Let's start with the definition: “What are mental models?”
Mental models are a collection of theories that allow you to understand how things work in the world. They are like the software on your computer that allows you to use it.
They help you make tough decisions, to act and lead a life in line with your ideals.
obviously, there are mental models that improve your life and mental models that make it worse. However, it is difficult to contest the results of a good mental model.
Therefore, below I expose only those mental models that you must absolutely master to understand how the world works and that will help you make better decisions.
Mental Models Of Thought
Addressing a problem by reversing the problem. For example, if you wonder how you can live a happy life, think of all the things that make a life miserable. If you avoid all the things they make a miserable life of, automatically your life will turn out to be happy.
Rule for operating this mental model: when you can't find a direct solution to the problem, use this mental model.
- Confirmation bias
People tend to move within the boundaries of their beliefs. Once we have an idea that we like, we do not seek further information to disprove it.
Rule for operating this mental model: Darwin wrote a note when he found an idea or concept that disproved his belief. Then he explored it and finally decided if it was necessary to change beliefs.
- Working backwards
Solve the problem or need of customers by working backwards.
Therefore, when you describe a product, explain what it is for and how it solves a particular problem. Customers want to be served rather than sold.
- Second order thinking
Often when we solve a problem, we end up unintentionally creating another or many others. To examine the repercussions of a long-term decision, we use second order thinking.
Extraordinary performance comes from seeing things other people can't see.
Rule for operating this mental model. When you have a solution, ask yourself: and then what? What are the possible consequences in a month, one year, 10 years?
- Optimism bias
You simply believe that you are less likely to be affected by one negative event than others.
A very typical example is people who do not exercise and believe that they can have good health even when surrounded by friends with similar habits and health problems..
Rule for operating this mental model: look around and consider that you have similar probabilities of negative events as everyone else. So ask yourself: what can I do to prevent such events?
Mental Models In Psychology
Make decisions based on the first information. For example when you want to bargain for a product, it starts from an anchor price. This initial price determines the final result.
Rule for operating this mental model: do not bargain based on the starting price if you do not know its value.
- Zero risk
People are averse to risk and loss. If you offer a guarantee or a free return, you are more likely to sell.
Rule for operating this mental model: when you offer something to someone, think about how to propose it without any risk for the buyer.
- Principle of commitment and consistency
It is the tendency to be consistent with what we have said and done previously.
For example, if a person asks you for a small favor and you do it, in the future you have a tendency to keep doing him favors even if they become unreasonable.
Rule for operating this mental model: prefer no to yes. When you say no, you have refused that offer. Instead when you say yes, you have refused all other possible offers.
- Structure to minimize regrets
This model was used by Jeff Bazos to decide whether to found Amazon.com or continue with his well-paying job.
When you are faced with an important decision in your life, like changing careers or having children, ask yourself: he has 80 years, I will regret not having done so?
If the answer is yes, failure. If the answer is no, forget it.
This model helps you to think beyond the immediate present and at the same time gives you the courage to act in uncertainty.
- Hick's law
This law predicts the time needed to make a decision in proportion to the quantity and complexity of existing alternatives.
For example, it takes a person much less time to make a decision if they only have three colors to choose from instead of a hundred.
Last thing… Hick's law cannot be used for complex decisions that need extensive research.
Rule for operating this mental model: always boil down to three choices.
- The risk formula
This mental model helps you assess risks without being emotionally affected. The formula is very simple: risk = severity X probability.
If you have more options available, calculate their risk and order them according to the risk they involve.
These factors can influence the perception of risk: fun activities, familiarity, difficulty in understanding and knowledge.
Moreover, this model doesn't work if you don't have reliable and sufficient data.
- Game theory
They are mathematical models of strategic interaction that study and analyze the individual decisions of a subject in situations of conflict or strategic interaction with other subjects aimed at the maximum gain of each subject.
In short words, this model demonstrates the importance of trust in relationships to obtain the best result.
Rule for operating this mental model: offer value to the first transaction to build trust. Trust drives the economy.
- Hyperbolic discount
This theory explains why we make terrible decisions. Hyperbolic discounting is a theory that the further a reward is in the future, the less is the immediate motivation to reach it.
People are choosing small but immediate rewards instead of larger rewards in the future. In other words, people prefer instant gratification instead of a better future.
Rule for operating this mental model: when you take an action, imagine the future that brings you if you repeat it several times.
- Control illusion
We believe we are able to control situations or have achieved goals by merit when our skills are actually only partially responsible.
In retrospect, most people can't even control their impulses. How we believe we are able to control people and situations?
Rule for operating this mental model: whatever you get, discount the 50% from your skills.
- Loss aversion
People hate losing something that belongs to them. Indeed, loss is twice as painful as the pleasure of gain. For this, loss aversion can easily alienate any incentive.
For example, people avoid losing at all costs 500 euro, but they don't apply the same effort in earning 500 euro. The monetary terms are the same, but the pain of loss is much stronger than gain and makes people irrational.
Moreover, people attach themselves to an object or someone giving it more value than they would have given if they had never owned it.
This is also the reason why people don't throw out old things. Even if they are worth nothing, their loss is painful.
Therefore, if you take something away from someone, they would resent you.
Rule for operating this mental model: Avoid triggering loss aversion in negotiations. Put yourself in the other person's shoes and consider their effort in acquiring that thing or reputation.
To use this theory to your advantage in negotiations, tell the person what they risk losing if they don't accept instead of telling them what they gain.
And don't ask people to give up something if they think they have the right.
To avoid loss aversion in your decisions, ask yourself what value you would give to the object or person if you did not own it. And if you can't get rid of things, ask yourself: “if you didn't, I would buy it back?”
- Bad cost of sunk costs
The tendency to continue an effort or attempt even when it is no longer worth it. We resist stopping after investing considerable time, resources and effort. This leads us to miscalculate its value and sacrifice additional resources.
The American effort to win the Vietnam war tells you nothing? 19 years of war, 850.000 dead and 168.000 millions of billions in dollars (1 trillion dollars today).
Rule for operating this mental model: ask yourself if you would invest resources knowing what you know now. If your answer is no, abandon the investment by accepting the losses.
- Maslow's hierarchy of needs
It is one human motivation theory represented by a pyramid with 5 levels of human needs. At the base there are the essential needs for survival and the immaterial needs are at the top.
Once a need is met, he is no longer a motivator. But top motivators fail once an underlying motivator fails.
Rule for operating this mental model: which is why I do this? There is always a basic cause in doing apparently unreasonable things. What needs can I fill to motivate a person?
This article it is very detailed if you want to deepen the subject.
P.S Alderfer's theory is very similar and includes three categories:
– Necessary existences: water, aria, food, safety, physical love and affection.
– Kinship needs: include the external estimate (social). Meaningful relationships such as familia, friends and colleagues. So belong to a group or family unit.
– Personal growth needs: internal esteem and self-realization. The desire to create and produce for the well-being of oneself and others.
If a high level need remains unsatisfied, a person might redouble his efforts on a need at the lower level. This is why many people indulge in basic needs, they fail to satisfy needs in the higher levels.
We prefer things to stay as they are. In other words, we resist you have changes even when it is beneficial to change.
For example, we tend not to change the car insurance even when we receive a better offer. We prefer the familiar.
- Effect of mere exposure (familiarity)
We prefer certain things and people because they are familiar to us. For this, when you go on vacation you prefer to eat your own food instead of the local one which could be just as good and less expensive.
For example, advertising uses the effect of mere exposure by showing you a product many times because the more you see something, the more you like it.
- Operant conditioning
Modification of the behavior of an organism using punishment and strengthening actions.
- Classic conditioning
One can associate a powerful stimulus such as food with a neutral stimulus such as the bell and as a result make the dog salivate. When the doorbell rings, the dog went up even if there is no food.
Environments can also be used to condition stimuli. The bedroom for rest, the study to study and the office to work.
We tend to feel obligated to pay back positive actions towards us even if they are unwanted. This mental model is used by sellers to sell products by offering gifts before asking for a purchase.
Rule for operating this mental model: when you receive something, ask yourself the reason behind the action. If you want to make a sale or buy a customer, offer something for free.
We tend to focus attention on the things that have survived and overlook the things that have failed. This can lead to optimistic tendencies.
For example, we tend to place too much importance on the character of a successful person and overlook all other factors in his favor such as luck and the right time.
Rule for operating this mental model: when we focus our attention on a successful thing or person, let us ask ourselves how the other thousand have failed.
- Diderot effect
Getting something new can lead us to buy more things that we wouldn't otherwise have considered.
An example: change the old bed for a new one, now you want to change all the furniture in the bedroom because the new bed clashes with the old furniture.
Rule for operating this mental model: when you want to change something in your life, multiplies the initial investment by X10.
- Goodhart's law
When a measure becomes a target, it ceases to be a good fit. Therefore, multiple correlated measures must be used to achieve a goal. And you need to be sure that these measures are clear and complete.
In other words, we need more metrics to measure our success.
Rule for operating this mental model: keep at least three measures in measuring your progress.
- The network effect
An asset takes on more value when many people use it. In other words, the winner gets most of the reward.
- Social proof (the flock of sheep)
People are influenced by what others do. If they believe that many people use a certain product, the perception is that that product must be good.
- Complexity theory
We tend to be attracted to complexity and therefore avoid simple solutions. In other words, if we are given two solutions, we tend to choose the more complex one.
However, people tend to go for medium complexity solutions – too easy is boring but too complex becomes confusion.
Rule for operating this mental model: use Occam's Razor technique. Equal results, choose the simplest one. The reason is that simple solutions are easier to verify and put into practice. However, one cannot rely only on simplicity but also on evidence.
Mental Models In Relationships
- Hanlon's razor
When people cause us problems, in most cases it is attributed to ignorance and not to malicious intentions. Hence the stupidity, not the cattle is the simplest reason.
Rule for operating this mental model: often, the best way to react to other people who cause us problems is to try to educate them, do not disdain them.
Remember that we try to react negatively towards the mistakes of people we don't like.
Mental Models In Business And Economics
- Comparative Advantage
David Riccardo explains how nations can benefit from international trade by specializing in the production of goods and services where they have a lower cost opportunity.
For example, Italy has specialized in fashion because at a lower cost opportunity than other nations (a creative population that other nations do not have). But it costs a lot to produce the garments in Italy, so they do it in countries where it costs less (Turkey, China, Indonesia, etc) and only the design is made in Italy.
Another example is the advantage of producing chemicals for oil-rich nations. They are an economical source of chemical materials.
Therefore, a nation or a person it stimulates economic growth more by focusing on the sector in which it has the most substantial comparative advantage.
In conclusion, if you are good at creating software and cooking, totally dedicated only to the creation of software while meals can be ordered from a catering. This is because creating software brings better rewards than cooking.
Rule for operating this mental model: identify what you do well, and you pay others to do everything else.
Reduce the risk from a single source. For example, if your only income is your job and suddenly you become unemployed, you have no more income. By diversifying your income, you reduce the risk of an asset collapsing.
A common saying: “Don't put all your eggs in one basket”.
Rule for operating this mental model: when more than 75% of your income comes from a single source, consider other alternatives.
- Economy of scale
It is the advantage a business gets due to its size. When the average cost decreases while production increases, there is an economy of scale.
However, there is a limit to the economy of scale. At some point, size decreases profits.
- Incentives (reward and punishment)
They are motivators to achieve the desired result. In developed countries, Intrinsic motivations work better than extrinsic motivations.
- Scarcity and abundance
When a product is scarce it commands a higher price than when a product is readily available.
Online stores often create a fake shortage of a product to prompt the customer to buy immediately: 'the last 3 pair of shoes!’ People are motivated because they don't want to miss the opportunity.
- Supply and demand
In a competitive market, the price varies according to supply and demand.
Rule for operating this mental model: ask yourself why a product or service commands that price.
- Price's square root law (Price's law)
This theory states that half of the results in a company or sector are created by 10% of the people participating.
For example, the authors who sell the 50% of the books are only the 10% of the total. In the company where you work, you will notice that the 10% of people produces the 50% of the results.
Rule for operating this mental model: if you want to create value, do something where you are very good.
- The Pareto principle
In economics, the 20% of the population holds 80% of the wealth. In business, 80% of sales come from 20% of customers.
This principle is also visible in nature where only the 20% of plant species cover 80% of the earth's surface.
Rule for operating this mental model: as for Price's law, do something where you are very good if you want to create value.
- Aggregation theory
In the digital age, the suppliers who have integrated the distributors are no longer in control of the market, but those digital companies that manage to aggregate services and offer the best consumer experience.
Digital companies that win consumer trust, they create a vicious circle between distributors who want to be present on the site and consumers who want to buy again.
Some examples are Amazon, Agoda, Facebook.
These companies have a direct relationship with consumers: payments report, an account or regular use.
They have no marginal costs to serve customers such as production costs, distribution and transaction. However they have fixed costs.
They can offer services on a scale without incurring additional costs. Once the critical number of users is reached, the aggregator will attract distributors.
Rule for operating this mental model: think of a market that has not yet been digitized, and find ways to standardize services and offer an excellent shopping experience to the consumer.
- The Principal Agent Problem
This problem occurs when there is a conflict of interest between the principal and the agent who prioritizes their interests at the cost of the principal. The agent-principal relationship is to legally appoint an agent to make decisions and actions on behalf of the principal.
Examples: Politicians (agents) and voters (main) – CEO (agent) and investors (main)
Rule for operating this mental model: create a reward system that aligns with the principal's interests and improve communication by clarifying expectations and / or hire auditors to verify information.
Mental Models For Investment
- Efficient market hypothesis
Market prices reflect current information. Therefore the prices fully reflect the information available. It is impossible to invest and beat the market through the latest information.
Mental Models In Biology
- Evolution theory (Darwin)
Natural selection favors flexibility. The strongest species does not always win, but the one that best suits the circumstances.
- Theory of the sexual economy
This theory explains the different competition between men and women to find partners. But also of the exchange between the resources of men and the femininity of women.
It's definitely not a romantic way to understand how couples form, but it is supported by many resources explaining how men and women become partners and how they compete between the same sexes.
Women enhance their sex appeal while increasing the cost of sex by stopping other women from being too promisque without receiving good compensation. Instead, the men cooperate with other men in the group to create resources and try to tap into the highest status to attract the attention of women.
In other words, women see other women as sexual rivals because men melt visually. Instead men view other men in a more complex way, as rivals but at the same time potential collaborators.
In conclusion, this theory ranks among the 'theory of evolution’ and 'economic theory of supply and demand.
- Coolidge effect
A phenomenon found in most mammals, including man, which male mammals exhibit a renewed sexual interest in the introduction of receptive partners.
For this, societies have introduced marriage contracts to curb this phenomenon through both moral and economic punishment.
The ability of living beings to regulate and maintain constant the internal environment despite variations in the external environment. An important alteration of the homestasis can lead to disease and even death.
A similar observation can be made with meditation which helps to keep the mind in balance.
An interesting fact is that when we try to make changes in our life, obstacles arise that try to get us back back to the previous lifestyle.
It doesn't matter if they are changes for the better or for worse, resistance is proportional to the speed of change.
Rule for operating this mental model: when you want to change something, the more radical the change, the more resistance we face.
The passage of mental and physical characteristics from one generation to another.
- Signals theory
The communication that takes place between individuals. Individuals with better signals have greater opportunities, and the reason is that the signals cost resources.
Honesty is guaranteed when only high-quality individuals can pay the high costs of reporting.
A critical issue at the heart of this theory is the type of signals: genuine or fake. A typical example is the fake millionaires or 'I want to be a celibacy’ who copy those lifestyles by sacrificing resources from basic needs.
This theory also has applications in economics. For example, it has been studied on the internet that the shorter a text, the less likely you are to sell.
In other words, a more sales page demonstrates useful information for purchasing, and the greater the chances of success because they give the correct signal.
Rule for operating this mental model: if we are unsure of a person's honesty, ask yourself what their cost is in reporting and the possible consequences of lying. The higher the cost, and the more likely they are to be honest.
Moreover, remember that the cost is relative to the situation. A donation of $100 from a student are worth much more than $1.000 from a millionaire.
Mental Models In Chemistry
- Activation energy
For every chemical reaction there is a need for energy. For example, if you want to start a fire, the activation energy is heat.
In everyday life, we need an initial push for a task. For example, putting on shoes could be one “activation energy” to make you run.
Rule for operating this mental model: creates a trigger effect for each action you want to perform repeatedly.
- Entropy (second thermodynamic law)
This principle explains that a system abandoned to itself will result in a condition of maximum disorder.
A life left to itself becomes complicated. Imagine the garden without constant care, or an abandoned house. Things go into disorder with the passage of time.
Therefore, all things tend to get disorganized, and it takes energy to keep them organized.
Rule for operating this mental model: you are more likely to live a life not aligned with your potential than the opposite. Therefore, you have to spend energy in organizing your ideal life.
A catalyst is a substance that accelerates a chemical reaction by lowering the activation energy and facilitates the occurrence of a reaction.
In the everyday world, you could optimize your environment (catalyst) to catalyze certain habits. For example, on the table have a basket of fresh fruit and nuts to encourage you to eat healthy.
Rule for operating this mental model: creates “catalyst environments” that require less energy to carry out an activity.
The environment is the best catalyst for creating good habits and maximum performance.
Mental Models In Physics
- Critical mass
The minimum amount of fissile material to sustain a sustained nuclear chain reaction.
In business, critical mass is the point at which a company is able to sustain itself without external funds. The same goes for epidemics such as Covid-19 which when they reach a critical mass are impossible to control.
Rule for operating this mental model: when you launch a product you have to commit how much more possible in marketing activities until reaching a critical mass of consumers.
- Relativity theory
The laws of physics are unchanged for all subjects that are not accelerated, and only the speed of light is independent. A very complex concept that explains why gravity and space time exist.
The speed of an object is the rate of change of its position with respect to a frame of reference and is a function of time. So distance and time indicate the speed of an object.
- First principle
Dig deeper and deeper until you are left with only the core truths. Therefore, do not assume that everything is already known. And in many cases the best solution is not where everyone is already looking.
Rule for operating this mental model: doubts everything you might doubt. Especially doubts the ideas you inherit. Find out the truth, that is the principle.
Mental Models In Engineering
- Breaking point
A point where something becomes unusable. For example, when we pass the breaking point of a bridge's capacity, the bridge collapses and becomes unusable.
In other fields, the breaking point are pauses to test, review and reflect on what has been done.
Rule for operating this mental model: create minor failure systems that do not collapse the entire system. In other words, operates with a safety margin.
- Safety margin
E’ the value from the breaking point that makes an object or an operation safe from serious negative effects.
For example, when you buy a business you want to have a safety margin in case you have been too positive on the value of the company.
In ingenieria, if a bridge has a range of 10 tons and declare access prohibited for vehicles with more than 8 tons, you have a safety margin of 2 tons.
In other words, the safety margin is an important mental model for avoiding the breaking point.
Rule for operating this mental model: use a safety margin of 40% for conservative operations. A safety margin of 20% in most cases it is sufficient.
The ability of a system to function under certain conditions for a specific period of time.
Rule for operating this mental model: create backup systems in case the routine mechanism fails. Taking notes is essential for evaluating performance issues.
Offer an alternative in case the system fails in order to improve reliability. A second job, a spare wheel or an alternative route are forms of redundancy.
Rule for operating this mental model: wondering what would happen if we lost our job, our partner or anything else essential to our mental and physical stability.
Mental Models In Mathematics
- Gauss curve
E’ a probability distribution used to analyze a group. The result is an average with one standard deviation indicating what is normal.
For example, in nature we can consider normality by analyzing their distribution thanks to the Gauss curve.
- Power law
E’ a non-linear probability distribution. A variation in one quantity causes a variation in another quantity exponentially.
Power law makes us aware that world distribution is seriously unequal. For example, the human being uses most of the earth's resources. The 20% of the population holds 80% of the wealth.
So we don't live in a world with a normal distribution, but in an unequal world. And this can also be observed in nature.
Moreover, small changes in one area can bring enormous change to another.
For example, a few hours of weight training each week can bring huge health gains. And the gain in health is disproportionate to the hours invested in physical exercise.
Rule for operating this mental model: look for opportunities in places where no one is looking. Invest a minimum of hours in rest, physical exercise, personal improvement, studio, meditation, etc.
How to put mental models into practice
The problem with most people is that they read mental models, they accept these theories but don't use them in everyday life.
This is what happens with many students who only learn theory but fail to put it into practice. The reason is that they are not fluent enough in the notions learned.
They just understood the concept, but not much and therefore they cannot put it into practice.
The best approach if you really want to get results from mental models is to figure out systems and processes to apply them in everyday life..
For example, you read Darwin's theory of evolution with interest and accept the fact that the animal species that adapt to change are those that survive.
How to put this theory into practice?
When you are confronted with changes, instead of resisting, start wondering what you could do differently in the new situation. The answer is out there.
Practically, you have to go beyond you have preconceptions and habits you have. You have to understand how mental models work until you are able to explain them to another person with different examples.
But that's not all, now you need to create rules, systems or stories to recall mental models when needed.
Quarda Warren Buffett, it is a machine in recalling what it has learned in life through stories and golden rules.
For example, Warren is aware of the psychological manipulation of open auctions. He made it a rule to never go to one.
What mental models do you want to adapt? How are you going to apply them?