“The mind of man at one and the same time is both the glory and the shame of the universe.” – Blaise Pascal

The name of this blog, Latticework, comes from an idea that Charlie Munger loves to talk about. That is, one of the things Charlie attributes to the success that he and Warren have shared over the years at Berkshire Hathaway is that they’ve accumulated a tremendous amount of worldly wisdom, through the process of creating a “latticework of mental models”. This latticework is more than just minutia of business acumen. Rather, Charlie’s mental models come from a wide array of academic topics such as: physics and mathematics, economics and psychology, philosophy and law, among others. As a self-proclaimed “learning machine”, Charlie uses this diverse portfolio of wisdom like a worldly filtration system. Instead of looking at a prospective investment opportunity solely through the traditional lense of a businessman, Charlie’s able to view his investments from multiple perspectives, helping him see deeper and clearer than he would be able to otherwise. That’s the power of mental models, and that’s exactly what this article is going to explore.

The Nobel laureate, Herbert A. Simon, known for his work in psychology, computer science, sociology, and economics may have been the pioneer of what we now refer to as the latticework of mental models. In his autobiography, Models of My Life, Simon writes how having more experience positively influences the abilities of decision makers:

A large part of the difference between the experienced decision maker and the novice in these situations is not any particular intangible like “judgment” or “intuition.” If one could open the lid, so to speak, and see what was in the head of the experienced decision-maker, one would find that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted; and that he had mechanisms in his mind to evoke these, and bring these to his conscious attention when the situations for decisions arose.

 

Most of what we do is to get people ready to act in situations of encounter consists of drilling in these lists into them sufficiently deeply so that they will be evoked quickly at the time of the decision.

What we can learn from Simon’s work on decision making, is that someone who has the benefit of repertoire, or pre-constructed mental models for understanding a given situation has a competitive advantage over someone who’s encountering those ideas for the very first time. If this rings a bell, it’s because it’s not far removed from another famous decision-making Nobel laureate’s findings, Daniel Kahneman. In Kahneman’s classic, Thinking Fast and Slow, we learn that the decision-making area of the brain really operates using two distinct and opposite modes: System 1 (quick, instinctive) and System 2 (slow, rational, deliberate). System 2 thinking requires a greater conscious cognitive effort and is often activated during complex or novel situations. Conversely, System 1 may feel effortless, like brushing your teeth. Perhaps what’s most interesting and relevant to the world of investing and business valuation, is that with time, practice, and persistent effort, your brain begins to rewire what would normally require the help of System 2, and shortcuts these decisions instinctively using System 1. Thus, what Charlie Munger, Herbert Simon, and Daniel Kahneman have all observed and noted is that a brain equipped with mental models, not only is able to make complex decisions quicker, but also understands them more deeply and in context to the greater world as a whole.

In Charlie’s must read 1994 lecture to the USC Business School, one of the first and most important pieces of advice that he discloses is that you must have multiple models.

What are the models? Well, the first rule is that you’ve got to have multiple models—because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does. You become the equivalent of a chiropractor who, of course, is the great boob in medicine.

 

It’s like the old saying, “To the man with only a hammer, every problem looks like a nail.” And of course, that’s the way the chiropractor goes about practicing medicine. But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world. So you’ve got to have multiple models.

In other words, you don’t want to be the fool running around hammering everything in sight because you think it’s a nail when it’s actually a screw. That’s how you get trapped in one-dimensional thinking. You can avoid this the same way you’d diversify market risk by investing in business from different industries; you can diversify risk of myopic thinking through acquiring and practicing different mental models.

If you’re thinking this sounds too taxing of your time and irrelevant, and are wondering how studying philosophy, psychology, and sociology can help you become a better investor, you’re not alone. Luckily and ironically, there’s a mental model that explains how you can go about efficiently constructing your own latticework of mental models. This economic idea is called the Pareto Principle, also called the “80-20” rule. Essentially, the model shows that 80% of something’s effects usually comes from 20% of its causes. For example, 80% of the world income goes to about 20% of the population, or 80% of a company’s profits come from 20% of its products, etc. In our in-depth conversation with Robert Hagstrom of Legg Mason, and author of Investing: The Last Liberal Art and The Warren Buffett Way, Hagstrom discusses how his firm solves this very problem, and shares his solution:

You can’t spend 90% of your time becoming an authority on physics and biology because you’ve got work to do on valuing businesses, but you can spend a little bit of your time understanding the big models and how they work and how they may relate and that’s what we did in Investing: The Last Liberal Art was kind of give you a surface view of how these models work. You’ve got a working knowledge of physics, you’ve got a working knowledge of biology, evolutionary biology. Psychology now, thankfully, is much mainstreamed in our business and so we try to add a little bit more there on risk tolerance and things of that nature.

(Watch the full conversation in The Manual of Ideas Members Area.)

A “working knowledge” or just 20% of the core mental models, may be all that you need to grasp 80% of what they have to offer. Of course, if you want to dive deeper on any one particular subject, that’s even better. But the main idea that Robert and Munger are getting at is that the benefit of a mental latticework is that it gets stronger the more you weave into it. Like a system benefiting from synergistic effects, mental models offer exponential rewards to those willing to take the time to acquire their wisdom.

Summary

Charlie Munger gave another speech to USC in 2007. This time, instead of speaking to the Business School, Charlie was speaking to the entire graduating student body at their Commencement. You can watch the entire speech if you visit the link above (it’s divided into five separate clips). Like his 1994 lecture, Charlie goes into depth about the value of the latticework of mental models, and the potential worldly wisdom waiting to be acquired by the eager seeker. But there was one particular line in the 2007 version that stuck out as something really worth honing in on.

Wisdom acquisition is a moral duty. It’s not something you do just to advance in life. As a corollary to that proposition which is very important, it means that you are hooked for lifetime learning. And without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.

Today, it seems all too common that higher educational institutions position degrees for their market value. In other words, students end up going to college for economic purposes rather than intellectual curiosity. Which is totally rational, but the issue here is that when those same students graduate from college and enter the workforce, most will find that they have a very real and important life decision regarding the continuation of learning. If wisdom is valued solely for its economic purposes, than a person’s education most likely will stop once a degree is obtained. If however, you make a commitment to continue your education throughout a lifetime of learning, then you fulfill what Charlie calls a moral duty.

At Latticework, we’re striving to catalyze the global community of intelligent investors around a shared mission of lifelong learning. So on this point, I couldn’t agree more with Charlie. The wisdom you acquire and share through your own latticework of mental models has radiating effects far beyond personal profit. A commitment to lifelong learning serves a higher purpose, a moral purpose, and is perhaps the best investment you or I will ever make.

Additional Resources

One of My Favorite Mental Models, with Josh Brooks of Granite House Capital Management