Charlie Munger

Critical Thinking Skills & Mental Models

Charlie Munger, is probably best known as the Vice Chairman of Berkshire Hathaway, Inc and long term business partner of Warren Buffett.

Aside from his extremely successful business career as an investor and his various philanthropic ventures, Charlie Munger is also well known for his thinking skills and especially for his emphasis on developing multiple mental models to cut through complexity and make good judgement calls and good decisions.

He is incredibly well read and has studied many disciplines other than business such as psychology, history, biology physics and economics.

Like all of us, Charlie Munger has had his share of personal setbacks, an early divorce in era when divorce carried enormous social stigma, severe financial setbacks, the death of his son at the age of 9, cataracts when he was 52 followed by failed surgery which led to blindness in his left eye and the removal of that eye.

His insights on life in general and business in particular are extremely perceptive, and frequently correct with an uncommon consistency.

In this article we are going to be looking at some of the core principles of his thinking skills so that we can adopt them and incorporate these principles into our toolkit of thinking skills as we learn how to think more effectively.

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.”

“...developing the habit of mastering the multiple models which underlie reality is the best thing you can do.”

Charlie Munger - Mental Models

How to think effectively? According to Charlie Munger:

“...developing the habit of mastering the multiple models which underlie reality is the best thing you can do.”

Munger is referring here to mental models.

Two broad categories of mental models that are particularly useful are those that help us understand how :

[1] The world works and thus to predict the future.

[2] Our mental processes can lead us astray via cognitive biases.

Our world is multi-dimensional and our problems are complex. Most problems cannot be solved using one model alone, thus it follows that the more models you have in the toolkit, the better equipped you will be to solve your problems because you can look at the problem from a variety of perspectives and increase the odds that you will come to a better solution.

But if you don’t have the models, you become the proverbial man with a hammer to whom every problem looks like a nail.

Another important consideration is how you prioritise your learning. Trying to keep up-to-date with all the latest information will lead to us chasing our tails, therefore Charlie Munger says that we should focus on things that change slowly:

"The models that come from hard science and engineering are the most reliable models on this Earth."

For further reading:

Mental Models: The Best Way to Make Intelligent Decisions (109 Models Explained)

The "Lollapalooza Effect"

But the learning and applying models is not enough, we also need to understand how they interact and combine, and most notably when autocatalysis or [as Charlie Munger calls it] the lollapalooza effect occurs.

The lollapalooza effect occurs when two or more forces are all operating in the same direction and often you don’t get just simple addition but rather you get a nuclear explosion once you reach a certain point of interaction between those forces such as a breakpoint or critical-mass is reached.

In the field of psychology the phenomenon wherein different biases layer and interlock with one another is the "Lollapalooza effect." It occurs when multiple different tendencies and mental models combine to act in the same direction. This makes them especially powerful drivers of behavior, and can lead to both positive and negative results.

The lollapalooza effect can cause huge negative effects but it can also cause massively positive trade-offs. So, understanding the interconnectedness of the models is critical.

Munger stated that while psychologists have been good at identifying individual biases, they are less good at figuring out how they interact and manifest in the real world, because it is difficult to run controlled experiments in that environment. At the 2017 Daily Journal annual meeting, he said:

"The psychology people couldn't do experiments that were four or five things happening at once because it got too complicated for them and they couldn't publish. So they were ignoring the most important thing in their own profession. And of course the other thing that was important was to synthesize psychology with all else. And the trouble with the psychology profession is that they don't know anything about 'all else.'"

For further reading:

Lollapalooza Effect

The Lollapalooza effect: What are the mental models for success?

Latticework of Mental Models: Lollapalooza Effect

Charlie Munger - How To Prioritise Learning Mental Models

“The more basic knowledge you have … the less new knowledge you have to get.”

  • Get back to basics.  Understanding a simple idea deeply, creates more lasting knowledge and builds a solid foundation for complex ideas later.
  • Build your foundation. Take the time to do a Feynman One Pager on an idea you think you know really well. While easy, this process will reveal any gaps you have in your knowledge.
  • The multidisciplinary mind understands the basic ideas. You don’t need to understand the latest study in biology, but you sure as heck better understand the concept of evolution because it applies to so much more than animals.
  • Understanding the basics allows us to predict what matters. Put simply, people who understand the basics are better at understanding second and subsequent order consequences.
  • What has been will continue to be. The longer a technology lives, the longer it can be expected to live.
  • Time can predict value. While produce and humans have a mathematical life expectancy that decreases with each day, some things, like books, increase in life expectancy with each passing day.

Further reading:

How to prioritise learning

In the words of Charlie Munger:

“...take a simple idea and take it seriously.”

Charlie Munger - Cognitive Biases: The Psychology of Human Misjudgment

Standard Causes of Human Misjudgment - according to Charlie Munger

  1. Reinforcement and Incentives - under recognition of the power of what psychologists call reinforcement and economists call incentives.
  2. Psychological denial - reality is too painful to bear, so you just distort it until it’s bearable.
  3. Incentive-cause bias - the greater the incentive the greater the bias - it’s present in every profession and in every human being, and it causes perfectly terrible behaviour.
  4. Bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance - includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won. The human mind has a big tendency of shutting down on an idea so the next one can't get in. 
  5. Painful qualifying and initiation rituals,  pound in your commitments and your ideas. The Chinese brainwashing system, which was for war prisoners, was way better than anybody else’s. They maneuvered people into making tiny little commitments and declarations, and then they’d slowly build. That worked way better than torture.
  6. Bias from Pavlovian association, misconstruing past correlation as a reliable basis for decision-making. Pavlovian association is an enormously powerful psychological force in the daily life of all of us. And all these psychological tendencies work largely or entirely on a subconscious level, which makes them very insidious. In many cases when you raise the price of alternative products, it’ll get a larger market share than it would when you make it lower than your competitor’s product because of the association of price with quality.
  7. Bias from reciprocation tendency -One of the reasons reciprocation can be used so effectively as a device for gaining another’s compliance is that it combines power and subtlety. Especially in its concessionary form, the reciprocation rule often produces a yes response to a request that otherwise would surely have been refused.
  8. Bias from over-influence by social proof, that is, the conclusions of others, particularly under conditions of natural uncertainty and stress. This is a lollapalooza. It describes a psychological and social phenomenon wherein people copy the actions of others in an attempt to undertake behavior in a given situation. Social proof is considered prominent in ambiguous social situations where people are unable to determine the appropriate mode of behaviour, and is driven by the assumption that the surrounding people possess more knowledge about the current situation.
  9. Bias from contrast caused distortions of sensation, perception, and cognition - the sensation apparatus of people is over-influenced by contrast. It has no absolute scale, just a contrast scale.
  10. Bias from over-influence by authority - remember the Millgram experiments?
  11. Bias from Deprival Super Reaction Syndrome, including bias caused by present or threatened scarcity, including threatened removal of something almost possessed but never possessed - people are really crazy about minor decrements in a downwards direction.
  12. Bias from envy/jealousy.
  13. Bias from liking distortion, including the tendency to especially like oneself, one’s own kind, and one’s own idea structures, and the tendency to be especially susceptible to being misled by someone liked.
  14. Bias from the non-mathematical nature of the human brain in its natural state as it deals with probabilities employing crude heuristics and is often mislead by mere contrast.
    The tendency to overweigh conveniently available information and other psychological rooted mis-thinking tendencies on this list when the brain should be using simple probability mathematics
  15. Mental and organizational confusion from the say-something syndrome  -  this occurs when people don't have a language or framework with which to explain something and they tend to metaphorically jump up and down and make a lot of noise.
What happens when these standard psychological tendencies combine?

The short answer to this is that the lollapalooza kicks in.

Munger give these examples:

  • Tupperware parties. "Tupperware has now made billions of dollars out of a few manipulative psychological tricks."
  • The Moonies. "Moonie conversion methods. Boy, do they work. He just combines four or five of these things together"
  • Alcoholics Anonymous. "A 50% no-drinking rate outcome when everything else fails? It’s a very clever system that uses four or five psychological systems at once toward, I might say, a very good end."

Further reading:

Transcript & Video of a 1995 Charlie Munger speech listing 24 standard causes of human misjudgement

Charlie Munger - Five Simple Notions that Solve Problems

In 1996, Charlie Munger gave a talk titled "Practical Thought about Practical Thought". He started the speech by outlining five simple notions that help him quickly solve problems:

1. Simplify

"… it is usually best to simplify problems by deciding big 'no-brainer' questions first..."

2. Numerical Fluency

"Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest."

3. Invert

"Inverting the problem won’t always solve it, but it will help you avoid trouble. Call it the avoiding stupidity filter.

… it is not enough to think problems through forward. You must also think in reverse..."

4. Study The Basics

You need to understand the big nuggets of wisdom in the three buckets of useful knowledge.

Munger believes in using these regularly and in combination:

"You must think in a multidisciplinary manner...You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory..."

5. Lollapalooza Effects

And you need to watch out for when really big ideas combine.

"… really big effects, lollapalooza effects, will often come only from large combinations of factors..."

The Charlie Munger Two Step Process To Making Decisions

1. The Forces at Play

The key to the first step is: knowing what you know and what you don’t know.

To paraphrase Donald Rumsfelt: There are the "known knowns", the "known unknowns" and then there are far more troubling "unknown unknowns".

Charlie Munger says:

"You need to understand your circle of competence.

If you know what you don’t know, you might still have to make a decision, but your approaches for making that decision will change.

For example, if you’re forced to make a decision in an area that you know is well outside your circle of competence, one tool you can use is inversion.

While there are millions of factors that go into decisions, there will always be a few variables and factors that will carry the bulk of the weight.

To make consistently good decisions, you need to develop a deep fluency in the area in which you are making decisions, and you need to pull in the big ideas from multiple disciplines to make sure you’re exercising good judgment."

2. The Psychological Factors

There are many causes of human misjudgment, most of these are unconscious to us. Please see "Standard Causes of Human Misjudgment" above.

Further reading: The Munger Two Step Process


"So there’s an iron rule that just as you want to start getting worldly wisdom by asking why, why, why; in communicating with other people about everything, you want to include why, why, why. Even if it’s obvious, it’s wise to stick in the why."

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