The Art of Manliness - #471： Using Mental Models to Make Better Decisions

00:00:00.000 Brett McKay here and welcome to another edition of the Art of Manliness podcast. We live in

00:00:18.940 a complex, fast-changing world. Thriving in this world requires one to make fast decisions

00:00:23.660 with incomplete information. But how do you do that without making too many mistakes?

00:00:27.420 My guest say argues that one key is stockpiling your cognitive toolbox with lots of mental

00:00:31.920 models. His name is Shane Parrish. He's a former Canadian intelligence officer and the owner

00:00:35.520 of the website Fardom Street, which publishes articles about better thinking and decision

00:00:39.160 making and is read by Wall Street investors, Silicon Valley entrepreneurs, and leaders

00:00:43.000 across domains. We begin our conversation discussing how Shane's background as an intelligence officer

00:00:47.400 got him thinking hard about hard thinking and why the musings of investors Warren Buffett

00:00:51.620 and Charlie Munger has had a big influence on his approach to decision making. Shane

00:00:55.520 then shares his overarching decision making philosophy and explains what mental models

00:00:58.820 are and why they're powerful tools to make better decisions. We then discuss why you should

00:01:02.620 focus on being consistently not stupid instead of trying to be consistently brilliant in tactics 0.99

00:01:07.640 you can use to make better decisions. After the show's over, check out our show notes at 0.93

00:01:11.360 aom.is slash Fardom Street. Shane Parrish, welcome to the show.

00:01:26.300 Thanks. I'm glad to be here.

00:01:27.740 So you head up a website called Fardom Street. I don't know how I discovered you. It was a long,

00:01:34.000 it was a couple of years ago and I've been following it religiously ever since then because I love it.

00:01:38.020 It's a website, a learning community dedicated to learning how to think better, make better

00:01:44.660 decisions. But what's crazy is this thing, I mean, it's read by all these Wall Street investors

00:01:51.040 and leaders across fields. So how did this, how did Fardom Street start and like become this

00:01:55.820 phenomenon? Well, in 2007, I made a decision that probably impacted the lives of a lot of other

00:02:03.000 people. And I remember leaving work. And at the time I worked for an intelligence agency

00:02:07.040 and it was about 2am and I was walking home and I was struggling because I didn't know if I had made

00:02:12.640 the right decision. And I went into work the next day on about three hours of sleep because I stayed

00:02:17.480 up all night. And you know, the stakes are high, right? You have your country, you have people in

00:02:22.920 theater who are making decisions based on what you're doing. You have decisions that you're making

00:02:27.380 that affect them. You have your team, you have their families, you have your organization,

00:02:32.260 you have your country's relationship with other countries and all of that. You're making a call

00:02:36.000 on a judgment call, you know, in the wee hours of the morning after not a lot of sleep.

00:02:40.400 And I went in the next morning and I said, Hey, I went to my boss and I was like, I don't know if I'm

00:02:44.980 making these decisions right. I mean, they're working out, but I don't know if I'm doing it right.

00:02:49.320 I don't know if I'm comfortable, like that I've thought about everything. I might be missing

00:02:52.820 something. And he just laughed at me and said, you know, everybody's in the same boat and sort

00:02:58.380 of shrugged it off. And I remember going home that day going like, I think people deserve better.

00:03:03.020 And I started just doing a deep dive into how to make decisions and like, how do we learn about

00:03:08.100 the world that we're living in? And I went back and I ended up doing my MBA and the MBA proved

00:03:15.200 relatively useless in my case. I think in part because, you know, I had six, seven, seven years of work

00:03:21.520 experience at that point, which is really probably 14 because I was working 12 to 14 hours a day,

00:03:26.880 six days a week. And you just have this different view of the world when you've worked that much

00:03:32.580 and you've done, you know, sort of all the different jobs that I've done and had all the

00:03:36.140 responsibilities I had. And the world's not simple. It's complicated and it's interconnected.

00:03:41.040 And, you know, the MBA is very much like read this chapter and apply this to this case study.

00:03:45.620 And, you know, it oversimplifies things to a degree that is unhelpful. And while I was doing my MBA,

00:03:51.320 I said, well, if I'm not going to learn while I'm doing my MBA, I might as well learn on my own.

00:03:55.840 So I created this website. And at the time it was called 68131.blogger.com, which we don't own

00:04:02.340 anymore, but that was the website. And the reason that it was called that is 68131 is the zip code

00:04:08.580 for Berkshire Hathaway. And the website is an homage to Charlie Munger and Warren Buffett and their way

00:04:14.680 of thinking. And I figured nobody would type in five digits for a website. Like at the time,

00:04:19.620 this is sort of unheard of. And I didn't want a password on the site, so I didn't choose a better

00:04:23.900 domain. And then I just started keeping track of what I was learning, right? And I started with a

00:04:28.840 lot of academic stuff because I figured I would never have access to academic journals. I stopped

00:04:35.100 doing my homework for my MBA because it became formulaic, right? I knew what they wanted to hear.

00:04:39.880 I knew how they wanted things phrased. I knew how simple the world was to them.

00:04:43.860 And so I just kind of like banged out essays that they wanted, but you didn't have to really study

00:04:49.380 a lot. So my study became self-study. And I started reading the letters of Berkshire Hathaway. I started

00:04:53.840 reading everything I could on Charlie Munger. And I'm wondering silently in the background why these

00:04:59.920 two guys who in Omaha, Nebraska have created, by all accounts, one of the biggest business successes

00:05:05.780 in history and think about the world in such a complicated, interconnected way. And why aren't I

00:05:12.140 learning that at my MBA? And then as I started to look into it, a lot of these successful people

00:05:16.360 that I admire, sort of Steve Jobs and Elon Musk and all of these people, they think about the world

00:05:22.360 in this very messy sort of way. I mean, they have a way to bring it back to first principles or to walk

00:05:28.520 around a problem in a three-dimensional way, but they realize that it's interconnected and every action

00:05:32.940 that you do has a consequence to it. And I thought, man, this is a much better way to learn.

00:05:38.500 So I just started the website, started writing about it. It was anonymous because I worked at an

00:05:43.080 intelligence agency. I wasn't exactly about to put my name on a website. And slowly, I don't know why

00:05:49.720 or how, but people started to discover the website. At first it was like one person and you can kind of

00:05:55.340 see like one person following you on your RSS feed at the time. And then I think it was like two years

00:06:00.720 and I had 500 and I was like, oh my God, like, this is crazy. Like how did 500 people find this website?

00:06:06.220 And it was 2013, I think, when we, I became unanonymous at 25,000 readers. And that was a big sort of like

00:06:16.660 milestone.

00:06:17.880 And that, is that when you changed it to Farnham Street?

00:06:20.140 Yeah, because everybody's sort of like, it was like Farnham Street dot something dot,

00:06:25.940 like, I don't know, at the time it was like an easier to type version, but it was still weird.

00:06:30.020 And then we went to FarnhamStreetBlog.com that year. I became unanonymous. And I think we started

00:06:36.100 the email list all in the same sort of like year. And that was a major sort of like inflection point

00:06:43.280 for us about what we were doing and what I was doing. And I was still working full time for the

00:06:48.300 intelligence agency at the time, but we started to get this audience. And our audience at the time

00:06:53.740 was probably 80% Wall Street. And I would say it's a lot less Wall Street as a percentage basis now,

00:07:00.020 but the three main audiences we have are probably Wall Street, Silicon Valley, and professional sports.

00:07:07.740 That's really interesting, professional sports. Well, we can talk about that later.

00:07:10.700 So Farnham Street, that's the address of Berkshire Hathaway, correct?

00:07:13.340 Right. So that's the street in Omaha, Nebraska, where Warren Buffett lives and works.

00:07:18.080 And it's where the headquarters for Berkshire Hathaway is.

00:07:21.540 Okay. So before we dig into what you write about, I want to backtrack to talk about how

00:07:26.640 that moment when you made that decision, when you're working for the intelligence agency,

00:07:30.860 and you're like, boy, I don't know if I made the right decision.

00:07:33.320 Like before that time, it sounds like you had a moment where you took a step back and you started

00:07:37.460 thinking, like doing metacognition, right? Thinking about how you think. But before that,

00:07:42.600 how were you making decisions? Or is it just sort of, okay, on the fly, what were you doing?

00:07:47.260 Yeah. If you think about it, like, I mean, I started August 28th, 2001. Two weeks later,

00:07:54.340 September 11th happened. And I think like, I don't know, three days after that, I was promoted.

00:08:00.200 And it had nothing to do with me. It had nothing to do with my skills. It had nothing to do with

00:08:04.780 sort of like how good I was as a person. It just had, I was in the right place at the right time to

00:08:09.660 take on a leadership role. And nobody, nobody ever taught me how to make decisions. Nobody in school

00:08:16.180 taught me like how to look at a problem in a three-dimensional way and walk around it from

00:08:20.520 different perspectives and like all the perspectives in the room. And nobody at work taught me how to

00:08:26.580 do that either. It's sort of like you're expected to figure it out and you end up with this ad hoc

00:08:30.980 process, which is often works, right? But when it doesn't work, it's hard to diagnose why it doesn't

00:08:36.660 work. And then it's hard to compensate for your errors through a process. And we all have strengths

00:08:41.620 and weaknesses. And ideally, we want to have a repeatable process that we can use that changes as

00:08:48.220 the environment changes, but adapts to our strengths and weaknesses. So it accounts for them, or at least

00:08:52.780 allows for us to take into account where we are naturally prone to make good decisions or bad

00:08:58.760 decisions, or we're naturally prone to overconfidence in a certain scenario. And so then we want to

00:09:03.920 structure something in, if possible, to reduce the biases that we might have in that sort of way.

00:09:12.000 And I think like, you don't want to do that for every decision possible. I mean, we don't want to,

00:09:16.760 you can't, sometimes you have to make split second decisions. And that becomes more about

00:09:20.620 preparation and pattern matching and thinking through second order consequences. But often you have

00:09:27.000 a lot of time to make decisions. And a lot of time can be like 30 minutes. And you want to sort of

00:09:31.800 structure you're thinking, and not a lot of people do. And I think that's one of the reasons that we

00:09:35.400 don't get better at making decisions, is we always bring a slightly different approach to the table

00:09:40.340 for how we're going to decide. Whereas if we sat down and we had some sort of process,

00:09:45.200 it doesn't have to be formal. But that process can be like, what are the variables that govern the

00:09:50.220 situation? How do those variables interact with each other? And how might I be fooling myself? I mean,

00:09:55.200 it can be as simple as that. And it can be more complicated, depending on your strengths and

00:09:59.860 weaknesses and the type of decision you're making. Okay. And we'll get into those specifics

00:10:03.300 here in a bit. So let's talk about Charlie Munger. So this is a guy that you were drawn to when you

00:10:08.660 first started thinking about these things while you're doing your MBA. For those who aren't familiar

00:10:12.660 with Munger, what does he do? I mean, he works at Berkshire Hathaway, but you don't hear too much

00:10:17.000 about him because Warren Buffett is the guy that gets most of the attention. Yeah, Buffett gets a lot of

00:10:21.700 the attention. I mean, Munger is an irreverent billionaire at this point. He's the vice chairman of

00:10:26.740 Berkshire Hathaway. And he just has this very unique, almost Richard Feynman-esque view of the

00:10:33.800 world and a bit of wit to him in a way that I find intellectually stimulating, right? Like the

00:10:41.740 world is complicated. I want to read about it. I want to understand that things interact. And if I

00:10:48.020 only understand one portion of the world, I'm not going to understand what's going to happen when I

00:10:52.080 make a decision. And he's very detailed and nuanced about how he thinks about things and how

00:10:58.520 he builds what he calls a latticework of mental models. And I think that that really resonated

00:11:04.280 with me while I was in school because I started seeing each chapter as not something that stands

00:11:09.480 alone in and of itself, sort of like each idea in business school, but something that interconnects

00:11:16.140 with every other part of the world. And then it became, oh, I can just add this to my latticework,

00:11:21.360 my framework. But the next time I make a decision, I'm not going to make it just based on this new

00:11:25.400 model I have. I'm going to incorporate this old model, or I'm going to see if this old model

00:11:29.200 incorporates. And then I'm going to check that. And now I have a better, more accurate view of the

00:11:34.880 world. You can think of it sort of as in like tracing paper, right? If you draw lines on each sheet of

00:11:40.720 paper, each sheet of paper gives you a view into the world. But if you put those paper on top of each

00:11:45.380 other, well, now you might be able to see what the picture actually is. And that's what we're doing,

00:11:50.920 right? We're struggling to sort of like go through the world and make these decisions. And if you think

00:11:56.420 about what we do when we make decisions, a lot of us make poor initial decisions. And then we spend so

00:12:01.800 much time correcting that. And it could just be like a miscommunication. It could be that we didn't

00:12:06.640 think of the second order consequences. It could be that we didn't have the right models in our head

00:12:12.260 to accurately see the problem for what it was. So we didn't know what to do. So we're slightly

00:12:15.960 off course. But then we spend a ton of time chasing that down, which causes stress and anxiety. And

00:12:21.300 it's part of the reason that we've worked so long. And there's a different approach to that. And one

00:12:26.100 of the different approaches is like, can I learn about the world or intelligently prepare for the

00:12:31.140 decisions I'm likely to make? And what does that intelligent preparation look like? How do I make it a

00:12:35.480 little bit less about luck and make it more about what's within my control?

00:12:40.180 Yeah. And one of the things I love about Charlie Munger is, as you said, he's very nuanced and it's

00:12:44.580 very sophisticated, his thinking. But the way he explains his thinking process, it's very folksy.

00:12:50.020 It's very simple. And you're like, whenever you read something, you're like, oh yeah,

00:12:53.600 that makes perfect sense. Why didn't I think of that before?

00:12:56.560 Yeah. It's so hard to disagree with him, even when he's controversial, right? Like one of his

00:13:00.160 opinions is that the US shouldn't be selling their oil. They should be keeping it and importing oil

00:13:04.600 because oil is cheap and it's a finite resource. And if you think about that at the start, you're

00:13:09.720 like, well, that doesn't make sense. But the more you dig into it, you're like, oh, that probably

00:13:13.320 actually, if you take a different time horizon, that might actually be the best decision that a

00:13:19.600 nation could make.

00:13:21.200 Right. And we'll get into some more Mungerisms here in a bit. So before we get into specific, 0.99

00:13:26.700 I don't know, heuristics or hacks or whatever you want to call them to make decisions, because I think

00:13:30.660 that's what a lot of people want first. They want tactics. Let's talk about

00:13:34.460 overarching principles that you use that guide pretty much everything. It's like meta principles,

00:13:41.020 like first principles that you use to guide decisions in your own life. Or whenever you

00:13:45.660 consult someone or coach someone, what do you tell them?

00:13:49.340 Well, so we have five principles listed on the website that we have, which is fs.blogs

00:13:54.820 slash principles. And it's kind of just guiding a framework for what we can think about, right?

00:14:00.580 And the first one is direction over speed. And the concept there is if you're pointed in the

00:14:06.580 wrong direction, it doesn't matter how fast you're traveling, right? Inversely, if you're locked into

00:14:11.840 your desired destination, all progress is positive, no matter how slow or small it seems, right? You're

00:14:17.440 going to reach your goal eventually. And if you think about this as a lot of us spend a lot of time

00:14:23.240 on speed. And not only do we have subtle cues and organizations that we want to signal to other

00:14:29.080 people that we're working fast, that we're busy, that we're, we're doing things, but we don't

00:14:33.480 actually stop and take time and think about like, where are we going? I might be really busy in these

00:14:38.580 meetings, but does that mean we're actually making progress? Or does it mean like, I just have this

00:14:42.600 endless calendars of meetings? Like, does it actually contribute to the work, right? And if you think of

00:14:48.740 velocity, velocity is a concept in physics that not only has speed involved in it, but it has

00:14:54.920 displacement, right? So it has a vector associated with it. Whereas speed is just, it's just fast.

00:15:00.600 Like if you think of a plane leaving New York and going to LA, well, one plane leaves New York and

00:15:05.220 starts flying around in circles and the other plane leaves New York and it's headed for LA, right?

00:15:09.760 They're both flying at the same speed, but one of them is going to their destination and the other is

00:15:14.880 just flying around. It's going just as fast. And I think that concept is something that we have to

00:15:20.220 keep in mind, not only in our personal lives and our relationships, but in the workplace.

00:15:25.760 The second principle that we talk about on the website is live deliberately. And we settle into

00:15:32.600 habits and we simply live often the same year over year again, right? We're waiting for some future

00:15:39.880 event before we start occurring or before we start living. Like we're, we're waiting for something to

00:15:44.760 happen and we're not conscious about the decisions that we're making. We're not conscious about who we

00:15:49.380 spend our time with. We're just defaulting to what we've done in the past. And so while we wait for

00:15:54.700 a raise or maybe a career opportunity or ideal relationship, I mean, life is passing us by and life is so

00:16:02.640 fragile. And I think we forget that there is no thing more fragile than life. I remember I was in

00:16:09.640 Hawaii this year and I ended up, somebody drowned on the beach and they, they died right in front of

00:16:17.440 me. And I was like, I was like crying and I was like, Oh my God, like this person is the same age

00:16:22.960 as me. They look fit and healthy, just like me and their life is over. And, you know, maybe they

00:16:29.300 have an aneurysm while they were swimming or a heart attack. I don't, I don't know the medical sort of

00:16:33.940 like reason of this, but I was like, man, life can go at any point in time. And if you realize that

00:16:40.500 and you recognize it, you can start setting aside time today to pursue your dreams, right? You can

00:16:46.960 start today to learn the things that you'd like to know. You can reach out today and repair a

00:16:52.800 relationship that you want to repair. You can jettison this dead weight that's holding you down

00:16:58.580 and you can be more free, but to do that, you have to be conscious. So living deliberately is

00:17:03.460 about awareness and purposeful action. The third thing that we talk about on the website from a

00:17:09.280 principal's point of view is thoughtful opinions held loosely, right? So the common refrain is strong

00:17:15.700 opinions held loosely, but we prefer thoughtful, right? Because often like you have to look at where

00:17:21.360 we get our opinion. So how do you respond when you're faced with facts that contradicts a long held

00:17:26.520 belief of yours? I mean, you should have your ego wrapped up in outcomes and not necessarily you

00:17:33.100 being right. And I think that's the key to that principle, right? You want to update your knowledge.

00:17:37.640 You want to update your database, your mental sort of like a repository of information with new facts.

00:17:43.420 And I think the fourth principle we talked about is principles outlive tactics. And the example we use

00:17:51.260 on the website is football, but another example is sort of the chef and the line cook, right? So a line

00:17:58.240 cook is really good at maybe following a recipe, but they don't necessarily know how the ingredients

00:18:03.100 interact with one another to form a recipe. And they don't necessarily know what that recipe

00:18:09.300 is intended to do. So when something goes wrong, they might not be able to sort of understand

00:18:15.780 what's happening. And so we want to understand things, right? We want to understand not only the

00:18:24.000 what, which is tactics, we want to understand the how. Sometimes we can get the results we want

00:18:30.560 through tactics, but if you want results in a changing environment, you must also understand the

00:18:37.340 why, right? By understanding principles that shape the reality, you understand the why. And alternatively,

00:18:42.880 like another way to view this is tactics might get you what you want, but if you're not a principled

00:18:49.780 person, you might sort of like end up wanting to redo your life. And if you think that sounds crazy,

00:18:57.220 there's this great example. And this time of year is perfect, right? A Christmas Carol by Charles

00:19:02.360 Dickens, right? So you had Ebeneezer Scrooge and he wanted to be the richest man in the city. He wanted

00:19:10.840 to be respected. He wanted to be well-known. And I think that he did all of those things,

00:19:16.200 but he did it in a way that was mutually exclusive from things that really mattered. And I've seen this

00:19:21.800 play out over and over again, right? I used to be the, I used to work directly for the deputy minister

00:19:27.400 in the intelligence agency. And you see this sort of stuff happen where people get to their position

00:19:33.940 the power through tactics and then maybe want to redo at the end of their career. Maybe those tactics

00:19:40.760 are mutually exclusive from the relationships that they want after. And the fifth sort of principle

00:19:46.760 we talk about is owning your actions, right? And it's incredibly difficult to do. We're not programmed

00:19:51.860 to expose our egos or to make ourselves vulnerable when we make mistakes or do something stupid. 0.82

00:19:56.980 But one of the most powerful ways that I've discovered in life to make giant leaps forwards is

00:20:02.400 not only accept that we'll screw up, but actually seek out like, how do we correct this? How do we,

00:20:08.660 how do we get better the next time we're going to do this? It's mostly through refusing to accept

00:20:14.420 ownership of our mistakes that we protect our ego. We protect our worldview. We protect that we're,

00:20:21.340 we're not complicit in why this went wrong, right? Those things prevent us from learning. And we

00:20:27.180 don't want to, we don't want to be prevented from learning. I think it was Stephen Covey who said that

00:20:32.400 proactive people don't blame circumstances, conditions, or conditioning for their behavior.

00:20:38.240 We want to take ownership for our decisions and our lives. And there is an element of luck. There's

00:20:45.060 a lot of elements of luck that happen in the world, right? Like what country you're born in,

00:20:50.160 what your socioeconomic status when you're born in, what your parents are like. You don't control

00:20:56.360 any of that. But at some point you grab the steering wheel and you're, you might not be

00:21:02.260 the next Kanye. And, you know, maybe that's an unfair comparison, but there's a version of you

00:21:07.060 that's on a trajectory. And what you should be focused on is like, how do I maximize my own

00:21:12.200 personal trajectory given where I should be, right? Given where I could be. And I think one of the ways

00:21:17.060 that we do that is we try to go to bed smarter every day. So I want to go back to that principle three,

00:21:22.080 thoughtful opinions held loosely. Because that's related to a mongerism that really resonated with

00:21:27.380 me. He has this idea that people should have fewer opinions. And we're like, you shouldn't have an

00:21:33.440 opinion until you can argue the other side's part of the argument as well as they can. And then you

00:21:40.380 can earn your opinion. Is that kind of what you were going for there? Yeah. I mean, we call it the

00:21:45.500 work required to have an opinion, right? And so often what I used to see when I managed a lot of

00:21:51.640 people in organizations was that people come in, they would have this really strong opinion, but they

00:21:57.460 wouldn't have really thought about the other side of it. And so that they would have a ton of their own

00:22:01.660 ego involved in it. And one of the ways that I use to reduce ego, and it doesn't eliminate it, but as I

00:22:07.720 would assign people a role in the meeting. So you would argue for or against it, right? And then your ego

00:22:13.720 comes into like, I'm really going to argue against it, even if I believe in it, because I want to look,

00:22:18.440 you know, like I know what I'm doing, and I'm confident, and I've thought about it. And I

00:22:21.380 wouldn't tell people what role they would have before the meeting. And that was just a way to

00:22:25.600 encourage people to do the homework that they need to do before they can come up with an opinion.

00:22:30.440 And it helps you think about a problem in a three-dimensional way. You should be able to

00:22:34.400 sit down and say, here are the common counter arguments about what I think. And here's what I think

00:22:39.820 about those counter arguments. And you should be able to have that discussion with

00:22:43.620 yourself. And I think that intellectual playfulness, the intellectual curiosity needed to do that is

00:22:49.720 difficult. And you can't do that for everything, right? Sometimes you have to let other people

00:22:54.620 have a, you know, think forward to you. And you can't think about everything, but you have to

00:22:58.840 acknowledge that, you know, maybe that's not your opinion. Maybe that's just an idea instead of what

00:23:04.880 should be done. Yeah. And I imagine the internet makes having thoughtful opinions difficult because the

00:23:10.060 internet rewards strong opinions, right? That shock people or are very upfront.

00:23:17.160 I think we're looking for sort of abstractions or heuristics or tactics, and we're not looking for

00:23:23.420 like how those are created. And if you think about how we learn, you know, a lot of what we consume

00:23:28.400 online is sort of other people's abstractions, right? Like our principles would be a great example of

00:23:33.700 that. Those are abstractions that I've created over years that I think are valuable. And if you

00:23:39.740 read those, you might understand them and you might be like, oh, this makes a lot of sense.

00:23:44.680 And just like when you read a website, that's like the four things you need to do to master office

00:23:49.420 politics. And those tactics probably do make sense. But what you're missing is sort of the reflection

00:23:54.940 that went into those abstractions. And what you're missing from the reflection is the experience that led to

00:24:00.760 that reflection. And so you're missing a lot of fluency and a lot of details that we commonly don't

00:24:07.500 get. We skim over as readers or, you know, consumers of information, but it's through that,

00:24:13.560 that we make reflections. It's through those details that we understand when something is likely to work

00:24:18.820 and when it's not likely to work. And I think that that is when we draw our own abstractions. And so if

00:24:24.540 we're reading other people's abstractions or we're consuming information from other people, we're trying to

00:24:29.620 consume an experience for other people. What we really want to do to improve our learning is ask

00:24:34.700 them like, how did they come up with that? What variables did they consider relevant? How do those

00:24:40.200 variables interact with each other? And then we can actually start to learn about the situation

00:24:43.800 because now they're going to give us the context that we need to draw our own abstractions or at the

00:24:48.500 very least learn when those abstractions are more likely to serve us and when they're more likely to

00:24:53.580 hurt us. 0.56

00:24:54.260 So we've talked about principles, like first principles here. Let's take a step down

00:24:59.200 and talk about how we can look at the world before we actually make decisions. And something you have

00:25:06.020 written about extensively is this idea of mental models. So for those who aren't familiar, what are

00:25:10.900 mental models and how can they help us see the world better?

00:25:14.580 So mental models describe the way the world works, right? They shape how we think,

00:25:19.160 how we understand and how we form beliefs. They're largely subconscious, right? They operate below

00:25:25.540 our surface. We're not generally aware that we're using them at all, but we are. They're the reason

00:25:31.180 that we look at a problem. The reason that when we look at a problem, we sort of like pick these

00:25:37.860 variables that matter. These are irrelevant. They're how we infer causality. They're how we match patterns.

00:25:44.520 And they're sort of like how we reason, right? And if you think about it, a mental model is simply a

00:25:50.680 representation of how something works. We can't keep all the details of the world in our brains or

00:25:57.020 concepts. So we use models to simplify something that's more complex into something that's

00:26:03.140 organizable and understandable. And gravity is a great example of a mental model, right? And one example

00:26:08.740 of how that works, and it's super simple, but if you're holding a pen like I am right now,

00:26:13.160 and I tell you I'm going to drop this, and I ask you what happens, well, you know what happens.

00:26:18.020 And if you hear a click and you see my hand open, you can also retrospectively try to figure out what

00:26:23.100 happened because you understand this concept of gravity. But if I told you to calculate the

00:26:27.180 terminal velocity of something that was falling, most of us wouldn't be able to do that. So we have

00:26:31.920 this concept of gravity and it's useful. We don't necessarily need to know all the details about it,

00:26:37.260 right? We don't need to know that this pen is going to fall at 9.8 meters squared per second.

00:26:42.100 That's not going to help us at all. But we understand that if we drop the pen, what's

00:26:48.340 going to happen? And so the idea with sort of mental models is how do we focus our time on

00:26:54.600 learning mental models that are less likely to change over time so that our knowledge becomes

00:26:59.220 cumulative? And how do we develop a framework for making decisions that incorporates these mental

00:27:06.540 models, right? How do we think better? And if you think about thinking, the quality of your

00:27:11.580 thinking is proportional to the models that you have in your head and their usefulness in the

00:27:16.700 situation at hand, right? So the more models you have, you can think of it as a toolbox, the bigger

00:27:21.800 your mental toolbox. So the more likely you are to have the right model to see reality in this given

00:27:27.520 situation. And when it comes to improving your ability to make decisions, the variety of models that

00:27:35.200 you have matters, right? Most of us, though, if you think about it, we're specialists. We go through

00:27:40.720 high school and we start specializing in high school increasingly over and over again, right? So you go

00:27:44.840 into track science or arts, you go into advanced or non-advanced, then you go to college or university

00:27:50.280 and you get more specialized. You might get the first year, which is a little more multidiscipline,

00:27:55.920 but increasingly like you live in this sort of domain that you're in. So by default, a typical engineer

00:28:01.380 will think in systems. A psychologist will think in terms of incentives and a biologist might think

00:28:09.180 in terms of evolution, but it's only by putting these disciplines together in our head that we

00:28:14.240 can walk around a problem in a three-dimensional way, right? If we're only looking at the problem

00:28:19.040 one way, we've got a blind spot and blind spots are how we get into trouble. And so if you think about

00:28:25.060 a botanist sort of like looking at a forest, they may focus on the ecosystem. An environmentalist

00:28:30.280 may see the impact of climate change, whereas a forestry engineer might see the state of tree

00:28:35.960 growth. The business person might see the value of the timber and how much it's going to cost to

00:28:40.360 extract it. None of those people are wrong, but none of those views are able to describe the full

00:28:47.900 scope of the forest, right? So mental models are about how do we develop those models that we need

00:28:53.880 in our head to get a better view of reality. And I think that we don't get enough of that through

00:28:59.500 college, university, or our own sort of learning. And what we've tried to do is develop a system where

00:29:06.180 we talk about unchanging mental models that help give you the big ideas of the world.

00:29:11.620 And Munger had said that, I think that there's hundreds of mental models, but there's a very

00:29:17.520 relatively few of them carry the bulk of the weight in terms of making better decisions. And you can get

00:29:22.780 esoteric ones, just like you can have a chisel in your toolbox that you might pull out on occasion,

00:29:27.680 but you'll use your hammer a lot more. So there's tools that are more common than other tools that

00:29:33.100 help us think and solve problems. We're going to take a quick break for your word from our sponsors.

00:29:38.680 And now back to the show. So what are some examples of those sort of long lasting ones that you use on

00:29:44.480 a regular basis to make decisions? Well, I think one of my favorites is sort of like the map is not

00:29:49.940 the territory, right? And the concept there is the map of reality is not reality. The best maps are

00:29:55.540 imperfect. Even mental models are imperfect, right? That's because they're reductions of what

00:30:00.780 they represent. And if a map were to represent the territory with perfect fidelity, it would no

00:30:06.700 longer be a reduction, right? And it wouldn't be useful to us if it wasn't a reduction. But a map

00:30:12.380 can also be a snapshot of a point in time representing something that no longer exists. And this is an

00:30:17.600 important model because we run businesses off maps. We use financial statements to evaluate whether one of

00:30:24.320 our investments is doing good. Well, the financial statements are a map that doesn't represent what's

00:30:28.880 actually happening in the business. You can look to Enron as a perfect example of that. Like the

00:30:33.780 financial statements leading up to that, the bankruptcy were, you know, they didn't represent

00:30:39.300 the territory that was actually happening in Enron. If you think about the business that we're in,

00:30:45.640 you can think about email lists. Well, the size of your email list is a map, but it doesn't represent

00:30:50.420 the territory. It doesn't tell you about the open rates. It doesn't tell you about the engagement.

00:30:53.660 It doesn't tell you whether people care about whether they receive the email or how many emails

00:30:58.280 you get if people miss it. And just thinking about dashboards and how we run business, we have to run

00:31:05.040 businesses on heuristics. But the more that we run businesses on heuristics, the less in touch we are

00:31:10.520 with the territory, right? The less we see what's actually happening. And we want to keep grounded.

00:31:15.580 We want to keep an eye on what the territory really looks like because we want to know when the

00:31:20.920 territory shifts. Because a shift in the territory, a shift in the environment, a shift in the conditions

00:31:26.480 under which we're operating and the way that we're operating might mean that our map is outdated.

00:31:31.620 And if we're using the wrong map, we're going to get to the wrong destination.

00:31:35.580 Another one that I really like is sort of second order thinking, right? Which is one we used at the

00:31:39.940 intelligence agency all the time, right? Almost everybody can anticipate the immediate results of

00:31:45.660 their actions. But that's kind of first order thinking. And it's pretty easy and it's safe.

00:31:51.260 And it's a way to ensure that you kind of get the same results as everybody else. But second order

00:31:56.200 thinking is thinking further ahead and thinking holistically. It requires us to not only consider

00:32:01.940 our actions and their immediate consequences, but the subsequent effects of those actions as well.

00:32:07.580 And failing to consider the second and third order effects can unleash disaster. If you think about

00:32:11.980 running a business or doing something in life, you want to think about something where the first

00:32:16.900 order consequences are negative, but the second, third, fourth, fifth, sixth order consequences are

00:32:23.160 positive. And the reason that you want to look at those things specifically is because there's not

00:32:27.920 going to be a lot of people who do those things, right? If you think about delayed gratification is a

00:32:32.760 great example of sort of like a first order negative, second order highly likely positive, third order

00:32:39.280 highly likely positive, saving for retirement, another example, right? Like you're suffering now

00:32:44.040 to do something for a later benefit. And those are things that you want to think about, not only in the

00:32:49.160 context of business, like what pain am I willing to suffer now? What can I do now that I know is going

00:32:55.000 to be negative in the short term and visibly negative? That's important, right? You want people to see how

00:33:00.060 negative it is. But if I think about the second, third and fourth order consequences, those are

00:33:05.780 positive consequences. And even better if they're not super visible positive consequences. And then

00:33:12.360 you can start to do things from a competitive point of view that other people can't do and they won't

00:33:16.740 be able to copy and they won't understand what you're doing. And I think those things are really

00:33:21.580 just different ways of seeing the world, right?

00:33:24.780 Yeah. And so there's lots more we can talk about. They're all on the website. We'll send people links

00:33:28.740 there so they can go check them out. One of the other interesting things I've read that Munger talks

00:33:33.620 about is that he's a voracious reader. He's reading about economics. He's reading about

00:33:38.100 philosophy. He's reading biology. He's reading behavior psychology. And what I find interesting

00:33:43.660 is that he'll sometimes find ways, and as he's reading, he's developing these mental models and

00:33:47.660 he'll find ways to apply a mental model, say, from the realm of biology that you would never think to

00:33:53.700 apply to business, but he does that, right? Yeah, definitely. We learn this sort of domain

00:34:00.100 independence in school, which is really interesting, right? So you get presented with a physics

00:34:04.140 problem in physics class and that you use this almost algorithm to solve this problem. They're

00:34:10.880 going to give you a problem that looks like a certain way, and you're going to take this formula

00:34:15.160 that you used and you're going to apply it. And we're not focused on sort of like a core understanding

00:34:20.180 of the underlying concepts. And we're not focused on how those concepts might apply outside of

00:34:25.160 biology, outside of physics, outside of chemistry, outside of math. Like probabilistic thinking is a

00:34:30.720 great example of just probability applied to thinking, right? And a lot of people don't even

00:34:35.500 view sort of our thinking as probabilistic, but inherently it is probabilistic. We're just trying to

00:34:41.080 create better probabilities. And I think that we do ourselves a disservice when we learn about these

00:34:46.000 topics and we learn about them in such a one-dimensional way, because the real world doesn't present you

00:34:50.820 problems that look like your grade 10 chemistry test. They're going to present you problems where

00:34:56.380 the information you learned in grade 10 might be valuable for you to apply, but you're not going

00:35:02.420 to see it because you're not thinking about it in that way. And I think if we learn about all of these

00:35:08.060 basic concepts and we just take a look at like how they might apply in different situations. And I think

00:35:12.520 Munger sort of has been a champion on that. And Peter Kaufman is another one. And Peter Bevelin,

00:35:17.860 those three in particular have been really good at, here are some core concepts and here are how they

00:35:24.260 apply outside of these domains in which they've been presented or how we can think about them.

00:35:29.420 And most of the time those examples are fairly esoteric or specific, but they give you a sense

00:35:34.480 for like how you can think about evolution and how you can think about an example of evolution and

00:35:40.640 applied to business would be, you know, things evolve and we have these mutations and those mutations

00:35:45.620 sort of get beneficial selection in a certain environment. We think in organizations that we

00:35:52.980 don't want to try something that's failed again, but that's a really simplistic example. I mean,

00:35:57.580 when you go to somebody and you're like, I have this idea and they're like, oh, that failed. Like

00:36:00.780 we've tried that. And that is a really common thing. I talk to my friends who work in organizations

00:36:05.760 that happens all the time. What you're missing though, is the environment in which it failed.

00:36:10.300 You're not talking about that. You're not talking about, did the reason it fail change? Will it

00:36:16.900 succeed now? Nature is blind in terms of gene mutations. It just keeps trying the same experiments

00:36:22.340 over and over again. And it ends up with different results, right? A trait that is valuable today

00:36:27.720 might've been one that is way less valuable hundreds of thousands of years ago. And that's something that

00:36:34.160 we can apply to business. And you can think about it, it just requires a few extra seconds that you're

00:36:39.940 not dismissing it out of hand and you're going, oh, that failed because of this, but this reason

00:36:45.140 is no longer there. So maybe it will work now. And that allows us to experiment better. And that's

00:36:50.280 an example of like how we can apply evolution to business. So it sounds like the way you develop

00:36:55.420 mental models is reading a lot and just putting these things into practice. I mean, what have you

00:36:59.760 found the best way to develop these mental models? I think like reading and just thinking about

00:37:04.300 like, could this apply in a different scenario is a great example of that. But I mean,

00:37:09.380 we try to distill them for other people because we realize that not everybody has a ton of time

00:37:14.180 to sort of like put this effort into reading biology textbooks or, you know, reading as much

00:37:20.000 as we do. And so we're just trying to like, here's a model. Here's how you can apply it in different

00:37:25.060 ways. And we're going to add to it later, but we give you sort of like the 80% of it. If you do the

00:37:31.460 extra work, the problem is if we give you the whole model, you won't actually learn anything. You need to

00:37:36.220 do a little bit of mental work. You need to like, how does it apply to me? How does this apply to a

00:37:40.600 situation that I'm facing? How can I use this? Are there other circumstances? And it's those questions

00:37:45.300 that create the reflection for you personally. And that reflection leads you to sort of like your

00:37:50.180 own abstraction or where it's going to be useful and where it's going to hinder you. And I think that

00:37:54.980 like the big problem with mental models, I think the world would be just a much better place if we

00:38:00.620 all just the base level of education just included like all the big ideas from most of the major

00:38:06.120 disciplines, not the new novel stuff, like the stuff that doesn't change, right? Like incentives

00:38:11.220 and psychology and randomness and sort of like numeracy and evolution and power laws and systems

00:38:18.960 thinking and feedback loops and chaos dynamics. And, you know, those are the things that we want to

00:38:23.460 think about. And those are the things that we want to learn. And those are the things that you learn

00:38:27.920 in a particular domain, but you don't necessarily learn as a general education. And then we also

00:38:32.140 want to overlay that with sort of what we call the general thinking concepts, which are just tools

00:38:37.520 that allow us to think through problems in a different way. And we already talked about a

00:38:41.900 couple of them, right? The map is not the territory and sort of second order of thinking are just ways

00:38:46.760 that we think about problems in a different way. You can also add thought experiment, right? Which

00:38:51.140 Einstein is famous for. And the way that I landed on this was, you know, I did a lot of computer

00:38:57.020 programming. And so you end up with this concept called a sandbox and thought experiments are

00:39:01.980 really like a sandbox, right? You run this experiment and it can't really wreck this system,

00:39:06.400 but you're trying to think about what will happen. And it's in a contained sort of unit.

00:39:11.060 And that was how Einstein came up with relativity, right? And I think there's a lot to that.

00:39:16.160 Thought experiments also help us point out second order of thinking. They help us think in first

00:39:20.100 principles. They help us probabilistically think. And all these things sort of reinforce each other.

00:39:25.000 So the more of them you have, the better you're able to see reality. And the better you're able to

00:39:29.600 see reality, the fewer blind spots you're going to have. And the fewer blind spots you have,

00:39:33.800 the better decisions you're going to make.

00:39:36.100 Yeah. Another guy who did something similar to what Munger and these other guys are doing was

00:39:40.320 John Boyd, the military strategist with his OODA loop. And he had sort of a similar idea of

00:39:46.520 mental models. But I love this idea that he had. He only wrote, published one piece of published

00:39:53.000 work, right? On his whole life, it's called creation and destruction. And he had this idea

00:39:57.060 that you can take what I guess what he'd call mental models, and you can take parts of them

00:40:01.340 from each other and then combine them together to start something new. So you destruct,

00:40:06.360 and then you create something new. So that's what another level you can take with these mental

00:40:10.060 models is not just use them discreetly by themselves, but actually start mashing together

00:40:15.120 to create something new.

00:40:16.200 Yeah, totally. And you can also use other people's mental models against them, right?

00:40:21.480 If you're in a military or you work for an intelligence agency, you want to think about

00:40:25.680 the cultural influences that affect people's mental models. You want to think about their

00:40:29.820 genetic heritage. You want to think about their ability to analyze and synthesize and how they're

00:40:34.740 likely to use new information. And you want to think about how they're combining models and how

00:40:40.840 they're taught in schools to combine models. And if you think about organizations and diversity,

00:40:44.900 you also want to think through at a different level about the diversity. Like it gives it a

00:40:50.180 different meaning to diversity, right? Diversity becomes like applying mental models in a different

00:40:54.760 way. Diversity comes from different backgrounds, different socioeconomic status, different lives,

00:40:59.360 different... But so often we're getting less and less diverse in organizations. We hire similar

00:41:04.360 sort of backgrounds, similar people, and then more and more we're training them in very similar

00:41:09.300 ways. And so they go for it. Everybody wants to be promoted. And so they get into an

00:41:14.200 organization. They're like, what's my path to promotion? And it used to be like, you'd be like,

00:41:19.220 it's your first day, buddy, like calm down. But now it's kind of expected. We do this where we give

00:41:25.200 people a path to promotion. But what we're doing on that path is we're creating a checklist. We're

00:41:29.100 creating a checklist of people who are going to combine. They're going to A, have the same mental

00:41:34.260 models and B, they're going to combine them in the same way. So all of those people are more likely

00:41:38.960 in the future to look at a problem in the exact same way. And I think Boyd's concept of

00:41:43.380 almost combinatory play applied to mental models is really good.

00:41:48.300 So let's get into making decisions. So first of all, let's talk about why really, really smart

00:41:55.080 people can sometimes make really, really bad decisions. Is it just incorrect mental models or

00:42:00.900 is it a combination of something else?

00:42:02.540 Well, I mean, like think about what we were talking about earlier a little bit with the

00:42:06.700 information overload and sort of like how we consume information. It's really easy

00:42:12.820 to tell when we're physically overloaded. Like if we go to the gym together and I put too much weight

00:42:18.220 on a bench press, you're just not going to be able to lift it. And you know that you're physically

00:42:22.860 overloaded, but it's really hard to tell when we're cognitively overloaded. And when we're

00:42:27.060 cognitively overloaded, we tend to take shortcuts. Our brain wants to optimize for,

00:42:32.540 this applies to everybody, right? It wants to optimize for the best solution that fits

00:42:37.120 what we have immediately in our minds. And the more busy we are, the more hurried we are,

00:42:42.640 the less we're going to have in our minds, the less that decision has to satisfy, which is also

00:42:46.860 more likely to mean that decision is not good, especially if it's not a common decision that

00:42:50.720 we're making. And so I think we get led astray in a couple of ways, right? One is just we're

00:42:55.540 overloaded, we're overworked, we're overtired. And one of the reasons that all of that happens,

00:42:59.540 which is really weird and perverse, is that we just make poor initial decisions. And the

00:43:04.660 consequence of poor initial decisions is that we have to spend more time correcting those decisions,

00:43:08.720 which increases our anxiety and our stress. And one of the ways that we can get out of this sort

00:43:14.460 of like spiral is to counterintuitively just slow down, right? Actually schedule thinking time.

00:43:20.740 I mean, that would be one way that we would improve decisions dramatically. And most of the people I know

00:43:27.200 who make really good decisions on a consistent basis do that. And they're not people that you

00:43:32.180 would think typically have time, right? There are people like Patrick Collison who run Stripe and

00:43:36.520 Toby who runs Shopify. And those people make time to make decisions. They make time to think about

00:43:41.940 problems and they think about problems in a different way. And I think that that's really

00:43:45.660 important. And then you also counterintuitively, you want to do something that's first order negative,

00:43:50.880 second order positive. We talked about that earlier, which is like you want to intelligently

00:43:55.400 prepare to make decisions. What are the decisions that you're likely to be making in the next year

00:44:01.000 or two? What information do you need now in advance of those decisions that's going to allow you to

00:44:07.020 make better decisions? And I think too often we go searching for information at the point when we're

00:44:12.400 making a decision. And what happens is we just end up in this weird state, right? And the weird state

00:44:17.440 is that we're seeking out information when we need it. So we're more likely to overvalue the information

00:44:21.820 to begin with. But that information is also commonly known, right? So it's going to almost

00:44:26.940 guarantee a mediocre decision. And that might be great. A mediocre decision might be really good if

00:44:33.760 we don't know what we're doing. We sort of like want to follow the common wisdom because that's going

00:44:38.100 to lead to average performance. And if we do know what we're doing, we want to know when to deviate

00:44:43.840 because deviation when we're not following others is going to lead to outperformance. But too often we're

00:44:49.460 sort of like don't know what we're doing and we deviate. And that leads to like what I call the

00:44:54.180 lottery ticket. And it's like the Hail Mary pass in football. It might be successful and it might

00:44:59.280 not. And if it is, it's not repeatable and you have no idea why it worked. And if it doesn't work,

00:45:04.800 well, you just sort of absolve yourself and that you didn't know what you were doing. So you don't

00:45:08.600 actually get better. It's the worst quadrant to sort of like be in if you were to map that out on a

00:45:14.360 two-by-two matrix. And I think that we all suffer from these things. So the keys are like slow down.

00:45:20.760 It seems counterintuitive. You might have to work a little bit longer at first,

00:45:24.680 make better initial decisions. That's going to free up a lot of your time. That time,

00:45:29.440 use that time to invest in intelligently preparing to make better decisions. That's going to vary

00:45:34.820 depending on the type of career you have, the type of field that you're in. But you can start by

00:45:39.340 understanding the big mental models that exist in the world, right? What are the 101 biggest ideas

00:45:45.200 that I would have learned if I did a university education in just sort of like the basic ideas of

00:45:50.180 each discipline? And then think about how those things apply to your specific field, your specific

00:45:55.840 problems, and then get more esoteric, right? Like what information do I need to seek out to make

00:46:00.880 better decisions in my niche? And then you want to take time to incorporate that, find it. And not a lot

00:46:06.460 of people are going to do that. And slowly over time, you'll be able to leverage those decisions

00:46:10.600 into more and more responsibilities. At first, it's going to be small. You might have an incremental

00:46:15.460 advantage over somebody else in making a decision, but it might not even be, or it's barely perceptible.

00:46:22.040 But over time, as you make more and more consistently better decisions, you get more and more

00:46:27.280 responsibilities. As you get more and more responsibilities, that leverage starts to kick in.

00:46:31.560 And now that little advantage turns into a bigger advantage.

00:46:36.520 So it sounds like decision-making, a lot of the work isn't on the front end, right? It's not

00:46:41.780 actually when you make the decision. It's just getting the information used, thinking, using

00:46:46.720 mental models to look at the problem in a 3D way. And then when it comes time to actually making the

00:46:52.000 decision, I mean, is it pretty easy at that point?

00:46:54.320 Well, I mean, that's a really interesting question because I think if you understand the problem,

00:47:00.900 it's really easy to know what to do. And one of the indications that you don't understand the

00:47:06.000 problem, or you don't understand the trade-offs, or you don't understand what you're optimizing for,

00:47:10.600 you don't understand the situation the way you want to, is that you get stuck in this sort of

00:47:14.560 paralysis of information overload or seeking out information at the time of making a decision

00:47:21.040 in the hopes that it's just going to satisfy you. And that's a good state to be in. You just have to

00:47:26.640 be aware of it, right? None of these states are good or bad by default. Sometimes they serve you,

00:47:32.400 and sometimes they don't serve you. And your goal as a thoughtful sort of practitioner of decision-making

00:47:38.040 is to understand, when is this likely to serve me? And when is this likely to hurt me? And do I have

00:47:43.460 to deviate? And do I have to have a different process for this situation in particular? Like if

00:47:48.060 you're picking toothpaste, it doesn't really matter. The consequences of a bad decision are easily

00:47:52.840 remedied, right? But if you're making a consequential, irreversible decision, you want

00:47:59.280 to approach that problem differently. And what you don't want to be doing is like Googling other

00:48:03.500 people's thinking. You don't want to be Googling sort of like information because you're going to

00:48:07.880 overvalue it. And when you overvalue it, you're going to take risks that you probably shouldn't take.

00:48:13.480 And anything on the first page of Google is probably like commonly known, right? So you're not even

00:48:18.120 getting an information advantage over other people. So you have to think about all of those things when

00:48:22.700 you're making a decision. I know it sounds like a lot, but it becomes a bit of a habit after a while.

00:48:28.440 So whenever you make these decisions, one of my favorite mongerisms is this idea of like,

00:48:33.140 you know, try... The goal in life is to try not to be consistently not stupid instead of trying to 0.97

00:48:38.020 be very intelligent. Because a lot of people, they just, they focus on making really, really 0.97

00:48:41.500 brilliant decisions. But oftentimes they do that at the expense of just making really dumb decisions. 0.99

00:48:47.920 Yeah. Think about like most of the concepts that we learn to look at the world, 0.54

00:48:52.460 are on a risk basis. So the tools that we have to evaluate situations are based on risk. Like it's

00:48:58.240 like roulette, right? You know how many slots there are, you know, the odds it's going to land on any

00:49:02.880 particular slot, assuming a random will. But life isn't really about risk. It's more uncertainty.

00:49:10.420 And uncertainty by its very nature means we might not know all the possible outcomes. And if we don't

00:49:15.200 know all the possible outcomes, there's no way we know the probability of each individual outcome.

00:49:19.320 So we have this idea of what we see and what we think is likely to happen,

00:49:23.100 but we don't really know how accurate that view is. And so one of the ways to make that view more

00:49:28.820 accurate is to take the inversion of that, which is like, what are the outcomes that I want to avoid?

00:49:34.440 And what can I be doing now to avoid those outcomes? And if I can avoid those outcomes,

00:49:39.200 well, now I'm more likely to get to the outcome I want. And I think working backwards is really,

00:49:44.980 really hard for people to do. And if you think about in meetings, like we had this quote a while

00:49:50.680 ago, which is avoiding stupidity is easier than seeking brilliance. But I came up with that while 0.98

00:49:57.580 I worked at the intelligence agency and it was a really apt sort of quote because I was in meetings

00:50:02.660 all the time where people are trying to like one-up each other in their brilliance and insightfulness

00:50:08.440 and sort of like complicated view of a situation. But often the best decision really just when you're

00:50:15.460 dealing with an uncertain environment is like, okay, well, what are the things that would be really

00:50:20.680 bad? How do we eliminate those from happening? And if we can eliminate all the bad outcomes,

00:50:25.500 well, we're only left with good outcomes. And you can think about the problem forwards and sort of

00:50:30.060 backwards. And I think that that gives you a much more holistic view of the situation,

00:50:34.640 which leads to a better understanding, which leads to a better initial decision.

00:50:39.260 Yeah. I think one of the examples Munger gives of like good heuristics or rules that will

00:50:43.620 prevent you from doing stupid things. And if you just follow those, like you'll have a pretty good

00:50:48.320 life. Like the 10 commandments from the Bible, right? If you can go not killing anybody, not having any

00:50:54.480 envy, not committing adultery, not lying. Like that's, if you avoid those things, the consequences that

00:51:00.580 come with those things, like your life is going to be pretty good. And then everything else is just

00:51:03.920 cherry on the top after that.

00:51:05.460 Like avoid leverage, right? Like financial leverage, avoid, you know, alcohol and substance

00:51:11.220 abuse. And if you think about it in a decision-making context, there's other things you can do to sort

00:51:16.140 of like prime the environment, which is like, get a good night's sleep. Take time to think about the

00:51:21.480 problem. Don't be rushed. I mean, when you look at sources of stupidity or where we're likely to be

00:51:26.500 stupid, it's often when we're rushed, when we're switching context really quickly, when we haven't got a lot 0.99

00:51:32.220 of sleep, when we have something important to do. And I think that just slowing down and being like, 1.00

00:51:37.400 what are the basics? Let's get the basics right. And what do I control and what don't I control,

00:51:41.880 right? To a large extent, you control how much sleep you get. To a large extent, you control

00:51:46.160 whether you're rushed or not. Even if you work for an organization, I mean, you control a lot of your

00:51:50.520 time, a lot more of your time than you think you do. And the higher up you get in an organization,

00:51:55.400 one of the weird things I found is I controlled less and less of my time, the higher I got.

00:51:59.220 And I thought that was really weird when I almost needed more and more control over my time

00:52:04.400 and not less and less because the decisions have more and more consequences. And you're expected

00:52:09.140 to kind of context switch eight to 10 times over the course of a day and make large decisions that

00:52:16.200 affect a lot of people. And you're not really given a lot of time to think about that. And I think that

00:52:21.700 those are things that you want to start thinking about. What are those variables that we can get right?

00:52:24.980 What things prevent us from, you know, or get in the way or encourage is probably a better way to

00:52:30.700 look at that. What things encourage stupidity or encourage bad decisions? 0.99

00:52:35.580 And avoid those. 1.00

00:52:36.760 Yeah. And then you're better off than, you know, a lot of people just by doing that,

00:52:40.820 right? You don't have to be brilliant.

00:52:42.780 Yeah, you don't have to be brilliant. Just don't be stupid. So beyond taking a multidisciplinary 1.00

00:52:47.200 approach to decisions, have you come across any like tried and true tactics or checklists that you

00:52:53.700 walk yourself through in making a decision?

00:52:56.560 I think Munger's like, Munger came up with this and most people have never even heard of it,

00:53:01.000 but he came up with a very simple framework, which I call the Munger two-step, which is

00:53:04.980 look at the situation. Do I understand it? Okay. If I don't understand it, that's one path away from it.

00:53:12.820 In that path, you want to go seek out somebody who does understand it ideally. If I do understand it,

00:53:18.440 I know what variables matter and I know how those variables interact.

00:53:21.240 And then the second sort of step to this decision making is how might I be fooling myself? What are

00:53:27.940 the ways that I might be tricking myself into thinking that I'm right about this? And I think

00:53:33.200 that that is a very simple heuristic and framework that people can start with. And one of the mistakes

00:53:38.540 that I see people make is like, I don't know what I'm doing, but I recognize it. So it's super

00:53:42.700 important that you recognize it, right? There's again, a tying your ego to outcomes and not you

00:53:47.920 personally being right enables you to see the world much more clearly than other people.

00:53:53.420 And so when you're able to go to somebody else, the mistake that most of us make,

00:53:57.780 maybe we have to make a decision in an area that we're not an expert in,

00:54:01.180 is that we ask people what they would do. We go to the auto dealership and we ask them like,

00:54:07.200 what should we fix on our car? And of course they have their own incentives and we don't learn

00:54:12.580 anything when they tell us. Or we go to somebody and we say, how should I pick a doctor? And we go

00:54:17.360 to a doctor friend of ours and we ask them like, what doctor would you pick? What we should ask them

00:54:21.800 is like, what variables would you consider relevant when you pick a doctor? Because now we're actually

00:54:27.160 learning. Now, the next time I have to pick a doctor, I have an idea of what those variables are,

00:54:32.020 which is better than just somebody telling me what to do. But we're so busy and we're so sort of like

00:54:38.180 starving for meaning in our life that we just, sometimes we coast, right? We ask people like,

00:54:44.020 who would you pick as a doctor? And then we're not actually taking advantage of an opportunity to

00:54:47.900 learn. It might take five extra minutes to learn something, but you're going to learn something

00:54:51.460 that applies over the course of your life. That's a great example of something that might be first

00:54:56.100 order negative, second order positive. So I imagine on that second part of the Munger two-step,

00:55:01.700 like going, you know, figuring out how you're, how you could be fooling yourself,

00:55:05.560 like having a list of biases that exist out there that we know of and just walking through it,

00:55:11.300 check by say, it's like, am I, is this bias playing effect here? Is this bias playing effect

00:55:15.120 there? And then, you know, answer those questions and you kind of get a better idea if you're fooling

00:55:18.880 yourself or not. I have like a bit of mixed feelings on that. Like, I think that the more

00:55:24.560 intelligent you are, the better the story you're going to tell yourself about why that bias doesn't

00:55:30.760 apply in this particular situation. I think biases are great at explaining

00:55:34.180 why our minds trick us. I think that we need to structure things more physically in our environment

00:55:42.320 or with a process, structured thinking to sort of account for biases, right? Whether we have

00:55:50.740 reminders about what to do, whether we sort of like have this informal process that we adjust based on

00:55:57.360 the type of decision-making that we're doing. And I think that we want to incorporate that.

00:56:02.840 We also want to incorporate other people's views that are very diverse and different from us.

00:56:08.200 And I think that that's going to allow us to sort of like get out of this. And we really,

00:56:12.060 I mean, the ultimate one is just attach your ego to outcomes, not your ego to your opinion or your

00:56:16.840 idea of being the one that's adopted. And that's going to enable you to just see clearer what's

00:56:22.060 happening in the world. And I think ultimately that's what we want to do. We want to understand

00:56:26.480 the situation. It was Wittgenstein who said to understand the problem is to know what to do.

00:56:32.420 And I imagine too, besides detaching your ego from your decision, like also detaching yourself

00:56:37.660 from results might help because sometimes you can make a good decision, like the right decision,

00:56:41.360 but the results are bad because of factors that you had no control over.

00:56:45.320 Yeah. Sometimes I think a lot of times we, you have to play a repeatable game, right? And that

00:56:51.860 repeatable game is like, how do I calibrate? Like, is my judgment of the fact that I made this right

00:56:56.340 decision, correct? And you have to be self-aware enough to be like, oh, I consistently think I'm

00:57:01.920 right, but I'm getting bad outcomes. Well, there's something wrong either with your view of the world,

00:57:06.260 with how the decision is being implemented. There's something that, you know, there's a flag there that

00:57:11.140 you need to look at. It doesn't mean that you're wrong. It doesn't mean that you made a bad decision,

00:57:15.080 but it does mean that there's something there for you to look at. Too often, it's really easy just

00:57:19.540 to convince ourselves that we, we did the best we could. We made the best decision or, you know,

00:57:25.600 given the information we had, that was, that was all I would decide. But I used to ask people

00:57:29.440 at the intelligence agency, like what information you had, what information did you use to make that

00:57:35.180 decision? Show me. And people would just come up with stuff and they would come up with it post hoc.

00:57:39.580 And then that's how we started creating decision journals, right? Which is like, no,

00:57:43.020 you're going to record this at the time you make the decision. We're going to see like,

00:57:46.920 this is how I can judge your judgment. This is how I can be comfortable trusting you to make

00:57:51.760 decisions. I need to see the way that you think. I need to see the variables that you consider

00:57:56.540 relevant. And together, we're going to hone your judgment. And if you're consistently missing

00:58:00.620 something, it's my job as your boss or peer to sort of like point that out so that we can come to

00:58:05.060 better decisions together. And if we have to structurally process that, maybe your decision journal

00:58:10.380 includes a flag for, Hey, are you, uh, are you considering a large enough sample size? Because

00:58:15.740 you have a bias towards small sample sizes and just that alone, like you have to fill that in.

00:58:20.940 It's not a checklist. It's something you have to fill out. You have to explain and you have to do it in

00:58:24.800 your own handwriting. And we were able to pretty dramatically raise the, I think the quality of

00:58:30.940 the decisions we made. And is there some place people can go to learn about those decision journals,

00:58:35.160 like how to do that?

00:58:35.840 Yeah. If you just Google decision journal or just go to fs.blog

00:58:40.280 slash DJ for decision journal, you'll, we have a template online that we use. We'll be updating

00:58:46.820 that soon. Uh, we're working with the special forces to come up with a different, a slightly

00:58:51.580 different version of it right now.

00:58:53.700 That's awesome. Well, Shane, this has been a great conversation and there's like so much more we could

00:58:57.540 talk about. We could probably devote like entire episodes to like individual mental models.

00:59:01.720 So people can go to fsblog.com, fsblog to find out more about what you do.

00:59:07.100 Yeah. Or at Farnham Street on Twitter.

00:59:09.640 Fantastic. Well, Shane Parrish, thanks so much for your time. It's been an absolute pleasure.

00:59:12.300 Thanks, man. Really appreciated the conversation.

00:59:14.240 Well, that wraps up another edition of the AOM podcast. Head over to artofmanliness.com where

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00:59:50.320 listen to the AOM podcast, but to put what you've learned into action.

The Art of Manliness - January 07, 2019

#471： Using Mental Models to Make Better Decisions

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