Mental models according to Charlie Munger refer to an individual’s perception of the real world by use of concepts and beliefs and how it relates to the actual real world. Mental models are always mainly abstract due to the complexity of the world and it thus requires constant refreshing and acquisition of different mental models with the changing times. Munger advances the idea that investors and managers need to have big ideas acquired from different big disciplines in order to improve their businesses.

Having a latticework of mental models, as Munger suggests, has proved beneficial in making correct business choices. The ability of having knowledge from different fields enables one have a clear understanding of the business industry. One does not need to fully grasp a discipline as that may prove tedious. One only takes the major principles from different disciplines and tries to relate them for any patterns of similarity. This enables you to see opportunities where others cannot and how best to hedge risks. It also pre-empts the possibility of one only using one method to solve all problems which can prove fatalistic in a rapidly changing business environment.

During the last year, I had two friends who wanted to invest in stocks in a local automobile company. However they seemed fixated on the idea of investing in stocks without doing a thorough check on the company’s performance in the stock market, its last annual report and overall projections on the company’s growth over the coming years. I sat them down and explained to them in detail how best to invest in stocks. In the end, they were able to make an informed choice and chose a fast growing aviation company instead of the loss making and mismanaged automobile company. This experience taught me a valuable lesson about having a circle of competence before making a critical decision as it will ensure you make a well informed decision.

In my above example, I was able to help my friends due to my knowledge in the stocks market. This was because I had taken a keen interest in this field and thus was able to garner considerable knowledge that helped my friends make the right choice. Different ways can be used to enable people develop new mental models. Firstly, a culture should be fostered in a business environment where individuals are encouraged to be open minded to new ideas. Businesses should also actively encourage staffers to further their education by doing Masters or acquiring new skills in different fields of expertise. This opens individual’s eyes further. New mental models can also be developed by learning from mistakes in the past and develop new ways of solving the problem. This can be done by “inverting the problem” which means weeding out its root cause. This solves the problem by avoiding and thus helps in business growth.

References

Hagstrom, R. G. (2013). Investing: The last liberal art. Columbia University Press.Mauboussin, M. J. (2013). More Than You Know: Finding Financial Wisdom in Unconventional Places (Updated and Expanded). Columbia University Press.