1. “I think it is undeniably true that the human brain must work in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models: ones that will do most work per unit.” “If you get into the mental habit of relating what you’re reading to the basic structure of the underlying ideas being demonstrated, you gradually accumulate some wisdom.”
Every human can assimilate only so much information through their senses and has only so much memory and processing power. Humans must make decisions constantly. Charlie Munger’s belief is that by learning and thinking using the big models which have been developed by the very best minds, you can become “worldly wise.” The good news is that you don’t need to have perfect understanding of all these models. What you will need is greater knowledge and understanding of the models than the other people you compete with in a given activity like investing. You will naturally know some models better than others. Some mental models work better than others in some situations and knowing which models to use and when is a key part of good judgment. For better or worse, having good judgment often comes from making bad judgments. The process of acquiring wisdom is just that – a process. Acquiring wisdom takes time and effort.
2. “You’ve got to have models in your head. And you’ve got to array your experience ‑ both vicarious and direct ‑ on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.”
Richard Feynman liked to tell this story about something his father taught him: “You can know the name of that bird in all the languages of the world, but when you’re finished, you’ll know absolutely nothing whatever about the bird.” Rather than just knowing the names of various mental models, Charlie Munger is very focused on acquiring a deep understanding of these models so they can help him better understand the world. He believes that it is through the application of models in a varied range of settings in life that genuine learning takes place. Mistakes, folly and foibles are an inevitable part of this process. Robert Hagstrom describes the lattice approach as follows: “each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding.”
For Charlie Munger this approach comes naturally: “For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen.” Charlie Munger notes that some knowledge and skill acquisition happens based on personal experience and some vicariously through the experiences of other people. Watching other people make big mistakes is a lot less painful than making those mistakes yourself. Reading widely in a range of different domains is the most effective technique to expand the opportunities to learn from the experiences of others. Of course, Charlie Munger reads constantly. A great investor who does not read a lot is rarer than hen’s teeth.
3. “Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ‘em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form.”
This quotation from Charlie Munger reminds me of the scene in the movie The Paper Chase when a character named Brooks is faced with a need to think and reason during Socratic dialogue a classroom but instead tries to use his photographic memory of facts from the cases to find a response. Perfect recall of facts is not enough and Brooks found himself floundering in the classroom when asked to think and reason. Speaking of memory, I remember well when I first read Robert Hagstrom on this latticework concept which Charlie Munger espouses since it made me feel much better about my curiosity about all aspects of the world: “Those who cultivate this broad view are well on their way to achieving worldly wisdom, that solid mental foundation without which success in the market–or anywhere else–is merely a short-lived fluke. To drive his point home, Charlie used a memorable metaphor to describe this interlocking structure of ideas: a latticework of models. ‘You’ve got to have models in your head,’ he explained, ‘and you’ve got to array your experience-both vicarious and direct-on this latticework of models.’ So immediate is this visual image that latticework has become something of a shorthand term in the investment world, a quick and easily recognized reference to Munger’s approach.”
4. “What are the models? Well, the first rule is that you’ve got to have multiple models ‑ because if you just have one or two that you’re using, the nature of human psychology is such that you’ll torture reality so that it fits your models, or at least you’ll think it does.”
Charlie Munger is bringing up the tendency of humans to drift into dysfunctional patterns of thought like psychological denial when faced with something unpleasant. There are many sources of psychological and emotional dysfunction which will be discussed throughout Munger Month on this blog and many mental models that can be used to try to prevent mistakes from occurring. Using the right models can help you avoid what Munger calls “the psychology of human misjudgment.” Munger believes that by applying a lattice of models from disciplines like behavioral economics an investor can discover decision-making errors. Perfection is not possible to achieve, but following a better decision making process is possible. Focusing on having a sound decision making process rather than outcomes in any given case is wise. In the long term, it is a better process that will generate the better overall result. Reading too much into a good outcome that results from a bad process or a bad outcome that results from a good process, can create big problems.
5. The models have to come from multiple disciplines ‑ because all the wisdom of the world is not to be found in one little academic department. That’s why poetry professors, by and large, are so unwise in a worldly sense. They don’t have enough models in their heads. So you’ve got to have models across a fair array of disciplines. You may say, ‘My God, this is already getting way too tough.’ But, fortunately, it isn’t that tough ‑ because 80 or 90 important models will carry about 90% of the freight in making you a worldly ‑ wise person. And, of those, only a mere handful really carry very heavy freight.”
You do not need to know every mental model or even know them all deeply to make better decisions, but you do need to understand how most of them work at a basic level at least. It is also important that you read often and broadly especially since these models do change and are updated over time. The goal is to acquire wisdom and common sense rather than to be an academic expert in one or even a few narrow domains. One piece of good news about this process is that each new model is easier to learn since the other models you already know give you a foundation which makes incremental learning easier.
6. “When I urge a multidisciplinary approach- that you’ve got to have the main models from a broad array of disciplines and you’ve got to use them all – I’m really asking you to ignore jurisdictional boundaries. If you want to be a good thinker, you must develop a mind that can jump these boundaries. You don’t have to know it all. Just take in the best big ideas from all these disciplines. And it’s not that hard to do.” It is important that you read outside of your domain if you want to avoid failing based on man with a hammer syndrome. If all you know is medieval poetry or auto mechanics you are not going to acquire usable wisdom in life. Without worldly wisdom, you end up like a one-legged man in an ass-kicking contest says Charlie Munger. Read widely and be curious. Think for yourself and be open to new ideas. Use many models from many disciplines when thinking about a problem. For example, when thinking about an economy or a business Munger has suggested it is useful to apply models from biology. Munger has said for example “Common stock investors can make money by predicting the outcomes of practice evolution. You can’t derive this by fundamental analysis — you must think biologically” and “I find it quite useful to think of a free market economy—or partly free market economy—as sort of the equivalent of an ecosystem.”
7. “You must know the big ideas in the big disciplines, and use them routinely — all of them, not just a few. Most people are trained in one model — economics, for example — and try to solve all problems in one way. You know the old saying: to the man with a hammer, the world looks like a nail. This is a dumb way of handling problems.” Munger believes that thinking clearly is a trained response. He points out that “if you want to become a golfer, you can’t use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realize your full potential as a golfer.”
Some people take to this mental models approach and some people don’t. Some people find it interesting and some people don’t. One sure way to fail is to look at the world only through the lens of only one model. The surgeon or nutritionist who only thinks about the world through the lens of their particular discipline is a danger to themselves and others.
8.”You have to realize the truth of biologist Julian Huxley’s idea that ‘Life is just one damn relatedness after another'”
“You must have the models, and you must see the relatedness and the effects from the relatedness.”
One of the most enjoyable thing about the lattice approach is when you see how “it all fits together.” When you use a lattice of mental models approach you quickly learn that everything is related including the models themselves. This relatedness often allows an investor to use analogies to solve problems and find opportunities. The more you know about more things in life, the more you see how it all fits together. The process is like solving a huge puzzle that is never fully completed. The last three words in the previous sentence (“never fully completed”) are very important. The more you know, the more you know, that there is more that you do not know.
9. “I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence.”
One particularly important phenomenon related to mental models is what are called “complex adaptive systems.” If you adopt the model of complex adaptive systems you accepts the idea that the whole of many things is more than the sum of the arts and that there are many systems that cannot be modeled with certainty. Even after the fact, causation is impossible to prove with certainty when it comes to this phenomenon. Once you accept the idea that some things are simply not predictable, your world view changes. In Munger’s view it is better to have common sense and be Worldly Wise than futz around with a lot of models that are precisely wrong rather than approximately right. This is in part why Munger likes to say: “People calculate too much and think too little.”
10. “You need a different checklist and different mental models for different companies. I can never make it easy by saying, ‘Here are three things.’ You have to derive it yourself to ingrain it in your head for the rest of your life.”
Faced with the tendency of humans to fall down when making decisions based on the use of dysfunctional heuristics, humans can benefit from using tools or nudges to stay rational. Checklist are just such a tool. Despite the fact that a checklist is helpful in developing a better decision making process there is no formula or recipe for success in investing or most other aspects of life. Even with the best investing systems judgment and wisdom are required since risk, uncertainty and ignorance are constants in life. Life is always throwing new situations at you but they sometimes are quite familiar.
11. “Acquire worldly wisdom and adjust your behavior accordingly. If your new behavior gives you a little temporary unpopularity with your peer group … then to hell with them.”
To use worldly wisdom properly you must be prepared to be a contrarian. Being a contrarian will inevitably sometimes make you unpopular or lonely. Accepting this solitary state of affairs at times is essential since it is mathematically provable that you cannot outperform the crowd if you are the crowd. In the longer term you will ironically be more popular as long as you are right enough in your contrarian views. Of course, being a contrarian and wrong is not helpful and it is magnitude of correctness and not frequency of correctness that should be tracked on your scorecard.
12. “If you don’t keep learning, other people will pass you by. Temperament alone won’t do it – you need a lot of curiosity for a long, long time.”
“The theory of modern education is that you need a general education before you specialize. And I think to some extent, before you’re going to be a great stock picker, you need some general education.”
“If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands.”
“It’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.”
Charlie Munger, Robert Hagstrom, Michael Mauboussin and others I admire are advocates of a broad liberal arts education. I am not just talking about what you take as courses in school but what you learn about throughout your life. The best investors never stop learning. I particularly love the original title of Robert Hagstrom’s book Investing: The Last Liberal Art since it is such a true statement. Knowing a lot about a lot in many disciplines and being “a learning machine” are attributes of the best investors.
To sum up this blog post it is useful I think to just quote Charlie Munger on the benefits of his approach: “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.…so if civilization can progress only with an advanced method of invention, you can progress only when you learn the method of learning. Nothing has served me better in my long life than continuous learning. I went through life constantly practicing (because if you don’t practice it, you lose it) the multi-disciplinary approach and I can’t tell you what that’s done for me. It’s made life more fun, it’s made me more constructive, it’s made me more helpful to others, and it’s made me enormously rich. You name it, that attitude really helps.”
A partial list of some Mental Models used by Charlie Munger, compiled from many sources
Cash Flow Statement
Generally Accepted Accounting Principles
Economies of Scale
Monopoly and Oligopoly
Public and Private Goods.
Supply and Demand
Tragedy of the Commons
Time Value of Money
Margin of Safety
Burden of Proof
Duty of care
Presumption of Innocence
Process versus Outcome
Mathematics, Probability and Statistics:
Agent Based Models
Central Limit Theorem
Complex Adaptive Systems
Correlation versus Causation
Kelly Optimization Model
Law of Large Numbers
Mean, Median, Mode
Return to the Mean
Philosophy, Literature and Rhetoric:
- A Dozen Things I’ve Learned from Charlie Munger about Making Rational Decisions
- A Dozen Things I’ve Learned from Charlie Munger About Benjamin Graham’s Value Investing System
Tags: Charlie, Charlie Munger