The Mental Model Lollapalooza, or: How Charlie Munger Became a Billionaire
How did a lawyer from Omaha become one of the most successful investors of all-time?
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Through this article, and through the series that will follow it over the coming weeks and months, we will seek to explore the thought process of Charlie Munger and understand how that process can improve our own decision-making and subsequently the results we get in all aspects of our life, including work, investing, and personal relationships.
Bill Gates once said of Charlie Munger:
He is truly the broadest thinker I have ever encountered. From business principles to economic principles to the design of student dormitories to the design of a catamaran he has no equal… Our longest correspondence was a detailed discussion on the mating habits of naked mole rats and what the human species might learn from them.
High praise indeed!
Who is Charlie Munger?
Charles Thomas Munger is the business partner of Warren Buffett and vice-chairman of Berkshire Hathaway, the world’s largest and most successful holding company.
Initially trained as a lawyer, Charlie met Warren Buffett in 1959 at a dinner party and the pair immediately hit it off. After seeing Munger’s aptitude, Buffett convinced him to put the law behind him and get into investing. Munger set up his own investment partnership and the two maintained an incredibly close friendship, and still do to this day. In the mid-70s, Munger joined Buffett at Berkshire Hathaway and the pair have been an unstoppable investing duo ever since!
What Makes Him So Special?
You have to be someone pretty special to impress Warren Buffett, especially when it comes to investing.
Not only did Charlie impress Warren Buffett, he’s actually credited for convincing Warren to change his investment style from one focusing on statistically mis-priced companies that Buffett calls ‘cigar butts’ to investing in wonderful companies with competitive advantages.
Although Munger is definitely not as inclined to public or media appearances as Buffett, he has delivered a number of talks over his illustrious career, most of which have been focused on explaining the way he tries to understand the world.
How Charlie Munger Sees the World
“I suppose it is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.” — Abraham Maslow
Munger believes that most people in almost all professions suffer from the problem stated above, something that he refers to as: Man with a hammer syndrome.
His solution to this problem, and his suggestion for becoming successful in whatever field you’re in is to increase the number of tools at your disposal, so you don’t become the man with a hammer.
You have to learn (The big ideas in all the other disciplines) in such a way that they’re in a mental latticework in your head and you automatically use them for the rest of your life. If you do that I solemnly promise you that one day you’ll be walking down the street and you’ll look to your right and left and you’ll think ‘my heavenly days, I’m now one of the of the few most competent people in my whole age cohort.’ If you don’t do it, many of the brightest of you will live in the middle ranks or in the shallows.
Although Munger has had no formal training in psychology, physics, chemistry, biology, economics, or business, he has a deep understanding of the core principles of these fields and has used them to great advantage throughout his life.
A Caution
I don’t know whether Munger would approve of this article or the series that will follow. He’s a big believer that to understand something you have to practice over and over until you become fluent in it and then keep practicing it (“It doesn’t help just to know them enough so you can [repeat] them back on an exam and get an A”). Realistically, you aren’t going to get that fluency from an article online.
You’re going to get it from diligent studying of the big ideas in each of the major fields, by continuously utilising them in your thinking and by reading as much as you can about them and about the types of problems you’re interested in solving.
That being said, if this opens your eyes to a new way of thinking about the world- an approach based on a latticework of mental models from an array of disciplines- and sets you on the right path, I believe it will have done its job. After all, Munger says “If you skilfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands”.
How Do You Train a Pilot?
As Charlie proposes in his speech at the 50th reunion of his Harvard Law School Class, if you want to find the optimal method of teaching someone, find the discipline where the incentives for learning things correctly are highest. Perhaps nowhere is this more applicable than when learning to become a pilot, given the consequences of bad training.
Thankfully, Berkshire Hathaway own a pilot school called FlightSafety Academy so he’s got the inside scoop on how pilots are trained.
1) His formal education is wide enough to cover practically everything useful in piloting.
2) His knowledge of practically everything needed by pilots is not taught just well enough to enable him to pass one test or two; instead, all of his knowledge is raised to practice-based fluency, even in handling two or three intertwined hazards at once.
3) Like any good algebraist, he is made to think sometimes in a forward fashion and sometimes in reverse; and so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen.
4) His training time is allocated among subjects so as to minimize damage from his later malfunctions; and so what is most important in his performance gets the most training coverage and is raised to the highest fluency levels.
5) “Checklist” routines are always mandatory for him
6) Even after original training he is forced into a special knowledge-maintenance routine: regular use of the aircraft simulator to prevent atrophy through long disuse of skills needed to cope with rare and important problems.
The need for this clearly correct six-element system, with its large demands in a narrow-scale field where stakes are high, is rooted in the deep structure of the human mind. Therefore, we must expect that the education we need for broad scale problem-solving will keep all these elements but with awesomely expanded coverage for each element. How could it be otherwise?
What does this look like when turned into a training plan for building a latticework of mental models?
- Cover the biggest ideas from all major disciplines of study.
- Build a thorough enough understanding of these ideas to be able to easily use them when problem solving or making decisions.
- Develop different frameworks for approaching problems, the most important one being to invert problems.
- Focus most of your time on the biggest ideas that will have the biggest impact on your decision making ability.
- Use checklists when making decisions to ensure you have thought about the problem from the perspective of each of your mental models.
- Hone these skills through continued practice to avoid losing them. One of the ways Munger suggests doing this is to subscribe to a business publication such as The Economist to get regular exposure to problems that you can assess using your latticework.
The Fundamental Sciences
Now we’re starting to develop a cohesive plan for broadening our mind. We’ll tackle an array of these mental models from different fields of study over the coming weeks and months as I publish articles on each of them, but before that we should consider one last piece of advice from Mr Munger.
Charlie believes that the four fundamental sciences of mathematics, chemistry, physics, and engineering should be at the top of your priority list when looking to understand a problem. “You must both rank and use disciplines in order of fundamentalness.” I interpret this as meaning that if something can be explained by simple mathematics or using a principle from physics, give that model a lot more weight in your explanation than one from say economics or business studies.
Additionally, in line with point 4 on the pilot checklist above: “what is most important in his performance gets the most training coverage” spend the majority of your time attempting to understand these four fundamental disciplines, and less on other fields of study.
Finally, Munger also states that “you may not use any new principle inconsistent with an old one unless you can now prove that the old principle is not true”. Having an understanding of the essential ideas of the four fundamental sciences will provide you with a list of principles that you know to be true, those will help you quickly toss out ideas that don’t align with these.
That being said, it’s a crucial life-skill to be able to objectively assess yourself and be open to criticism that you are wrong, so you must be willing to take in data and ideas from various fields and, like Keynes (“When the facts change, I change my mind”) change your beliefs when you have sufficient evidence that your previous theories are incorrect.
Summary: Why a Lollapalooza?
When delivering talks in support of his mental model latticework approach, Munger often refers to a ’Lollapalooza effect’. By this, he means that when you have a few of these mental models acting in unison, the results are much bigger than the sum of their parts.
He is borrowing from the study of complex systems and non-linear dynamics here. In complex systems (such as the stock market, or the environment) when you have a few factors acting in the same direction, the resulting changes can be much larger than would be obtained by simply adding up the impact of each change individually.
Further, Munger believes that there is a critical mass of knowledge that can be obtained, at which point the results are enormously beneficial in your decision-making ability.
To quote from Peter Bevelin’s book, Seeking Wisdom:
At a certain scale, a system reaches a critical mass or a limit where the behavior of the system may change dramatically. It may work better, worse, cease to work or change properties.
Small interactions over time slowly accumulate into a critical state — where the degree of instability increases. A small event may then trigger a dramatic change like an earthquake.
This is also expressed in James Clear’s book, Atomic Habits, by the term valley of disappointment.
When the results from learning follow an exponential growth curve, initial changes fall below expectation, so people tend to give up early. However, as can be seen in my article on Compound Interest, if you persevere long enough, the results can be astronomical.
The Mental Model Lollapalooza Catalogue
I’ve created a separate article to act as a catalogue of links that will be updated as and when new mental model articles are released.
