Mastering Mental Models: Shane Parrishs Guide to Better Decisions 

Check out this recent New York Times article highlighting the success of Shane’s blog

It all started around 2007, when Shane did a deep dive into how to make better decisions Around this time, Shane was fed up with his job at a Canadian Intelligence Agency, although he didn’t quit He decided to get his MBA on the side, but ultimately found it to be pretty worthless “An MBA is very much like, ‘read this chapter, and apply it to this case study.’ It over simplifies things to a degree that’s unhelpful.”

Shane soon created a website, originally called “68131.com” to document what he was learning, and his quest to become better at decision making 68131 is the zip code for Berkshire Hathaway “The website was an homage to Charlie Munger and Warren Buffet and there way of thinking” “I just started keeping track of what I was learning” Shane started reading the Berkshire Hathway shareholder letters and everything he could on Charlie Munger “At the time I was wondering how these two guys in Omaha, Nebraska created by all accounts, one of the biggest business successes in history, and why they thought about the world in such a complicated, interconnected way – Why wasn’t I learning THAT in my MBA?”

“A lot of successful people – Steve Jobs, Elon Musk, and all these people, they think about the world in this messy sort of way. They have a way to bring it back to first principles, or to walk around a problem in a three dimensional way, but they realize that things are interconnected. Every action that you take has a consequence to it .”

The original website, was all anonymous Shane was still working full time for the intelligence agency, and just wanted to be careful

Slowly, people started to discover it It started with 1 person following their RSS feed, and two years later, ~500 In 2013, Shane became unanonymous, when the website had about 25,000 readers – around this time the website name changed to farnamstreetblog.com Why? – Farnam Street is the street in Omaha, Nebraska where Warren Buffet lives and works, it’s where the headquarters for Berkshire Hathway is Shane also started his email list around this time

Who was the original audience? ~80% people who worked on Wall Street (Shane says now it’s probably less) What about the audience now? It mainly consists of people who work on Wall Street, in Silicon Valley, or are professional athletes

“Nobody ever taught me how to make decisions. Nobody in school taught me how to look at a problem in a three dimensional way, and how to walk around it, from different perspectives. Nobody at work taught me how to do that either. You’re just expected to figure it out, and you end up with this ad hoc process.” The ad hoc process often works, but when it doesn’t, it’s hard to diagnose why it did’t work, and it’s hard to compensate for your errors

For decision making, you want to have a repeatable process that you can use that adapts to your strengths and weaknesses, so it accounts for them For example – this process might take into account where you are naturally prone to make good/bad decisions, or where you’re naturally prone to overconfidence You’d then structure something in, where possible, to reduce the biases that you might have You don’t want to do this for EVERY decision, but most decisions, you have a lot of time to make, and thus can follow a repeatable process Even 30 minutes is a good amount of time to really examine a problem from different angles, and think carefully through second order consequences

“One of the reasons we don’t get better at making decisions, is because we always bring a slightly different approach to the table for how we’re going to decide.” If we sat down, and we had some sort of repeatable process, we’d be much better off

What might this process look like? – On a simple level, you’d consider: What are the variables that govern the situation? How do those variables interact with each other? How might I be fooling myself?

Check out the book Poor Charlie’s Almanack – MANY people on Tim Ferriss’ podcast have recommended it Charlie is the Vice Chairmen of Berkshire Hathaway

“He has this unique, almost ‘Richard Feynmanesque‘ view of the world and a bit of wit to him, in a way that I find intellectually stimulating”

Charlie is very detailed and nuanced in how he thinks about things, and how he builds what he terms as a “lattice work of mental models” What does this mean? – Things you learn don’t stand alone in and of themselves. Each idea connects with every other idea/part of the world. How might you incorporate this into decision making? When you go to make decisions, you won’t make it based on just the new model, you’ll also incorporate the old model, and see if it applies “Think of it like tracing paper. If you draw lines on a sheet of paper, each sheet of paper gives you a view into the world. But if you put those pieces of paper on top of each other, then you might be able to see what the picture actually is.”

“A lot of us make such poor initial decisions, and then we spend so much time correcting that” When we do this – it causes stress, anxiety, and so much extra work There’s a better way – learn about the world, and intelligently prepare for the decisions you’re likely to make

Direction over speed If you’re pointed in the wrong direction, it doesn’t matter how fast you’re traveling If you’re locked into your desired destination, all progress is positive, no matter how small – you’ll reach your goal eventually “A lot of us spend a lot of time on speed. Not only do we have subtle cues that we want to signal to other people – like we’re working hard and we’re busy, and that we’re doing things, but we don’t actually take the time to stop, and think about the direction we’re going” Just because your calendar is stacked with meetings, does not mean you’re making progress

Live deliberately Many people are not really conscious of their overall life trajectory, who they spend their time with, or their habits – they just do what they’ve always done in the past “While we wait for a raise, or a career opportunity, or ideal relationship, life is passing us by. Life is so fragile, and I think we forget that. There is nothing more fragile than life.” You have a finite number of breaths left – take advantage of that Life can go at any point in time Start TODAY to pursue your dreams “Living deliberately is about awareness, and purposeful action”

Thoughtful opinions held loosely Not “strong opinions held loosely” Really think, how often have you thought about the other side of your opinions? Have your ego attached to the outcome, rather than you being right “Having your ego attached to the outcome, and not you being right, enables you to see the world much more clearly than other people” Always be updating your knowledge with new facts

Principles outlive tactics Think about a chef vs. a line cook: A line cook is good at following a recipe, but they don’t necessarily know how the ingredients interact with one another. They probably don’t know what the recipe is intended to do. When something goes wrong, they probably won’t be able to understand why Aim to always understand things – not only the “what” (aka tactics), but also the “how” “You can get results through tactics, but if you want results in a changing environment, you must also understand the why. By understanding the principles that shape reality, you understand the why.”

Own Your Actions It’s difficult to do – we’re not programmed to expose our egos or make ourselves vulnerable when we make mistakes or do something stupid “One of the most powerful ways that I’ve discovered in life to make giant leaps forward, is to not only accept that we’ll screw up, but actually seek out how to improve the next time you do so” By refusing to take ownership of our mistakes, we just protect our ego – this prevents us from learning Luck certainly plays a big factor in how your life pans out, but to a large extent, you control your own trajectory Just try to go to bed smarter every day

Mental models describe the way the world works – they shape how we think, how we understand, and how we form beliefs They’re largely subconscious, and we’re not really aware we’re using them at all, but we are Mental models account for which variables you assign as important when examining a problem An example of one – gravity (you know what will happen when you drop an item)

“The quality of your thinking is proportional to the models that you have in your head, and their usefulness in the situation at hand” The more models you have – the bigger your mental tool box, and the more likely you are to have the right model to see reality in a given situation Think of mental models as a tool box for your thinking

To improve your decision making, the variety of the models that you have, matters Most of us though, are “specialists” A typical engineer thinks in systems A typical psychologist will think in terms of incentives A biologist might think in terms of evolution “It’s only by putting these disciplines together in our head that we can walk around a problem in 3 dimensional way.” If you’re only looking at a problem one way, you have blind spots – those blind spots are how you get into trouble

The map is not the territory “The map of reality is not reality” “A map can also be a snapshot of a point in time representing something that doesn’t exist” This is important, because we run businesses off maps (like using financial statements to evaluate whether an investment is doing good) Financial statements are a map that doesn’t represent what’s actually happening in the business The size of your email list is a map, but it doesn’t tell you about the territory It doesn’t tell you about the open rates, the engagements, or whether people care if they receive the emails…or how many emails you’d get if you didn’t send our your weekly email

Second order thinking Everyone can anticipate the immediate results of their actions, but second order thinking/thinking further ahead, is much more difficult “Failing to consider the second and third order effects can unleash disaster” Look specifically for situations in life where the first order consequences are negative, but the second, third, fourth, fifth, and sixth, order consequences are positive Delayed gratification is a good example of this So is saving for retirement

Charlie Munger is quite the voracious reader

He’ll often find a way to apply a mental model from something like biology, to business, that you would never think to apply Many people think too domain specifically Think broadly – Think how what you learn in physics, math, chemistry whatever, might apply in other areas Try to instead, apply concepts outside the domains in which they’re presented

An example of how you might apply evolution to business: Things evolve due to random mutations, which are favored in the current environment Very often, in business organizations, people don’t want to try things that have failed But you have to consider why that idea failed in the past Think: “This failed because of X, and X no longer exists, so maybe it will work now” “Nature is blind in terms of gene mutations, it just keeps trying the same experiments over and over again, and it ends up with different results based on the current environment” A trait that is valuable today, might have been one that is way less valuable hundreds of thousands of years ago

Read A LOT and think about how what you’re learning, might apply in a different scenarios Do thought experiments – think about what might happen if you do X

When you come across a model, ask yourself: “How does this apply to me?” “How can I use this?” “How does this apply to a situation that I’m facing?”

“The better you’re able to see reality, the fewer blind spots you’re going to have. The fewer blind spots you have, the better decisions you’re going to make.”

SLOW DOWN Don’t rush – you’r way more prone to making decision errors One way to drastically improve your decision making skills is to actually schedule thinking time Shane says most of the people he knows to continually make really good decisions, do this MANY people are overloaded, overworked, and overtired It’s easy to tell when you’re physically overloaded (like there’s too much weight on the bar for your bench press), but not so easy to judge if you’re cognitively overloaded When you’re cognitively overloaded, you tend to take shortcuts Why do we become cognitively overloaded? We make poor initial decisions (so we have to spend more time correcting them , which increases out anxiety and our stress)

Make better initial decisions This will free up a lot of time

Use that time to intelligently prepare to make decisions Ask yourself – “What are the decisions I’m expecting to be making in the next year or two, and what information do I need in advance of making those decisions?” Too often we go searching for information, only at the point we’re making a decision – this increases the chance that we overvalue certain information Understand the big mental models that exist in the world – What are the 101 biggest ideas if you did a university education? What are the basic ideas of each discipline? Think about how those things apply to your specific field, and specific problems Then go further – Ask: “What information do I need to seek out to make better decisions in my niche?”

Get good sleep When you look at situations in the past where you’ve made bad decisions, there’s a good chance you were sleep deprived Some more thoughts: “If you really understand the problem, it’s really easy to know what to do”

Charlie Munger has famously said – “It is remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent”

Many people tend to think of situations in terms of risk (like playing roulette – we know all the outcomes) BUT life is more about uncertainty – so we don’t know all the possible outcomes “If you don’t know all the possible outcomes, there’s no way we know the probability of each individual outcome”

Instead, work backwards Consider the outcomes you want to avoid, and think about what you can be doing to avoid them If you can avoid them, you’re more likely to get to the outcome you do want If you can eliminate all the bad outcomes, you’re left with only good outcomes

Shane has said in the past – “Avoiding stupidity is easier than seeking brilliance”

Look at the situation, and ask yourself if you understand it If you don’t, that’s one path – go seek out someone who does understand it But don’t just ask for answers, ask so you learn…for example: Instead of asking your friend – “What doctor would you recommend I see?” Ask – “What variables would you consider if you were to choose a doctor?” If you do, you know what variables matter, and what variables interact

Then ask – “How might I be fooling myself?” or “How might I be tricking myself into thinking I’m right about this?”