Mental Models: The Last Unfair Advantage

Math is something I have always been good at. You take an input, apply a bunch of rules to it, and get an output. As long as you have done all of the math correctly that output should be the same for anyone that does the equation.

I got introduced to mental models during my time as a Summer Associate in venture capital. Everyone I talked to had their own “math” functions. From years of industry experience they built a latticework of frameworks that influenced their investment intuition. These mental models determined if an investment was good or bad. They were the difference between writing a $1,000,000 check and going separate ways.

Unlike math, we all have different rules we’re applying to our decision making which causes the output to vary (despite the same inputs). As more people begin to outsource their decision making to programs those rules transform into logic in lines of code.

The last unfair advantage in an age of infinite leverage is the mental models you have to aid you in reaching different conclusions.

What Are Mental Models?

Let’s start with the definition of a mental model. Put simply, a mental model is a concept, framework, or principle that helps you understand how the world works. Mental models come from all different disciplines like physics, psychology, economics, or engineering.

Most people only take a one sided approach to developing their mental models. Typically taking on the framework of whatever they studied in school. 

Engineers think about business completely differently than an accountant. Both ways of thinking are good for the business, but each of the functions are optimizing for a different outcome and objective.

An engineer might think in terms of:

  • Systems
  • Scalability
  • Feedback loops
  • Risk management

An accountant might think in terms of:

  • Cash flow
  • Compliance
  • Cost benefits
  • Time value of money

Mental models give you the ability to understand life and reality on a different level. The core ideas contained in each mental model guide your perception and behaviors. Which, as a result, builds your overall understanding.

Why Mental Models Are Important

If you’re an engineer that can also think like an accountant you understand business better. It reinforces the foundations you make decisions on.

The more connected the world becomes, the more important having great mental models is. New technological trends and ideas are spreading at record breaking speeds. Mental models give you something to spot and analyze trends through so you can recognize big ideas.

Every money decision you make is influenced by the mental models you have. Some people know how to make money. Others know how to keep it. A few people cannot seem to do either. Why is this the case? Each has different mental models involving money.

When people make rational decisions we can predict their behaviors with a high degree of certainty. But humans are not rational, we’re reasonable.

It’s rational to want a fever when you’re sick. A one-degree increase in the body’s temperature slows the replication rate of some viruses by 200x. But it’s not reasonable. When you’re having audible hallucinations from a fever of 106 and shivering uncontrollably rationale goes out the window.

You make decisions based on reason – a combination of logic and emotions.

Game theorists spend their lives studying strategies by rational thinkers. They model out optimal strategic choices for competition, cooperation, and negotiation to try and predict the behavior of individuals (sounds good in theory, right?).

But they almost always fail to match the model to reality. We are running all these decisions through a complex algorithm of mental models. Not just a framework from game theory.

Your mental models determine your decisions, perspectives, and outcomes. The frameworks in your head are your competitive advantage.

How To Apply Mental Models In Your Life

People will counter the argument that mental models are important by saying “mental models are mental masturbation.” Just learning about them is, but applying them into your life is anything but it.

However, it can be confusing to apply mental models to your life. How do you integrate them into your intuition?

The simple answer: use them often (but I will give you something more actionable).

Integrating mental models into your intuition isn’t really a simple process. You must work so hard at understanding the concepts that they become second nature to you. The secret is in the process.

1. Define your problem

The first step to applying mental models is knowing what problem you’re trying to solve. The problem must be big enough to require mental bandwidth. It doesn’t have an immediate answer.

When you have your problem defined you can begin lining up different mental models to determine the best outcome.

2. Pick one mental model

Learning about the models is just collecting them for future use. When you need to come up with an answer you can start trying on different models to see what fits. Pick one and see if it fits nicely into the puzzle that you’re trying to solve.

3. Develop your process

It’s not enough to think, I’m going to apply the mental model of affordable loss. 

Mental models fit into a process that you must develop. The process is about processing how they should work and what situations each one fits into.

If you spent 5 minutes thinking about affordable loss and then made your decision you didn’t use the mental model. This is the equivalent of looking at a car, but never test driving it.

Mental models must be test driven. The more physical you can make it the better. There’s no substitute for physical interaction. When I was practicing divergent thinking my process looked something like this:

5. Repeat the process

Doing something once is not enough. If you want to make the mental model second nature in your decision making process you must repeatedly do it until you find yourself doing it subconsciously.

When I first started applying Occam’s razor into my product development process I had to make an effort to reduce the amount of complex use cases I assumed the feature would have to account for. Unless the complexity was explicitly from a current use case it got removed from the assumptions I was operating under.

At first this was repeatedly listing out all the applicable use cases. When I started doing this I started to list out the most complex possibilities I could think of (there were lots of what ifs involved in them). Now, I start from a place of simplicity and only get as complex as necessary.

From working with the mental model repeatedly it’s become ingrained in my thinking. Spend time with each mental model you learn about and eventually you'll see a change your decision making process.

FOOTNOTES

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