How One Life Hack From A Self-Made Billionaire Leads To Exceptional Success
Countless books and articles have been written about Warren Buffett. Surprisingly few have been written about his business partner of over 40 years, Charlie Munger.
His model for success, backed by research, is simple and game-changing. It flies in the face of conventional wisdom on career success.
While Munger has certainly worked long and hard to become one of the world’s top investors, the signature of his success is different. According to his own account, rather than focusing on investment theory like a laser, he has studied widely and deeply in many fields, including microeconomics, psychology, law, mathematics, biology, and engineering, and applied insights from them to investing.
Bill Gates has said of 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.” Munger has, in short, been the ultimate expert-generalist.
Charlie Munger’s Approach To Being An Expert-Generalist
In connecting the dots across the disciplines, Munger has developed a set of what he calls models, which he uses to assess investment opportunities. In fact, he’s identified over 100 of these models that he uses frequently as of the publication of Poor Charlie’s Almanack. No doubt he continues to develop and perfect them.
What are these models exactly?
The best way to explain is to take the case of one he uses constantly, which he calls Two-Track analysis. It combines insights from psychology, neuroscience and economics about the nature of human behavior. This model instructs that when analyzing any situation in which decision-making by people is involved, which of course covers every business situation, he must consider two tracks:
How they would act if they behaved rationally, according to their true best interests.
How they would succumb to the pull of a number of irrational psychological biases that seem to be “programmed” into the human brain. Researchers have identified a host of them, and Munger has incorporated twenty-five of them into his Two-Track analysis model.
Another example is classical conditioning developed by Ivan Pavlov in the early 20th century. Pavlov discovered that with the right conditioning, dogs would salivate not just when eating food, but also in anticipation of it when he walked into the laboratory. Munger applies the same logic to business. In his book, he gives the example of how Coca-Cola (one of Berkshire Hathaway's largest holdings) conditions its customers with the right frequency and type of advertising while using their logo as the trigger.
The following is a summary of his rules on being an expert-generalist in his own words, excerpted and condensed from the various talks he’s given:
Rule #1: Learn Multiple Models
"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.”
“It’s like the old saying, ‘To the man with only a hammer, every problem looks like a nail.’ But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world.”
Rule #2: Learn Multiple Models From Multiple Disciplines
"And 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."
Rule #3: Focus On Big Ideas From The Big Disciplines (20% Of Models Create 80% Of The Results)
“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.”
Rule #4: Use A Checklist To Ensure You’re Factoring in the Right Models
“Use a checklist to be sure you get all of the main models.”
“How can smart people be wrong? Well, the answer is that they don’t…take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems.”
Rule #5: Create Multiple Checklists And Use The Right One For The Situation
“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 drive it yourself to ingrain it in your head for the rest of your life.”
The full article can be found here:
www.forbes.com/sites/michaelsimmons/2015/03/23/how-one-life-hack-from-a-self-made-billionaire-leads-to-exceptional-success/#2510864e44c6
His model for success, backed by research, is simple and game-changing. It flies in the face of conventional wisdom on career success.
While Munger has certainly worked long and hard to become one of the world’s top investors, the signature of his success is different. According to his own account, rather than focusing on investment theory like a laser, he has studied widely and deeply in many fields, including microeconomics, psychology, law, mathematics, biology, and engineering, and applied insights from them to investing.
Bill Gates has said of 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.” Munger has, in short, been the ultimate expert-generalist.
Charlie Munger’s Approach To Being An Expert-Generalist
In connecting the dots across the disciplines, Munger has developed a set of what he calls models, which he uses to assess investment opportunities. In fact, he’s identified over 100 of these models that he uses frequently as of the publication of Poor Charlie’s Almanack. No doubt he continues to develop and perfect them.
What are these models exactly?
The best way to explain is to take the case of one he uses constantly, which he calls Two-Track analysis. It combines insights from psychology, neuroscience and economics about the nature of human behavior. This model instructs that when analyzing any situation in which decision-making by people is involved, which of course covers every business situation, he must consider two tracks:
How they would act if they behaved rationally, according to their true best interests.
How they would succumb to the pull of a number of irrational psychological biases that seem to be “programmed” into the human brain. Researchers have identified a host of them, and Munger has incorporated twenty-five of them into his Two-Track analysis model.
Another example is classical conditioning developed by Ivan Pavlov in the early 20th century. Pavlov discovered that with the right conditioning, dogs would salivate not just when eating food, but also in anticipation of it when he walked into the laboratory. Munger applies the same logic to business. In his book, he gives the example of how Coca-Cola (one of Berkshire Hathaway's largest holdings) conditions its customers with the right frequency and type of advertising while using their logo as the trigger.
The following is a summary of his rules on being an expert-generalist in his own words, excerpted and condensed from the various talks he’s given:
Rule #1: Learn Multiple Models
"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.”
“It’s like the old saying, ‘To the man with only a hammer, every problem looks like a nail.’ But that’s a perfectly disastrous way to think and a perfectly disastrous way to operate in the world.”
Rule #2: Learn Multiple Models From Multiple Disciplines
"And 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."
Rule #3: Focus On Big Ideas From The Big Disciplines (20% Of Models Create 80% Of The Results)
“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.”
Rule #4: Use A Checklist To Ensure You’re Factoring in the Right Models
“Use a checklist to be sure you get all of the main models.”
“How can smart people be wrong? Well, the answer is that they don’t…take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems.”
Rule #5: Create Multiple Checklists And Use The Right One For The Situation
“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 drive it yourself to ingrain it in your head for the rest of your life.”
The full article can be found here:
www.forbes.com/sites/michaelsimmons/2015/03/23/how-one-life-hack-from-a-self-made-billionaire-leads-to-exceptional-success/#2510864e44c6
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