If we put all the data we have collected in the past year from our expanding digital universe into books, we would have created 80 quadrillion books. If we stacked them (assuming a thickness of 2.5 cm), it would reach the sun 13,333 times.
Or 211 light years into space.
But the irony is that with all that information, we are still struggling to find wisdom.
Isaac Asimov said this about the mountains of data collected by technology:
“The saddest aspect of life right now is that science gathers knowledge faster than society gathers wisdom.”
The conundrum. More information and data does not lead to better decisions.
So we need to pose questions that matter:
- How do we find wisdom amongst the noise?
- How do we distill all that raw information into frameworks that help us live better lives?
- How do we make wise decisions?
One answer is applying “mental models.”
What is a mental model?
A mental model is a simplified, conceptual framework that helps us understand and interpret the world, make decisions, and solve problems. It represents how certain things work, allowing us to predict outcomes based on past experiences, knowledge, or logic.
One example of a mental model is applying the compounding effect. This can be used to accumulate wealth and knowledge over a lifetime.
Example 1: Compounding effect of a long term approach to investing to build “wealth“—by investing in high-quality businesses or the stock market index that consistently grow earnings, reinvesting profits over decades to create exponential wealth. This was the mental model used by Warren Buffet to make his company the 8th most valuable business in the world at $982 billion.
Example 2: Compounding effect of life term learning and “knowledge.” Learning something new every day adds to your knowledge and over a lifetime it can produce enormous benefits to life and business. This is one of Bill Gates key mental models and in an information world, knowledge is wealth. Microsoft is now valued at over $3 Trillion.
Why mental models matter
Mental models help us cut through complexity and distill that into simplicity. They help us make sense of all the noise that overwhelms us and allow us to focus on the key principles that govern situations.
And the proof of the “mental model” approach can be found in many successful people that have used that approach—these include Richard Branson, Elon Musk and Jeff Bezos.
If you want to see what their mental models are you can jump to the bottom of this post.
Going deeper
Mental models can be applied to every aspect of life.
The biggest decisions in life often shape our personal happiness, relationships, and long-term fulfillment. These include choosing a life partner, who you hang out with and where you have your home and how you invest your money.
On the “who you hang out with,” I have a simple piece of advice:“If you want to fly like an eagle don’t hang out with turkeys.”
I have told my children this many times. I hope they are listening.
Here are some key decisions that we all face in life and some mental models that can help guide your thinking around them:
1. Choosing a life partner
Mental models
- First Principles Thinking: Strip down the decision to the core—what values, interests, and characteristics are non-negotiable? Start from there instead of societal or cultural expectations.
- Opportunity Cost: By choosing one person, you’re potentially excluding many other options. Weigh this carefully—make sure the decision aligns with long-term goals and values.
- Inversion: Consider the things you don’t want in a partner, and work backward to ensure you’re avoiding those qualities.
2. Career choices
Mental models
- Ikigai: Align your career with passion (what you love), mission (what the world needs), vocation (what you can be paid for), and profession (what you’re good at).
- Regret Minimization Framework (Jeff Bezos’s Model): When making a career decision, imagine yourself at 80 years old. Which choice would you regret less?
- Second-order Thinking: Consider the downstream effects of your career choices. Will this job lead to better future opportunities, or will it limit growth?
3. Where to live
Mental models:
- Cost-benefit Analysis: Compare financial, emotional, and opportunity costs of living in different places.
- Decision Matrix: Evaluate different locations based on factors such as job opportunities, social environment, cost of living, proximity to family, and climate.
- Circle of Competence: Consider where you have networks and resources that enhance your chances of success and happiness.
4. Financial investments
Mental models:
- Kelly Criterion: Helps calculate the optimal amount to invest, balancing risk and reward based on your current financial situation and probability of success.
- Margin of Safety: Only invest in opportunities that offer a wide margin between the price you pay and the value you estimate to reduce downside risk.
- Lindy Effect: Prioritize investments in things that have stood the test of time, such as real estate or blue-chip stocks.
6. Health and wellness choices
Mental models:
- Compounding: Small, consistent habits (diet, exercise, sleep) compound over time, yielding exponential benefits or detriments.
- Inversion: Think about what would negatively impact your health and avoid those choices (e.g., poor diet, lack of exercise).
- Sunk Cost Fallacy: Avoid continuing unhealthy habits just because you’ve invested time or energy in them. Focus on the future, not past investment.
7. Friendship and social networks
Mental models:
- Network Effects: Relationships multiply their value through connection. Invest in relationships that introduce you to new opportunities, ideas, and support systems.
- Reciprocity: Foster mutually beneficial relationships that grow through giving, helping, and sharing, which compounds over time.
8. Time management and prioritization
Mental models:
- Pareto Principle (80/20 Rule): Focus on the 20% of tasks that will yield 80% of the results.
- Eisenhower Matrix: Separate urgent tasks from important ones to focus on what truly matters in the long term.
- Parkinson’s Law: Time spent on a task expands to fill the time available. Set strict deadlines to force efficiency.
Does age or experience bring wisdom?
Charlie Munger lived to the age of 99 and died in 2023. He, with Warren Buffet built the Berkshire Hathaway company to a valuation of $982 Billion and is the 8th most valuable company in the world after starting in 1965.
He published a book titled “Poor Charlie’s Almanac” that was a distillation of all the information he had gathered over his lifetime that was instrumental in building a trillion dollar business.
In it he revealed one of his secrets about how he did that. He distilled that information into wisdom using over 90 mental models, some he revealed in that book and others are still to be unearthed.
In looking at his life, his mental models and his success it would suggest a strong correlation between age and experience producing wisdom. But he is not alone and there are many famous people that have developed wisdom and mental models from their life experiences to find success.
10 famous people and their mental models we can learn from
Many top entrepreneurs and famous individuals utilize mental models as key tools for decision-making, problem-solving, and life optimization. Here are a few prominent figures who are known for applying mental models and the specific frameworks they employ in business and life:
1. Sheryl Sandberg
Sheryl Sandberg is an influential business executive, philanthropist, and as of 2023, her net worth is estimated to be around $1.6 billion, primarily derived from her stock holdings and compensation from her time at Meta, as well as her investments in other ventures.
She is best known for her role as the Chief Operating Officer (COO) of Facebook (now Meta), where she helped grow the platform into one of the largest social media companies in the world. Sandberg is also the author of the bestselling book Lean In, which advocates for women’s empowerment and leadership in the workplace, and founded the Lean In Foundation to support gender equality initiatives. Here are 3 of her mental models and frameworks.
Lean in (Ownership mentality)
- Description: This model encourages women and individuals to take initiative, step up to leadership roles, and fully participate in their careers and opportunities.
- Example: Sandberg advocates for individuals, particularly women, to “lean in” and take charge of their careers instead of waiting for opportunities to come to them.
Power of social proof
- Description: Social proof refers to the tendency of people to follow the actions of others, assuming that if many are doing something, it must be right.
- Example: Sandberg has leveraged social proof to promote gender equality in the workplace, using data and examples of successful women to influence corporate culture globally.
The Flywheel effect
- Description: Small, consistent actions over time build momentum, resulting in larger and more impactful results.
- Example: Sandberg focuses on incremental progress in advocating for women’s empowerment, knowing that small changes compound over time to create significant shifts in societal and workplace norms.
My top takeaway:
The most powerful mental model here for me is the framework of “taking charge” and owning your future rather than one of victimhood. That is expanded on in her best selling book “Lean In.”
2. Warren Buffett
Warren Buffet built the Berkshire Hathaway company to a valuation of $982 Billion that is now the 8th most valuable company in the world after starting in 1965.
Key mental models
- Circle of competence: Buffett famously stays within his “circle of competence” by only investing in businesses he thoroughly understands. He avoids investing in industries or technologies he is unfamiliar with.
- Margin of safety: Inspired by Benjamin Graham, Buffett always looks for investments that have a sufficient margin of safety—buying undervalued assets that minimize downside risk.
- Compounding: Buffett leverages the power of compounding returns by investing in high-quality businesses that consistently grow earnings, reinvesting profits over decades to create exponential wealth.
- Opportunity cost: Buffett considers the opportunity cost of every decision, knowing that choosing one investment means giving up the potential returns of another.
My top takeaway
Invest as early as possible and let compounding make you rich over time. $10,000 invested in the USA sharemarket when you were 30 becomes $237,000 when you’re 60.
Going deeper
In a recent AFR publication there was a chart that revealed the power of compounding returns using an example of investing in stock markets. It compared the different stock markets total return if you invested $10,000 30 years ago.
It displays the power of compounding and how a small change in return can produce a much bigger result from the power of compounding.
This powerful visual comparison shows that $30,000 invested in the Australian Stock market 30 years ago vs the same $30,000 invested in the USA stock over the same period.
Result
Total value of $10,000 over 30 years with all dividends reinvested and no withdrawals. To put that in perspective a relatively small investment of $10,000 in the USA markets when you were 30 became $237,318 at the age of 60 but only worth $135,165 in Australia. That is a $100,000+ difference
- Australian stocks – $135,165
- USA stocks – $237,318
The other revelation was what a difference it made when there was only a 2% difference. Australia had a 9.1% return and the USA was 11.1%.
3. Ray Dalio
Ray Dalio is a financial success as the founder of Bridgewater which is one of the worlds largest hedge funds. And his biggest mental model is “radical transparency” within his organization. It is a model that works for him and his business. It may not work for you. But it may.
A good mental model will be what makes sense to you and your experience in life. It will be the intersection of your skills, life journey and curiosity. You need to own it. Make it yours. Sometimes I find road testing different ideas is a good first step. Here are some of Ray’s mental models to reflect on.
Key mental models
- Radical transparency: Dalio, founder of Bridgewater Associates, applies this mental model by encouraging complete openness and honesty in decision-making within his organization.
- Principled decision-making: Dalio emphasizes the use of clear principles for decision-making, especially when facing difficult choices. His book “Principles” outlines a structured framework for approaching life and business challenges.
- Probabilistic thinking: In investing, Dalio uses probabilistic thinking to assess risk and make decisions based on the likelihood of various outcomes, not just certainties.
- Feedback loops: Dalio relies on constant feedback to improve personal and organizational performance, iterating based on lessons learned.
My key takeaway
Feedback loops make a lot of sense to me.They can be seen as using information and data to find what works and what doesn’t as quickly as possible. It can be very data driven and objective or more nuanced and subjective.
4. Jeff Bezos
Jeff saw a vision of an online bookstore in 1995. 30 years later he has grown Amazon into a trillion dollar company and with a personal wealth of $211 billion dollars is the second wealthiest person in the world. He plays the long game and one of his prioritized models is long-term thinking.
Key mental models
- Customer obsession: Bezos applies this model by constantly focusing on what’s best for the customer, believing that business success follows when you put the customer first.
- Long-term thinking: Bezos is known for his “Day 1” philosophy, which encourages Amazon to think like a startup, focusing on long-term growth rather than short-term profits.
- Regret minimization framework: Bezos uses this model to evaluate major life decisions by asking whether he would regret not taking an action in the future.
- Network effects: Amazon Web Services (AWS) and Amazon’s marketplace benefit from network effects, where the value of the service increases as more people and businesses use it.
Key takeaway
The regret minimization model is something worth looking deeper at. This starts to become more obvious and apparent when you’re older. And many of us live with regret.
It is a great question to keep asking yourself. Maybe try putting yourself a bit further into the future and take the time to reflect on your current situation and ask better questions.
5. Charlie Munger
Charlie Munger was Warren Buffets sidekick at Berkshire Hathaway. The reality was that he was much more than that and it was a synergistic partnership that lasted 58 years.
But they both had their own mental models and agreed on others. Charlie died in 2023 and had used 90 plus mental models to help him make wise decisions.
Key mental models
- Inversion: Munger often advises solving problems by thinking in reverse: instead of asking how to succeed, he asks how to avoid failure, then avoids those pitfalls.
- Lollapalooza Effect: This model describes how multiple factors combine to produce outsized results, like in the case of a successful business or investment.
- Mental Latticework: Munger famously advocates for creating a “latticework of mental models” by drawing on knowledge from various disciplines (e.g., economics, psychology, biology) to make better decisions.
- The Psychology of Human Misjudgment: Munger deeply understands human biases like confirmation bias, anchoring, and the availability heuristic, and actively works to avoid these traps in decision-making.
Key takeaway
The inversion mental model is counterintuitive as it makes you look at the consequences of the opposite of what you want to achieve. Instead of focusing on what would make a project successful, you think about what could cause it to fail, and then work to avoid those pitfalls.
Example: Suppose you want to improve customer satisfaction in your business. Instead of asking, “What can we do to make our customers happier?”, you ask, “What are we doing that could be making our customers unhappy?” then take specific actions to eliminate these issues, thereby indirectly improving overall customer satisfaction.
6. Steve Jobs
I don’t need to introduce Steve Jobs except to say that his birthday on February 24 was on the same date of the year as mine. So we are both Pisces. Let’s leave the comparison there.
Key mental models
- Simplicity (Occam’s Razor): Jobs believed in stripping away complexity in product design and focused on simplicity to create intuitive and elegant products.
- First Principles Thinking: Like Elon Musk, Jobs broke down problems to their most fundamental truths, particularly when it came to product design and innovation.
- The Power of Focus: Jobs applied this model by focusing intensely on a few key products or projects and discarding everything else. He famously reduced Apple’s product lineup to focus on the core that would have the most impact.
- Reality Distortion Field: While this model is more controversial, Jobs applied it by creating a mindset in which seemingly impossible goals became achievable, motivating others to meet high expectations.
Key takeaway
Finding or creating “Simplicity” in the middle of all the noise and complexity takes time and effort. So…simplicity takes hard work. Winston Churchill said it well. “I would have written you a shorter letter but I didn’t have the time.”
To go back to comparisons between Steve and me. I love finding the simplicity in complexity. Let me say: Less is more.
7. Mark Zuckerberg
The founder of Facebook (now known as Meta) has maybe created the most information in the world by getting people to sign up to his social media platform and making it easy for the world to share their information without creating any of his own. That is “scaling economics” at its smartest.
Key mental models
- Network effects: Facebook’s growth relies heavily on network effects—where the more users the platform has, the more valuable it becomes. This model helped Facebook become dominant in social media.
- Scale economies: Zuckerberg understands the importance of scaling technology infrastructure efficiently to keep costs down as user numbers rise, enabling rapid global expansion.
- The Innovator’s dilemma: Zuckerberg avoids falling into the trap of incumbents by investing in new platforms and features (e.g., Instagram and WhatsApp) before competitors can disrupt Facebook’s core business.
- Feedback loops: Zuckerberg emphasizes quick iterations and feedback loops, allowing Facebook to adapt and improve its platform in response to user behavior and data.
Key takeaway
As competitors entered the market Mark quickly realized that he didn’t have to innovate all the time but buy or copy. Instagram and WhatsApp threatened to steal traffic, users and attention from Facebook so he bought them.
And to show the middle finger to Elon Musk at Twitter (Now known as X) he copied Twitter and started “Threads”. In just a few months Threads had acquired 100 million users.
Innovator’s dilemma solved.
8. Elon Musk
Elon is currently the world’s richest person. And Tesla and SpaceX are his biggest contributors to that wealth. And he didn’t get there without some clever thinking and using some powerful mental models that helped him.
Key mental models:
- First Principles Thinking: Musk deconstructs problems to their fundamental principles and rebuilds solutions from the ground up, as seen in his approach to electric vehicles (Tesla) and space travel (SpaceX).
- Probabilistic Thinking: Musk uses probabilistic thinking when assessing the risks and rewards of ventures like space exploration, knowing that while success may have low odds, persistence can shift the probabilities in his favor.
- Long-Term Vision: Musk’s companies are built around long-term goals, from sustainable energy (Tesla) to space colonization (SpaceX), focusing on creating long-term value over short-term profits.
- Optimization and Iteration: Musk optimizes every part of the production process for efficiency, constantly iterating and improving (e.g., the rapid prototype testing at SpaceX).
Key takeaway
Long-term vision is one of his superpowers and one of his mental models. Going to colonize Mars is as long term as it gets! It’s not in my vision as I quite like the beach and I have heard that there are no beaches and sand there.
But what is interesting is that this mental model is also one of the key mental models of Warren Buffet and Jeff Bezos. No more needs to be said.
9. Bill Gates
Bill along with Charlie Munger and Warren Buffet spends a lot of time reading. I am not talking about superficial reading (also known as doom scrolling) on Instagram, Facebook or TikTok.
As the founder of Microsoft that he started in the 1980’s (that is now worth $3.22 trillion) he has certainly earned the right to give himself the permission to read, and gain knowledge.
Key mental models
- Learning and Compound Knowledge: Gates focuses on learning across disciplines and compounding knowledge. He reads extensively to improve his understanding of a wide variety of topics, which informs his decisions.
- Opportunity Cost (again): Gates applies this model by focusing only on the opportunities with the greatest potential return, both in his business ventures and his philanthropic work.
- The Flywheel Effect: Gates believes in creating momentum through small, consistent improvements that eventually lead to massive business or social impact.
- Systems Thinking: Gates applies systems thinking to solve global problems, such as healthcare and education, understanding that complex systems require understanding interdependencies.
Key takeaway
“Compounding” is not just something reserved for financial wealth. It also applies to knowledge wealth. Taking a long term approach to gaining knowledge and hopefully wisdom is one of Bill Gates approaches and frameworks for life. Take the time to keep feeding your mind with deep knowledge and the compound effect of that will surprise you.
10. Richard Branson
Richard Branson had trouble reading as he was dyslexic. But that didn’t stop him succeeding as he had the ability to choose the right people to hire and partner with.
Key mental models:
- Calculated Risk-Taking: Branson’s career is built on taking bold risks, but he ensures they are calculated by limiting downside while maximizing upside potential.
- Brand as an Asset: Branson treats the Virgin brand as a central asset, expanding it across industries by applying the same principles of customer focus, fun, and innovation.
- Decentralization: Branson applies this model by running Virgin as a series of small companies, rather than one massive conglomerate, allowing for nimble decision-making and entrepreneurship within each subsidiary.
- People Over Processes: Branson focuses heavily on people as the core of his businesses, believing that hiring the right talent and culture is more important than rigid processes.
Key takeaway
I surround myself with people that do the things I hate and I am bad at. That includes cleaners, accountants and tax advisers.
So realizing that you are not good at something and choosing people to help you is leaning into the mental model of “People over process”
The bottom line
Many of these models can be adapted to our big decisions in our personal life. They can also be applied to business and investing.
The challenge is that there are many mental models and that alone will produce complexity and anxiety.
Your next task is to create a mental model list and distill them into which ones are relevant for you and make a shorter list. And then start applying them and testing them.
Ideas without action are just noise.
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* This article was originally published here
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