Mental Models

#1 Adaptability

“It’s not that strongest spices that survive,
Nor the most intelligent,
But the one most responsive to change.”

-Charles Darwin

#2 The Red Queen Principle

If you want to get somewhere else, you must run at least twice faster.

Avoid Running faster and faster only to stay in the same place.

#3 Peltzman Effect/Preverser Incentive

The result of increased safety measures for Auto Drivers might increase unintended risks for unrelated people. With the safety features in Car the drivers tend to be less focused, which results in reckless driving then this can lead to injuries or Deaths to pedestrians.

Imposing some restriction by incentives for certain actions which results in unintended consequence

In Hanoi Vietnam, Government has intended to reduce excess rat population, so incentivized people to kill rats and reward a person who comes up with the rat tail. The well-intended process has resulted in people farming rats.

#4 Hedonic Treadmill

According to this theory, a person makes more money, expectations, and desires rise in tandem, which results in no permanent gain in Happiness.

#5 Contrast Effect

When you have spent your money on the Mediocre investment, don’t back it up with more money.

e.g Berkshire Textile investment vs See’s Candy & New Paper Business

Don’t fall into the trap (Throwing Good Money after Bad) even though the money to be spent was small compared to money already spent.

#6 Pattern Seeking

Have I seen this before? or Has it happened before?

What Happened Then?

Why should this be any Different?

#7 Domaine Dependence

As we get more and More focused on one area of work, it is harder to look outside our own domain for solutions to our problems.

Economists have long been divided by a simple problem. When you go to the movie theater, soda and popcorn cost a totally unfair price compared with other locations. This just tortures economists. At least one million man hours have gone into trying to solve this problem. Economists understand that a first-class ticket on an airplane costs more than coach. They get that one. It’s marginal utility. But they can’t figure out the movie theater to save their lives.

Here’s the Munger approach to the problem. In the auto world, a car manufacturer will sell a car for $40,000 and charge $200 for the extra gizmo. No one cares about the extra $200 when you’re already spending $40,000. It’s insignificant. The movie theater is basically the same thing. People are OK paying that much for a soda after they’ve paid so much for an admission ticket.

Now, psychologists can explain this clearly. Economists can’t for the life of them. It’s so simple what happens with you think beyond your trained field. It’s amusing to see someone spend one million man-hours on something I can solve with my left hand.


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