6.18.24

I've been reading Poor Charlie's Almanac by Charlie Munger this week. He instructs each of us to have a collection of "models" we use in analyzing choices. (Investment choices, yes, but others too.) His use of "models" corresponds a bit to the idea of "lenses" that have become popular to talk about in the last decade. 

For reflection. Here are ten of the most important models according to his philosophy:

1. Inversion: Thinking about what you want to avoid or prevent can help you identify the right course of action. Instead of asking "How can I achieve success?" ask "How can I avoid failure?"

2. Occam's Razor: Simplest solutions are often the best. Avoid overcomplicating problems with unnecessary variables.

3. Probability: Understanding basic probability is crucial for decision-making. This includes Bayes' Theorem for updating probabilities based on new evidence.

4. Opportunity Cost: Every choice has a cost. Understanding what you’re giving up by choosing one option over another helps in making better decisions.

5. Circle of Competence: Stick to what you know best. Knowing your own strengths and weaknesses helps you avoid mistakes.

6. Mr. Market: Treat the stock market as an erratic entity offering opportunities, rather than a guide to intrinsic value. This helps maintain emotional stability in investing.

7. Margin of Safety: Always allow for error. This principle, borrowed from engineering, helps mitigate risk.

8. Reciprocity: People tend to return favors. Understanding this principle helps in building and maintaining relationships.

9. Confirmation Bias: Recognize the tendency to seek information that confirms your preconceptions. Being aware of this helps in seeking out contradictory evidence.

10. Lollapalooza Effect: When multiple biases and tendencies combine to produce an extreme outcome. Recognizing this helps in understanding how small factors can lead to significant effects.

These models come from various disciplines, including psychology, economics, mathematics, and engineering, and help in approaching problems from multiple perspectives.

ChatGPT assembled this list for me in less than 3 seconds. 

So that's interesting too.