally present and grateful and comfortable being bored
  6. As barriers are removed, competition intensifies as it becomes easier for the average person to access resources and learn, making more fields a winner take all type environment.
  7. Those who can work intelligently with machines, those with access to capital and those who are the best at what they do will vastly outperform others – world becoming more ‘winner take all’
  8. Ability to master hard things quickly and produce high quality work quickly are two vital characteristics in order to succeed
  9. Many corporate pressures to be always connected but has shown to lead to lower quality work. Most of these habits can be broken with habits which promote deep work
  10. Clarity for what matters gives clarity into what doesn’t 
  11. Deep work goes hand in hand with awareness and attention which are strongly correlated with happiness 
  12. Flow, challenging tasks are inherently important for a happy life but just as important is what you choose to put your energy into
  13. Need to develop own routines and philosophy for Deep Work. Some may set aside a certain time every day for deep work, some may fit it in wherever they can and still others might try to remove all distractions for constant Deep Work with regular breaks
  14. Having a set time and location when you do certain types of work helps save some willpower and eliminate certain decisions
  15. Mason Curry spent 5 years studying great thinkers and their routines
  16. Great, creative minds think like artists but work like accountants – can’t wait for inspiration to strike, must have great routines
  17. Grand gesture – radical change to normal environment with big effort of time or money with the goal of improving the deep work task, you increase the perceived importance of the task and reduces procrastination and increases focus and energy. Bill Gates’ think week, JK Rowling staying at a 5 star hotel, $4,000 for round trip flight solely to do deep work and Michael Pollan’s writing cabin with no internet or phone are some examples. Dominant force is the psychology to get you completely committed to deep work
  18. Hub and spoke model – the hub is what you do deep work on but also expose yourself to serendipitous ideas, people, meetings and interactions
  19. White boarding effect – sometimes doing Deep Work collaboratively is more effective than solo Deep Work
  20. Focus on the wildly important (less but better and deeper), act on elite measures (both lag and lead measures), keep a compelling score card of elite measures, create a cadence of accountability and plan weekly reviews of how much and how effective your Deep Work is
  21. Productive meditation – think of your deep work task during some mindless physical activity such as walking the dog or going for a run. Beware distractions and looping of things you already know
  22. Being able to memorize a deck of cards will help you stay concentrated for long periods of time
  23. Quit social media as much as possible
  24. Craftsman’s approach to tool selection – determine key things that will determine your success and happiness and only use tools which help you get substantially closer to achieving these goals. Focusing as much of your time and energy on tools which bring disproportionate rewards is the best way to leverage your time
  25. A minimalistic, simplistic lifestyle is helpful to stay focused and do Deep Work
  26. Be very deliberate about how you spend your leisure time before it begins 
  27. Most people hit a mental block with deep work after about 4 hours
  28. It can be a helpful and insightful exercise to try to plan out your day by half hour chunks and see how closely you can follow it and to clearly see where and how you spend your time. This is more about establishing thoughtfulness to your schedule than constraints and rigidity

  Why I got out of it

  1. Scheduling your life to create time to be able to think and work deeply for a couple hours everyday will compound over time and give you more success and happiness than you could ever imagine

The Art of Thinking Clearly by Rolf Dobelli


  1. Dobelli lays out some of the most common and disastrous mental biases we are susceptible to. The cognitive biases and errors we make have been made by every generation for hundreds of years. Learning how to spot and eventually mitigate these risks can have great benefits for our lives, relationships and decision making
Key Takeaways
  1. The fallacies laid out here is by no means complete
  2. Recognize that many of these fallacies are interconnected and play off each other. Lessening one also often improves others
  3. Some cognitive errors are necessary for living a happy, normal life so we don’t want to remove every fallacy. Removing most, however helps avoid must large, stupid mistakes – less irrationality
  4. Survivorship bias – so easy to ignore failures and think odds of success much higher than reality. Guard against it by continuously studying ‘graveyards’
  5. Swimmer’s body illusion – Body a result of selection, not a result of swimming. Don’t fail to recognize factor of selection for results
  6. Clustering illusion – Brain seeks patterns and rules and simply invents them if can’t find any. Don’t fall into trap of seeing patterns when there are none
  7. Social proof – Herd instinct, causes us that the more people doing something the better of an idea it is – making it likely we follow suit. The evil behind investment bubbles, cults and more
  8. Sunk cost fallacy – don’t keep on doing something just because you have already sunk a lot of time, money, energy or love into it
  9. Reciprocity – Beware free gifts
  10. Confirmation bias – skewing new information so it fits what we already believe. Must constantly search for disconfirming evidence which is one of the hardest things to do (Darwin the master)
  11. Authority bias – Tend to blindly follow authority figures
  12. Contrast effect – Have difficulty with absolute judgments as we tend to always compare to something else. People awful at noticing small, gradual changes
  13. Availability bias – don’t think that examples that are most likely to come to mind are necessarily correct or most telling. We think dramatically, not quantitatively. People tend to prefer wrong information to no information (map is not the terrain)
  14. It’ll get worse before it gets better fallacy – A form of confirmation bias – upside for consultant either way (right if things stay bad or customer happy if things improve)
  15. Story bias – Stories simplify and distort reality as we build meaning into things only after the fact. Narratives often irrelevant but we find them irresistible. Be very aware of story teller’s intentions and incentives (you are often the story teller)
  16. Hindsight bias – keeping a journal helps keep you honest. All seems clear in retrospect
  17. Overconfidence effect – people are systematically overconfident in forecasts, knowledge, predictions and decisions on a massive scale. Experts suffer even more than laymen
  18. Chauffeur knowledge – do you truly understand something or simply surface? (Planck and chauffeur). True experts delineate their circle of competence and stick in it
  19. Control illusion – thinking we can sway an outcome when we can’t
  20. Incentive super response tendency – beware what you incentivize! Rat breeding example. People respond to incentives themselves and not the grander intentions behind them. Good incentive systems think of both intent and reward
  21. Regression to the mean
  22. Outcome bias – Never judge a decision by its outcome, rather judge the process
  23. Paradox of choice – less is more. Good enough is the new optimal
  24. Liking bias – will help or buy more from people we like, more similar the more we like them
  25. Endowment effect – liking something more merely because we own it
  26. Coincidence – most underestimate the role of chance in our lives
  27. Groupthink – reckless decisions made because social proof gets people to agree when they otherwise would not. In a tight group, speaking your mind even more important
  28. Neglect of probability – react to size or danger of event rather than likelihood of it happening. No intuitive grasp of risk
  29. Scarcity error – people more highly value what is scarce. Focus only on price and benefits
  30. Base rate neglect 
  31. Gamblers fallacy – dice do not have memory, play the probability
  32. Anchoring effect
  33. Induction – drawing universal conclusions from individual observations
  34. Loss aversion 
  35. Social loafing – individual effort and accountability decrease as we become one with the crowd. Smaller teams tend to be more effective
  36. Exponential growth – people cannot gasp the power of exponential growth
  37. Winner’s curse – highest bidders win but typically pay too much so lose. Competition and ambiguity of true value of things cause this
  38. Fundamental attribution error – Overestimate individual’s influence and underestimate the environment’s
  39. False causality – mistaking correlation, effect or coincidence for causality
  40. Halo effect – a single bright characteristic makes everything else seem better
  41. Alternative paths – all the outcomes that could have happened but didn’t. Don’t contemplate invisible or missing outcomes or info as much as we should
  42. Forecast illusion – people horrible at predictions, even experts
  43. Conjunction fallacy – when we think a subset seems larger than the entire set. We all have soft spots for plausible stories
  44. Framing – information is perceived differently depending on how it is presented
  45. Action bias – people want to look active even if it accomplishes nothing, accentuated in new situations or where you’re unsure
  46. Omission bias – inaction seems more admissible than action even if both lead to the same outcome
  47. Self serving bias – attribute success to ourselves and luck to others’
  48. Hedonic treadmill – we always recalibrate happiness and sadness to our situation. Avoid negative things you can’t get accustomed to, expect only short term happiness from material things, get as much free time, autonomy and deep relationships as possible
  49. Self selection bias
  50. Association bias – seeing connections where none exist
  51. Persian messenger syndrome
  52. Beginner’s luck – regression to mean always brings you back down. True skill lies in outperformance over long periods of time
  53. Cognitive dissonance
  54. Hyperbolic discounting – desire for immediate gratification causes us to make bad decisions for our long term interests
  55. Because justification – people accept reasons even if they don’t explain everything
  56. Decision fatigue – decide better when you decide less
  57. Contagion bias – things can get a negative connotation simply through association
  58. Problem with averages – often mask underlying distribution. Don’t cross a river which is on average 4 ft deep. Beware things which follow power laws (when extreme outliers dominate like Bill Gates’ wealth)
  59. Motivation crowding – surprisingly small monetary incentives crowd out other incentives (volunteering feels less good if we are compensated). Bonuses help more in jobs where people don’t get intrinsic fulfillment
  60. Twaddle tendency – excessive words hides lazy thinking or poor understanding. Jabber disguises ignorance
  61. Will Rogers phenomenon – accounting type illusions which make situations seem better but actually add no value
  62. Information bias – the delusion that more information helps us make better decisions
  63. Effort justification – overvalue things you put a lot of effort into (Ikea effect)
  64. Law of small numbers – much larger fluctuations with small numbers
  65. Expectations – raise expectations for self and those you love and lower it for things you can’t control
  66. Simple logic – scrutinize even simple sounding problems more closely
  67. Forror effect – why pseudoscience works so well, very general or flattering statements most people want to associate with
  68. Volunteer’s folly – giving your time is often not the most effective way to volunteer as using your skill to earn money and donate to a cause or to those who can perform the needed skill more aptly is often a better way to give
  69. Affect heuristic – emotional reactions determine risks and benefits, rather than expected value and probabilities. Substituting how we feel rather than what do I think
  70. Introspection illusion – internal reflection is not reliable and become overconfidence in our beliefs, nothing more convincing than own beliefs; become your own toughest critics
  71. Boat burning effect – remove options in order to become all in. Options and more choices have hidden costs and diminishes will power. Invert in order to determine what to avoid
  72. Neomania – new things always seem to shine brighter. Rule of thumb – whatever has survived for X years will survive for another X years
  73. Sleeper effect – forget source of information but remember message and how it made us feel. Don’t accept any unsolicited advice, avoid ads, remember source of all info you get
  74. Alternative blindness – fail to compare your best alternative to next best alternative(s). Consider all alternatives
  75. Social comparison bias – tendency to withhold assistance from people who might outdo you even if you’ll look like a fool in the long run (hire people who are better than you)
  76. Primacy and recency effects 
  77. Not invented here syndrome – tendency to fall in love with our own ideas
  78. Black swan – unthinkable events which affect every aspect of your life; profit from the unthinkable by trying to catch a positive back swan (entrepreneur or inventor or build something which scales) and avoid negative black swans by giving yourself margin in every aspect of your life
  79. Domain dependence – insights do not pass well from one field to another, especially from theoretical to practical
  80. False consensus effect – frequently overestimate the popularity in the general public of things we like
  81. Falsification of history – remove wrong past assumptions so you think you were right all along; adjust past views to present views. Safe to assume half of what you remember is wrong
  82. In group / out group bias – even small similarities can cause in group bias and anyone outside is a potential enemy
  83. Ambiguity aversion – difference between risk and ambiguity is that with ambiguity the probabilities of outcomes are unknown. Can make calculations knowing risk but not with uncertainty
  84. Default tendency – status quo bias, cling to way things are even if not the best option
  85. Fear of regret – those who don’t follow the crowd tend to feel more regret and therefore tend to act more conservatively. Last chances envoke panic
  86. Salience effect – outstanding features get much more attention than they deserve, can lead to prejudice and changes how we interpret the past and how we act, avoid jumping to the easiest conclusions
  87. House money effect – we spend and think about money differently depending on how we got it
  88. Procrastination – Self control drains will power – eliminate distractions, set self imposed deadlines for yourself, refuel your batteries
  89. Envy – most destructive sin as it is no fun in any way, different from jealousy as jealousy requires at least 3 people, tend to envy people similar to us, stop comparing self to others, determine circle of competence and work on mastery, be only envious of the person you want to become
  90. Personification – we empathize with other people but less so if we can’t see them or don’t know them, statistics don’t stir us but people do
  91. Illusion of attention – tend to only see what we focus on and miss everything else, think the unthinkable, try to spot the Black swans, Pay attention to silences as much as noises
  92. Strategic misrepresentation – exaggerate self or promises in order to achieve some goal, look at past performance and do a cost/benefit analysis to protect self from this
  93. Overthinking – paralysis by analysis, use your emotions and intuition strategically with simple matters or areas your are highly skilled in but use your reasoning for more complex matters
  94. Planning fallacy – people take on too much and is even worse in groups, we are not natural planners and underestimate role of outside events, use pre mortems
  95. Man with a hammer syndrome – locate shortcomings and try to add tools (mental models) to aid you in your life, thinking and decision making
  96. Zagarnik effect – seldom forget uncompleted tasks but immediately forget what we’ve finished, outstanding tasks gnaw at us until we have a clear and detailed view of how we will accomplish them, create step by step instructions with detail to complete tasks
  97. Illusion of skill – luck plays a bigger role than skill, in some areas skill plus almost no role
  98. Future positive effect – missing information much harder to appreciate than what is present, have problems perceiving non events and the absence of things
  99. Cherry picking – selecting and showcasing only the best characteristics and hiding or not mentioning the rest. Always ask about the failures and try to notice what is missing or not mentioned
  100. Fallacy of the single cause – no single factor causes any event but people want a single cause to explain an event
  101. Intention to treat error – failed events show up (unlike in survivorship bias) but in the wrong category. Always try to determine if failed events are not included in the study
  102. News – makes people well informed but ignorant, harmful in the long run
  103. Negative knowledge or knowing what to avoid is much more important than positive knowledge or knowing what to do – via negativa. Eliminate the downside and the upside will take care of itself 
  104. Today’s world, unlike our ancestor’s, rewards deep thinking and independent action. Due to our biology, this is very difficult 
What I got out of it
  1. A really complete and informative book which details some of the most common heuristics and mental biases which lead us to poor decisions or faulty thinking

Seeking Wisdom: From Darwin to Munger by Peter Bevelin


  1. Through real life examples, many of them centered around Warren Buffett and Charlie Munger, Peter Bevelin helps the reader learn how to think better, make fewer poor decisions  understand ourselves and others better. Discusses mental models, human fallibilities, heuristics, instincts, human psychology, biology and more.

Key Takeaways

  1. Main goal is to understand why people behave the way they do. “This book focuses on how our thoughts are influenced, why we make misjudgments and tools to improve our thinking. If we understand what influences us, we might avoid certain traps and understand why others act like they do. And if we learn and understand what works and doesn’t work and find some framework for reasoning, we will make better judgments. We can’t eliminate mistakes, but we can prevent those that can really hurt us.”
  2. Learn from other’s mistakes
  3. Learn the big ideas that underlie reality and develop good thinking habits (namely, objectivity)
  4. This book is a compilation of what Bevelin has learned from reading some of the works of the world’s best thinkers
  5. Book is broken down into 4 parts – what influences our thinking, examples of psychological reasons for misjudgments, reasons for misjudgments caused by both psychology and a lack of considering some basic ideas from physics and mathematics and lastly describes tools for better thinking
What I got out of it
  1. Seriously good read if you’re at all interested in understanding how and why we make decisions (both bad and good) and how we can go about improving our thought processes and tools. Fantastic read and couldn’t recommend more highly
Part 1 – What Influences Our Thinking?
  • Brain communicates through neurochemicals and genes are the recipe for how we are made
  • Behavior is influenced by genetic and environmental factors
  • The flexibility of the brain is amazing as it can change due to our thoughts and experiences
  • Mental state (situation and experience) and physical state are intimately connected – beliefs have biological consequences, both good and bad
  • World is not fixed but evolving – evolution has no goal
  • Pain (punishment) and reward (pleasure) have evolutionary benefits with pain avoidance being our primary driver
  • Hunter-gatherer environments have formed our basic nature – competitive, access to limited resources, many dangers, self-interest, ostracism = death
  • Cooperation leads to trust, especially amongst relatives
  • Fear is our most basic emotion and it guides almost everything we do. Repeated exposure lessens instinctual reactions
  • Novelty is always sought out
  • Reputation, reciprocation and fairness are big human motivators
  • Very painful to lose anything, especially status, once obtained. Higher status linked to higher health and well being
  • People learn their behavior from their culture
  • Assume people will act in their self-interest
  • Don’t blindly imitate/trust others – think rationally and form your own opinions
Part 2 – The Psychology of Misjudgments
  • Outlines 28 reasons for misjudgment. These are never exclusive or independent of each other. Many of these echo similar sentiments to Cialdini’s Influence
    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
    6. Bias from consistency tendency (only see things that confirm our already formed beliefs)
    7. Bias from deprival syndrome (strongly reacting when something is taken away)
    8. Status quo bias and do-nothing syndrome
    9. Impatience
    10. Bias from envy and jealousy
    11. Distortion by contrast comparison
    12. Bias from anchoring
    13. Over-influence by vivid or the most recent information
    14. Omission and abstract blindness
    15. Bias from reciprocation tendency
    16. Bias from over-influence by liking tendency
    17. Bias from over-influence by social proof
    18. Bias from over-influence by authority
    19. Sensemaking
    20. Reason-respecting
    21. Believing first and doubting later
    22. Memory limitations
    23. Do-something syndrome
    24. Mental confusion from say-something syndrome
    25. Emotional arousal
    26. Mental confusion from stress
    27. mental confusion from physical/psychological pain, the influence of chemicals or diseases
    28. Bias from over-influence by the combined effect of many psychological tendencies working tougher
  • Behavior can’t be seen as rational/irrational alone – must have context
  • People can take bad news, but we don’t like it late
  • Evaluate things, people and situations by their own merits
  • Past experiences are often context dependent. Just because some stimulus caused you earlier pain, doesn’t mean that is still the case today
  • Create a negative emotion if you want to end a certain behavior
  • Good consequences don’t necessarily mean you made a good decision and bad consequences don’t necessarily mean you made a bad one
  • Frequent rewards, even if smaller, feels better than one large reward
  • The more “precise” people’s projections about the future are, the more wary you should be
  • Munger looks for a handful of things in people – integrity, intelligence, experience and dedication
  • Recognize your limits. How well do you know what you don’t know/ Don’t let your ego determine what you should do
  • Bad news that is true is better than good news that is false
  • People associate being wrong as a threat to their self-interest 
  • Labeling technique – when somebody labels you, whether you agree or not, you are more likely to comply and behave in ways consistent with that label
  • Avoid ideology at all costs
  • “There is nothing wrong with changing a plan when the situation has changed.” – Seneca
  • Base decisions on current situations and future consequences
  • Don’t fall in love with any particular point of view
  • Know your goals and options
  • Remember that people respond to immediate crisis and threats
  • People favor routine behavior over innovative behavior and similarly, people feel worse when they fail as a result of taking action than when they fail from doing nothing
  • Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action
  • People give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future
  • “We envy those who are near us in time, place, age or reputation.” – Aristotle
  • “The best way to avoid envy is the deserve the success you get.” – Aristotle
  • How we value things depends on what we compare them with
  • Sometimes it is the small, invisible changes that harm us the most
  • Accurate information is better than dramatic information. Back up vivid stories with facts and numbers
  • We see only what we have names for
  • Always look for alternative explanations
  • We see available information. We don’t see what isn’t reported. Missing information doesn’t draw our attention
  • A favor or gift is most effective when it is personal, significant and unexpected
  • Always try to see situations and people from their POV
  • People tend to like their kin, romantic partners and people similar to them more as well as those who are physically attractive. We also like and trust anything familiar
  • Concentrate on the issue and what you want to achieve
  • The vast majority of people would rather be wrong in a group than right in isolation
  • “It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” – Ralph Waldo Emerson
  • When all are accountable, nobody is accountable
  • Being famous doesn’t give anybody special expertise – beware ads with celebrity endorsements
  • “We don’t like uncertainty. We have a need to understand and make sense of events. We refuse to accept the unknown. We don’t like the unpredictability and meaninglessness. We therefore seek explanations for why things happen. Especially if they are novel, puzzling or frightening. By finding patterns and causal relationships we get comfort and learn for the future.”
    • Consider how other possible outcomes might have happened. Don’t underestimate chance
  • Any reason, no matter how flimsy, often helps persuade others
  • 5 W’s – A rule for communication – must tell who was going to do what, where, when and why.
  • Memory is very selective and fallible – keep records of important events
  • Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place
  • “Wise men talk because they have something to say; fools, because they have to say something.” – Plato
  • Awareness of ignorance is the beginning of wisdom
  • When we make big decisions, we could compare our expected feelings with those of people who have similar experiences today. In that sense, we are not as unique as we think we are
  • Understand your emotions and their influence on your behavior. Ask – Is there a reason behind my action?
  • Hold off on important decisions when you have just gone through an emotional experience
  • Cooling-off periods help us think things through
  • Stress increases our suggestibility
  • Stress is neither good nor bad in itself. It depends on the situation and our interpretation
  • “I’ve suffered a great many catastrophes in my life. Most of them never happened.” – Mark Twain
  • People tend to overestimate personal characteristics and motives when we explain the behavior of others and underestimate situational factors like social pressure, roles or things over which there are no control
  • The less knowledgeable we are about an issue, the more influenced we are by how it is framed
  • Advice from Munger – can learn to make fewer mistakes than others and how to fix your mistakes faster when you do make them. Were the factors that really govern the interests involved, rationally considered and what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often mis function. And, take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems
Part 3 – The Physics and mathematics of Misjudgments
  • 9 Causes of Misjudgment/Mistakes
    1. Systems Thinking
      • Failing to consider that actions have both intended and unintended consequences. Includes failing to consider secondary and higher order consequences and inevitable implications
      • Failing to consider the likely reactions of others
      • Overestimating predictive ability or using unknowable factors in making predictions
    2. Scale and limits
      • Failing to consider that changes in size or time influence form, function and behavior
      • Failing to consider breakpoints, critical thresholds or limits
      • Failing to consider constraints – system’s performance constrained by its weakest link
    3. Causes
      • Not understanding what causes desired results
      • Believing cause resembles its effect – a big effect must have a big, complicated cause
      • Underestimating the influence of randomness in good or bad outcomes
      • Mistaking an effect for its cause
      • Attributing an outcome to a single cause when there are multiple
      • Mistaking correlation for cause
      • Drawing conclusions about causes from selective data
      • Invert, always invert! – look at problems backwards
    4. Numbers and their meaning
      • Looking at isolated numbers – failing to consider relationships and magnitudes. Not differentiating between absolute and relative risk
      • Underestimating the effect of exponential growth
      • Underestimating the time value of money
    5. Probabilities and number of possible outcomes
      • Underestimating the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events
      • Underestimating the chance of common but not publicized events
      • Believing one can control the outcome of events where chance is involved
      • Judging financial decisions by evaluating gains and losses instead of final state of wealth and personal value
      • Failing to consider the consequences of being wrong
    6. Scenarios
      • Overestimating the probability of scenarios where all of a series of steps must be achieved for a wanted outcome. Also, underestimating the opportunities for failure and what normally happens in similar situations
      • Underestimating the probability of system failure
      • Not adding a factor of safety for known and unknown risks
      • Invest a lot of time into researching and understanding your mistakes
    7. Coincidences and miracles
      • Underestimating that surprises and improbable events happen, somewhere, sometime to someone, if they have enough opportunities (large enough or time) to happen
      • Looking for meaning, searching for causes and making up patterns for chance events, especially events that have emotional implications
      • Failing to consider cases involving the absence of a cause or effect
    8. Reliability of case evidence
      • Overweighing individual case evidence and under-weighing the prior probability considering the base rate or evidence from many similar cases, random match, false positive or false negative and failing to consider relevant comparison population
    9. Misrepresentative evidence
      • Failing to consider changes in factors, context or conditions when using past evidence to predict likely future outcomes. Not searching for explanations to why past outcome happened, what is required to make past record continue and what forces change it
      • Overestimating evidence from a single case or small or unrepresentative samples
      • Underestimating the influence of chance in performance (success and failure)
      • Only seeing positive outcomes and paying little or no attention to negative outcomes and prior probabilities
      • Failing to consider variability of outcomes and their frequency
      • Failing to consider regression – in any series of events where chance is involved unique outcomes tends to regress back to the average outcome
      • Postmortems – Record your mistakes! Instead of forgetting about them, they should be highlighted
        • What was my original reason for doing something?
        • What were my assumptions?
        • How did reality work out relative to my original guess? What worked and what didn’t?
        • What worked well? What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?
Part 4 – Guidelines to Better Thinking
  • This section helps provide tools which create a foundation for rational thinking
  • 12 Tools for rational thinking
    1. Models of reality
      • A model is an idea that helps us better understand how the world works. Helps explain “why” and predict “how” people are likely to behave in certain situations
      • Ask yourself, “Is there anything I can do to make my whole mental process work better? And I [Munger] would say that the habit of mastering multiple models which underlie reality is the best thing you can do…It’s just so much fun – and it works so well.”
      • A valuable model produces meaningful explanations and predictions of likely future consequences where the cost of being wrong is high
      • Considering many ideas help us achieve a holistic view. No single discipline has all the answers – need to consider mathematics, physics, chemistry, engineering, biology, psychology and rank and use them in order of their reliability
      • Must understand how different ideas interact and combine
      • Can build your own mental models by looking around you and asking why things are happening (or why things are not happening).
    2. Meaning
      • Truly understand something when “without using the new word which you have just learned, try to rephrase what you have just learned in your own language.”
      • Meaning of words, events, causes, implications, purpose, reason, usefulness
      • “Never express yourself more clearly than you are able to think.” – Niels Bohr
      • Use ideas and terms people understand, that they are familiar with and can relate to
      • We shouldn’t engage in false precision
    3. Simplification
      • “If something is too hard, we move on to something else. What could be more simple than that?” – Charlie Munger
      • Make problems easier to solve. Eliminate everything except the essentials – break down a problem into its components but look at the problem holistically – first dispose of the easy questions
      • Make fewer but better decisions
      • Dealing with what’s important forces us to prioritize. There are only a few decisions of real importance. Don’t bother trying to get too much information of no use to explain or predict
      • Deal with the situations in live by knowing what to avoid. Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it
      • Shifting mental attention between tasks hugely inefficient. Actions and decisions are simpler when we focus on one thing at a time
      • Some important things we can’t know. Other things we can know but they are not important
      • Activity does not correlate with achievement
    4. Rules and filters
      • Gain more success from avoiding stupid decisions rather than making brilliant ones
      • Filters help us prioritize and figure out what makes sense. When we know what we want, we need criteria to evaluate alternatives. Try to use as few criteria as necessary to make your judgment. Then rank them in order of their importance and use them as filters
      • More information does not mean you are better off
      • Warren Buffet uses 4 criteria as filters
        • Can I understand it? If it passes this filter then,
          • Understanding for Buffett means thinking that he will have a reasonable probability of being able to assess where the business will be in 10 years
        • Does it look like it has some kind of sustainable advantage? If it passes this filter,
        • Is the management composed of able and honest people? If it passes this filter,
        • Is the price right? If it passes this filter, we write a check
      • Elimination – look for certain things that narrow down the possibilities
      • Checklist procedures – help reduce the chances of harm (pair with Gawande’s The Checklist Manifesto)
        • Should think about – different issues need different checklists, a checklist must include each critical item necessary for “safety” and avoiding “accidents” so we don’t need to rely on memory for items to be checked, readily usable and easy to use, agree with reality
        • Avoid excessive reliance on checklists as this can lead to a false sense of security
    5. Goals
      • How can we make the right decision if we don’t know what we want to achieve? Even if we don’t know what we want, we often know what we don’t want, meaning that our goal can be to avoid certain things
      • Goals should be – clearly defined, focused on results, concrete, realistic and logical, measurable, tailored to individual needs and subject to change
      • Goals need target dates and controls stations measuring the degree to which the goal is achieved
      • Always ask – What end result do I want? What causes that? What factors have a major impact on the outcome? What single factor has the most impact? Do I have the variable(s) needed for the goal to be achieved? What is the best way to achieve my goal? Have I considered what other effects my actions will have that will influence the final outcome?
    6. Alternatives
      • Opportunity cost – every minute we choose to spend on one thing is a minute unavailable to spend on other things. Every dollar we invest is a dollar unavailable for other available investments
      • When we decide whether to change something, we should measure it against the best of what we already have
    7. Consequences
      • Consider secondary and long-term effects of an action
      • Whenever we install a policy, take an action or evaluate statements, we must trace the consequences – remember four key things:
        • Pay attention to the whole system, direct and indirect effects
        • Consequences have implications or more consequences, some which may be unwanted. We can’t estimate all possible consequences but there is at least one unwanted consequence we should look out for,
        • Consider the effects of feedback, time, scale, repetition, critical thresholds and limits
        • Different alternatives have different consequences in terms of costs and benefits. Estimate the net effects over time and how desirable these are compared to what we want to achieve
    8. Quantification
      • How can you evaluate if a decision is intelligent or not if you can’t measure it against a relevant and important yardstick?
      • We need to understand what is behind the numbers
        • Buffett says that return on beginning equity capital is the most appropriate measure of single-year managerial performance
    9. Evidence
      • Evidence helps us prove what is likely to happen or likely to be true or false. Evidence comes from facts, observations, experiences, comparisons and experiments
      • Occam’s Razor – if we face two possible explanations which make the same predictions, the one based on the least number of unproven assumptions is preferable, until more evidence comes along
      • Past record is the single best guide
      • The following questions help decide if past evidence is representative of the future – observation (will past/present behavior continue?), explanation (why did it happen in the past or why does it happen now?), predictability (how representative is the past/present evidence for what is likely to happen in the future?), continuation and change (what is required to make the past/present record continue or to achieve the goal?), certainty and consequences (how certain am I?)
      • Falsify and disprove – a single piece of evidence against something will show that it is false
      • Look for evidence that disproves your explanation and don’t spend time on already disproved ideas or arguments or those that can’t be disproved
      • Engage in self-criticism and question your assumptions
      • Find your mistakes early and correct them quickly before they cause harm
      • The mental habit of thinking backward forces objectivity – because one way  to think a thing through backward is by taking your initial assumption and say, “let’s try and disprove it.” That is not what most people do with their initial assumption. They try and confirm it.
    10. Backward thinking
      • Avoid what causes the opposite of what you want to achieve and thinking backwards can help determine what these actions are
        • Should also make explicitly clear what we want to achieve
      • “Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools do not imitate the successes of the wise.” – Cato
    11. Risk
      • Reflect on what can go wrong and ask what may cause this to turn into a catastrophe?
      • Being wrong causes both an actual loss and an opportunity cost
      • To protect us from all unknowns that lie ahead we can either avoid certain situations, make decisions that work for a wide range of outcomes, have backups or a huge margin of safety
    12. Attitudes
      • “Life is long if we know how to use it.” – Seneca
      • Know what you want and don’t want
      • Determine your abilities and limitations. Need to know what we don’t know or are not capable of knowing and avoid those areas
      • Ask – what is my nature? what motivates me? what is my tolerance for pain and risk? what has given me happiness in the past? what are my talents and skills? what are my limitations?
      • Be honest – act with integrity and individuality
      • Trusting people is efficient
      • Act as an exemplar
      • Treat people fairly – must be lovable
      • Don’t take life too seriously – have perspective, a positive attitude, enthusiasm and do what you enjoy
      • Have reasonable expectations – expect adversity
      • Live in the present – don’t emphasize the destination so much that you miss the journey. Stay in the present and enjoy life today
      • Be curious and open minded and always ask “why?”
Munger Harvard School Commencement Speech 1986
  • Avoid drugs, envy, resentment, being unreliable, not learning from other’s mistakes, not standing on shoulders of giants, giving up, not looking at problems from different POVs, only reading/paying attention to information that confirms your own beliefs
  • Be objective
  • “Disraeli…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 a piece of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in nothing the way the world had taken his enemies down without his assistance.”
Wisdom from Charles Munger and Warren Buffett
  • Appeal to other people’s interests over your own
  • Institutional imperative – tendency to resist change, make less than optimal capital deployment decisions, support foolish initiatives and imitate the actions of peer companies
  • Board of directors have few incentives (unless large owners) to replace CEO
  • Type of people to work with – need intellectual honesty and business owners must care who they sell to
  • Need role models early on
  • Emulate what you admire in others but also be aware of what you don’t like
  • Know your circle of competence
  • Use all available mental models, not just what you’re comfortable with
  • Scale extremely important – efficiencies, information (recognition), psychology (fit in), and in some industries leads to monopolies and specialization
    • Disadvantages of scale – specialization often leads to bureaucracy
  • On what something really means – ask “and then what?” to truly get at somethings core
  • There is a certain natural tendency to overlook anything that is simple and important
  • Avoid commodity businesses
  • Deal only with great people and you will avoid 99% of life’s headaches

Buffett and Munger: A Study in Simplicity and Uncommon, Common Sense by Peter Bevelin

  1. A very interesting dialogue between Warren Buffett, Charlie Munger, the “librarian” and the “seeker” of knowledge. The dialogue discusses how to live a successful, happy and fulfilling life, what to avoid in life and in business and how to improve mental biases and heuristics in order to make better decisions
Key Takeaways
  1. On fatal mistakes, prevention and simplicity
    1. Mistakes are a fact of life
    2. Don’t bother about mistakes that don’t actually matter
    3. Avoiding problems is better than being forced to solve them
    4. If we understand what works and not, we know what to do
    5. It is better to try to be consistently not stupid than to be very intelligent
    6. Thinking backwards is a great tool for solving problems
    7. Keep it simple and make it easy for yourself
    8. The secret is ignorance removal
  2. On what doesn’t work and what does
    1. Find and marry a lousy person
    2. Turn our body and mind into a wreck
    3. Only learn from your own terrible experiences
    4. Use a hammer as your only tool and approach every complex problem as if it was a nail
    5. Go through life with unreasonable expectations
    6. Only take care of your own interest
    7. Blindly trust and follow the recommendations of advisors and salesmen
    8. Mindlessly imitate the latest fads and fashions
    9. Overly care what other people think about you
    10. Let other people set your agenda in life
    11. Live above your means
    12. Go heavily into debt
    13. Go down and stay down when bad things happen
    14. When in trouble, feel sorry for yourself
    15. Be envious
    16. Be unreliable and unethical
    17. Be a jerk and treat people really badly
    18. Have a job that makes you feel miserable
    19. Work with something that goes against your nature and talent
    20. Believe you know everything about everything
    21. Associate with assholes
    22. Distort your problems so they fit your wishes
    23. Stick to, justify and rationalize your actions no matter how dumb they are
    24. Be an extreme ideologue
    25. Make it easy for people to cheat, steal and behave badly
    26. Risk what you have and need, to get what you don’t need
    27. Only look at the sunny upside (over stress the downside)
  3. On what else doesn’t work and what does in business and investing
    1. Invest your money in overpriced assets – preferably businesses without any competitive advantages or future and with lousy and crooked management
    2. If you are a businessman think like an investor and if you’re an investor, think like a businessman
    3. Investing is about where to allocate your capital
    4. Buy “wrongly” cheap productive assets you understand
    5. Things are often cheapest when people are fearful and pessimistic
    6. Be opportunistic and adapt and change when the facts and circumstances change
    7. Stick to businesses where you can assess that their economics is good and getting better
    8. Buy assets protected with a durable competitive advantage run by able and honest people
    9. Understand why it has a moat – the key factors and their permanence
    10. One test of the strength of a moat is essentiality and pricing power
    11. Go in a field, in which you have no interest, not any competence or talent for, no edge in and where the competition is huge
    12. Think about where the business is going to be in the future – not the macro factors
    13. Common sense is better than advanced math and computer models
  4. On filters and rules
    1. The right filters conserve thought and simplify life
    2. Never lose sight of what you’re trying to achieve or avoid
    3. The tune out “folly” filter
    4. The important and knowable filter
    5. The circle of competence filter
    6. The too tough filter
    7. The opportunity cost filter
    8. The “and then what?” filter
    9. The “compared to what?” filter
    10. Checklists help – assuming of we are competent enough to pick the key factors and evaluate them
    11. Have some avoid-rules
    12. Learning never stops
What I got out of it
  1. An incredible book on heuristics, mental biases, how to live, how to not live, what to avoid, the importance of thinking backwards. Highly recommend and will re-read many times moving forward
  • Buffett and Munger have an amazing ability to eliminate folly, simplify things and boil down issues to their essence and get right to the point and focus on simple and timeless truths. Succeed because rational and very seldom let extraneous factors interfere with their thoughts
  • Making better decisions helps avoid a lot of misery
  • Start out with failure and then engineer out its removal
  • Einstein’s razor – things should be made as simple as possible, but no simpler
  • The more basic knowledge you have, the less new knowledge you have to get
  • Seeking Synthesis – always putting things in context and having a latticework mindset, linking the largest areas and using/always adding to your toolbox
  • The very successful say no to almost everything – you must keep control of your time
  • Consistently rub your nose in your own mistakes
  • Best way to avoid envy is to plainly deserve the success you get
  • Set up a system and environment which plays to strengths and minimizes weaknesses
  • Ignorance more often begets confidence than does knowledge
  • There is enormous efficiency in good character. If crooks knew how profitable being honest is, they would be
  • Knowing what you ultimately want to accomplish makes it easier for you to decide what is and is not important
  • Good question for field you know little about – “can you give me a very simple example and explanation for what you’re talking about?”
  • To speak/write clearly is to think clearly – orangutan test
  • Iron rule of nature is you get what you reward for
  • No need for extra analysis – just know what you need to know
  • Attractive opportunities come from capitalizing on human behavior (fear, pessimism, greed)
  • Understanding a business should always be filter #1
  • Best way to understand moats and their key factors and permanence is to study companies who have achieved them
  • Almost always easier to figure out who loses (short horses rather than long autos)
  • Franchise – another word for moats, a product or service that: is needed or desired; is thought by its customers to have no close substitute and; is not subject to price regulation. These three allow a company to regularly price its product or service to earn high ROC. The test of a franchise is what a smart guy with a lot of money could do it if he tried. The real test of a business is how much damage a competitor can do, even if he is stupid about returns
  • Share of mind matters more than share of market
  • Best business by far has high ROC with little need of incremental capital to grow at high rates
  • If you had $1b, could you compete? – silver bullet question (ask CEOs if they could kill one competitor, who would it be and why?)
    • When speaking with management ask “If roles reversed, what would you ask if I were running your business?
  • Northern Pike Model – if you introduce a dominant species, they will soon take over (as WalMart did early on)
  • You don’t have to make money back the same way you lost it
  • It’s simple, to be a winner, work with winners – get great management and let them do their thing
  • if you can detach yourself temperamentally from the crowd, you’ll end up being very successful
  • What is important and knowable? Ignore the rest
  • Wall of Shame for things / investments that have been mistakes (don’t forget to include omissions!)
  • Always consider higher order effects and the implications 

Capital Account: A Money Manager’s Reports on a Turbulent Decade by Marathon Asset Management

  1. Relates the story of the 2001 TMT bubble from the perspective of Marathon Asset Management
Key Takeaways
  1. Capital cycle theory – when companies trade at a premium in the stock market to their replacement cost, new investment is stimulated; that demand forecasts are inherently unreliable; that when competition is increasing, there is a great danger of supply exceeding demand; that investment bankers will promote excesses and that investors will capitulate to these developments. After the boom has turned to bust, capital cycle analysis that a period of consolidation in the industry is necessary before returns improve
    1. High returns will attract excess competition, which will in turn lower excess returns
    2. May not be great at spotting rewarding sectors but it will help you spot bubbles and overvaluation; must take a global perspective
    3. Analyze industries within the Capital Cycle framework and quality of management
    4. Reversion to the mean occurs only in the long run
    5. Before taking a position in out of favor sectors which have failed historically to earn their cost of capital, investors should first ascertain whether capital or capacity is actually being removed from the industry
    6. Capital cycle analysis must always be accompanied by a parallel analysis of management reinvestment discipline
  2. The sectors Marathon looks at are characterized by corporate restructuring, industrial consolidation, a focus on the core business and a history of underinvestment – may not be fashionable or exciting but often lead to good results
  3. Take the view that a strong relationship exists between stock prices and replacement cost and furthermore, that the best investment returns are achieved when shares sell at a material discount to their replacement cost (Cemex)
  4. Investment experience shows that the range of investment outcomes is not normally distributed but is characterized by fat tails – shares spend relatively little time at fair value (highest quality companies can be undervalued for decades – WalMart)
  5. Business executives and gate keepers (lawyers, auditors, etc.) are mostly to blame for bubble
  6. Investors who ignore the noise generated by investment banks are likely to be winners
  7. Goodhart’s law – When any single measure of corporate profitability becomes a target for investors and business managers, it becomes useless
  8. EBITDA was popularized during this time as it stripped all “bad stuff” (aka costs) from earnings
  9. Folly of short termism – quarterly figures inherently unreliable, profits generated by a company over a three month period are tiny in comparison to the total value of the business, changes in competitive position cannot be measured over such a brief period of time, earnings can be manipulated
  10. Avoid IPOs, really anything that is being sold to you – most new issues are poor investments or else they wouldn’t take place at all
  11. Ability to allocate capital efficiently is the biggest predictor of share price performance.
  12. Profitability is determined primarily by the competitive environment, or the supply side, rather than by revenue growth trends. It is better to invest in a mature industry where competition is declining than in a growing industry where competition is expanding
  13. The winners are those who make fewer mistakes
  14. Overvaluation (Tobin’s Q = market cap / replacement cost) leads to over expansion which leads to too much supply which lowers profitability
  15. Distinction between innovation and adoption is critical
  16. Over the long run, it is a company’s ROC, not changes in quarterly earnings, which primarily determines the direction of its share price. The ROC of any company is largely subject to the state of competition within its industry.
  17. When shares are priced on the assumption that existing returns are likely to be maintained or even improved, then a rapid increase in industry capacity should serve as a red light. Unfortunately, business people have a tendency to extrapolate from recent trends. The ‘animal spirits’ of the corporate world tend towards optimism and overconfidence. CEOs frequently assume their competitive position is stronger than it is and that currently favorable conditions will continue indefinitely. As a result, they are frequently surprised by their unfavorable consequences of capital expansion in their industry. And professional investors, who mostly take their cue from what management tells them, are also liable to be wrong-footed.
  18. Growth company framework
  19. As one moves down the growth stock decision tree, business risk tends to decline as management has the operating model more under its control. The failure rate of stocks is therefore lower
  20. Substitutionary locomotion model the best – efficiency is at the heart of the model but a substantial amount of ‘savings’ are redeployed either for advertising, to generate new demand, or for innovation, to create more products. Because accelerated advertising or research goes through the profit and loss account, these companies often do not appear to be growing earnings as fast as they might be. In the race of fable, they resemble the tortoise rather than the hare. Management of such companies understand that not all costs are equally bad. They have a rising quality of costs as well as earnings (Colgate, Wrigley prime examples). JNJ, GSK, and Merck raising R&D budgets and might appear to be part of this elite but the issue  is complicated by growing competition in the pharma sector which is shortening life cycles of new drugs
  21. Rising advertising budgets show three things – underlying earnings growth rate that these companies have declared is sufficiently robust to allow for increased expenditure; providing these businesses have not been permanently damaged by the prior decline in advertising outlays, revenue growth should be reasonably robust; since there is little point in promoting a tired product, the rise in advertising spend also implies an increase in product innovation
  22. A successful product must make a consumer’s life easier (razor blades) or more pleasurable (Coca Cola)
  23. Efficiency based model – a key criterion for success is that the company should be profitable enough to expand but not so profitable that competitors are attracted into the field (WalMart, Home Depot)
  24. Price-based growth model – Has pricing power and can increase margins and profits through raising its selling price or reducing input costs (Kellogg, PM)
  25. Growth due to overvaluation – when a company’s shares are trading at many times the replacement cost of the business, there is a great incentive to grow the business
  26. Growth by acquisition – Source of value add is either merger synergies or a valuation arbitrage between share prices of the lowly valued target company and the highly valued predator
  27. Seeing quantum increase in mispricings and it often takes years to revert
  28. Low inflation doesn’t have the magical power to prep markets like many believe
  29. Believes passive investing is dumb as index construction is inherently flawed
  30. One of primary cures for poor returns is consolidation – economies of scale
  31. Capitalism works efficiently only under conditions of genuine competition
  32. 2 handled pump – management talks up the stock, sells at all time highs, sees stock tumble and buys again at lows (Silver Kings)
  33. MacGuffin – something which is just believable enough without being either understandable or clearly measurable
  34. EVA – Economic Value Add; spread between ROIC and cost of capital – bigger –> higher valuation
  35. Leads to some poor incentives – short-term, cut good expenses such as R&D and advertising to momentarily boost earnings
  36. Buybacks becoming increasingly popular but improperly implemented
  37. Turnarounds
  38. Most important criteria for easier turnarounds – intellectually honest management, good capital allocation (declining levels of investment preferred), robust core business, long product lives/loyal customer base, constrained supply side, good balance sheet, constructive fellow investors (bond and equity), properly constructed management incentives
  39. More difficult turnarounds – management in denial, more investment needed, core business troubled, short product lives/disloyal customer base, supply side out of control, bad balance sheet, stubborn investment constituencies, counter-productive incentives
  40. Smooth, incremental growth impossible but market penalizes if can’t deliver
  41. Importance of meeting management – by personally meeting can get to know management on a deeper level by observing tendencies, body language, lifestyle, see if they keep their promises, make sure they’re not formerly investment bankers, encourage a cultish personality, are self-promotion; like some ruthlessness in their managers as well as loyalty, intelligence, flexibility and honesty
  42. Richemont, Bunzl, Reckitt Benckiser, Heineken, Nokia, Intertek, Svenska Handelsbanken
  43. The more overvalued the market is, the more likely acquisitions will be made via shares
  44. What I got out of it
    1. Really great perspective on how Marathon analyzed the bubble in real time, how they kept their patience and viewed the situation in real time and how they avoided the mania and eventual losses

A Few Lessons From Sherlock Holmes by Peter Bevelin

  1. Bevelin takes quotes and examples from Sherlock Holmes as examples of several tools and techniques to improve thinking and decision making
Key Takeaways
  1. Observation and inference
    1. See things for what they are and report them truthfully
    2. Beware of first impressions – appearances can be deceiving
    3. More is missed by not looking than not knowing
    4. It is not the amount of information that counts by the relevant one
    5. Sometimes it helps to shift perspective
    6. The value of experience is not in seeing much but seeing wisely
    7. “By doing it many times over till it is done perfectly – for it is worth doing.”
    8. Checklist routines for critical factors to help
    9. Look as diligently for what is missing for what is there
  2. Deduction
    1. Reasoning backwards, working back from observations/effects to causes
    2. Use the simplest means first
  3. Analogies
    1. You cannot judge the relevance of an isolated fact. Experience has taught me, and must have taught you, that the most trivial, commonplace and seemingly irrelevant facts have a way of suddenly assuming a crucial importance by connecting, explaining or filling in the detail of later discoveries
    2. That process…starts upon the supposition that when you have eliminated all which is impossible, then whatever remains, however improbable, must be the truth. It may well be that several explanations remain, in which case one tries test after test until one or other of them has a convincing amount of support
  4. Test your theory
    1. If it disagrees with the facts, it is wrong
    2. There is nothing more deceptive than an obvious fact
  5. Patience
    1. Distance gives perspective – sometimes we need to remove ourselves from the problem and get a fresh perspective
  6. Put self in other’s shoes
    1. If we could see the world the way others see it, we easier understand why they do what they do
    2. Don’t make the world fit your tools and use the right tool for the job
  7. Criticize self
    1. Have you tried to find evidence against what you believe? Why might we be wrong? What have we overlooked? What (new) information or evidence is needed to make us change our mind?
    2. When we meet a fact which contradicts a prevailing theory, we must accept the fact and abandon the theory, even when the theory is supported by great names and generally accepted
  8. Learn from mistakes
    1. Update your beliefs in light of new information
    2. For one’s own training it is better to make an incorrect diagnosis than none at all – if you call yourself to account afterwards
  9. Know your limits
    1. Don’t think about how to get things done, instead ask whether they’re worth doing in the first place
    2. A lot of misery comes from what we allow ourselves to get dragged into
What I got out of it
  1. Really good, short read on some key characteristics necessary for deep thinking and better decision making

The Decision Book by Mikael Krogerus and Roman Tschappeler

  1. Provides a brief summary of 50 decision models, or mental frameworks, on how to best attack a particular problem or situation. Focuses on better understanding ourselves, others, making the right choices with the information you have, creating effective teams and more.
Key Takeaways
  1. This book is a treasure for those who are looking for new mental models and how to apply them to many difficult/varied scenarios
What I got out of it
  1. Incredible reference for difficult decisions, how to improve yourself, how to improve others, how to create effective teams and more. Website

Damn Right! Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger by Janet Lowe

  1. Lowe details Charlie’s life through his early career as a lawyer, later partnership with Buffett to form Berkshire Hathaway, his family, his hobbies and outlook on life
Key Takeaways
  1. Warren, Charlie are very similar and make an amazing team. They are both from Omaha but didn’t meet until 1959
  2. Very eclectic reader – hundreds of biographies
  3. Wanted wealth because it grants independence
  4. Loves complex ideas and detailed analysis
  5. Credits his success to self-education, mental discipline, deeply understanding big ideas
  6. Always act as honorably as possible
  7. Star Island is his secluded family getaway
  8. Family was very smart, hard working and loving. Father taught him power of Tao – love of doing small things excellently
  9. Poker helps with business decisions – when to fold early and when to back heavily
  10. Somewhat arrogant but his opinions are not set in stone
  11. Divorced “Nancy 1” and soon after remarried to “Nancy 2”
  12. Tended to do a task himself or totally delegate it (usually delegated)
  13. Saw advantage of high quality businesses (easy decisions) early on and helped Buffett see the benefit of paying a fair price for high quality businesses
  14. Made first real money in real estate in California
  15. Able to look at facts and come up with new, insightful conclusions
  16. Great at analyzing businesses quickly and saying no if it falls outside his circle of competence
  17. Can zero in on what is truly important
  18. Must think correctly AND independently
  19. To become truly wealthy, need ownership in a business
  20. Simply easier to be ethical, rational and honest. Hard work and honesty gets you almost anything
  21. If Charlie trusts someone, he trusts them completely
  22. Blue Chip float lead to purchases in See’s Candy, Precision Steel
  23. Typically make one major decision every 3 years. Extreme patience with extreme decisiveness
  24. Must only deal with quality people
  25. Want to be in sectors that tend towards natural monopolies
  26. Bought Buffalo Evening News in 1977. At the time was nearly 25% of BRK net worth
  27. Foresaw savings and loan debacle and moved Wesco away from thrift
    1. “Our experience in shifting from savings and loan operation to ownership of Freddie Mac shares tends to confirm a long-held notion that being prepared, on a few occasions in a lifetime, to act promptly in scale, in doing simply and logical things, will often dramatically improve the financial results of that lifetime…A few major opportunities clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the past.”
  28. Remember the obvious rather than grasping the esoteric
    1. “Most geniuses—especially those who lead others—prosper not by deconstructing intricate complexities but by exploiting unrecognized simplicities.” — Andy Benoit
  29. “Our rule is pure opportunism”
  30. Look for integrity, intelligence, experience and dedication. Look to create the best business environment anywhere through evaluations without extensive meetings, capital access, focused compensation, and freedom to do one’s best
  31. Don’t confuse simplicity with ease
    1. “People underrate the importance of a few simple big ideas. And I think to the extent Berkshire Hathaway is a didactic enterprise teaching the right systems of thought, the chief lesson is that a few big ideas really work. I think these filters of ours have worked pretty well because they are so simple.”
  32. In the mid ’90s, BRK transitioned to owning more companies outright and became the buyer of first resort
  33. Munger admires Costco so much he violated his rule and joined their Board
  34. Avoid the mistake of not buying great, undervalued businesses when the stock has appreciated
  35. Tell the truth, tell it fully, tell it fast
  36. Giving time, talent, risking reputation as important as contributing money
  37. Many people specialize too early. Must deeply learn subjects you can’t live well without (psychology, math, physics, engineering)
  38. Paranoid self pity, the “victim mindset” is the most destructive frame of mind
    1. Every time you think about someone or something ruining your life, it’s in fact just you
  39. A few really big ideas carry most of the weight
  40. “To those whom much is given, much is expected. Always live below your financial means so that you will have money to invest. Invest in such a way so as to avoid the possibility of falling into a negative position – primarily, by limiting the amount of debt you use…If you want to get smart, the question you have to keep asking is “why, why, why?” And you have to relate the answers to a structure of deep theory. You’ve got to know the main theories. And it’s mildly laborious, but it’s also a lot of fun…From physics, Munger has learned to solve a problem by seeking the simplest, most direct answer. The easiest way invariably is the best way. From mathematics Munger learned to turn problems upside down or to look at them backward – invert, always invert.”
  41. If he taught finance, would look at about 100 companies who have thrived or failed
  42. Take a simple, basic idea and take it very seriously
  43. Truth is hard to assimilate in any mind when opposed by interest
  44. 5 best practices for thinking, problem solving, decision making
    1. Simplify by answering the big “no brainer” questions first
    2. Gain numerical fluency
    3. Invert problems
    4. Must use elementary and multidisciplinary thinking
    5. Lollapalooza effects come only from a combination of a large number of factors
  45. Pilot training should be implemented into different fields
    1. Formal education wide enough to cover practically everything useful
    2. Wide base of knowledge raised to practical fluency
    3. Ability to think forwards and backwards (concentrate on what you want to avoid as much as what you want to happen)
    4. What is most important gets the most attention
    5. Checklist routines are always used
    6. Forced into a special knowledge maintenance routine
What I got out of it
  1. Interesting read on Charlie Munger’s life, career, though process. Multidisciplinary thinking, inverting problems, always act honestly key topics, take a simple, basic idea and take it very seriously