Having a set of mental models is the highest leverage anyone can have to succeed in a career and business. I have collected many mental models throughout my professional journey that has helped me overcome the challenges I have faced. I had published a while back on the 5 mental models for leadership in a fast-changing environment
But there are hundreds of mental models that exist and in this article, want to 5 mental models that I have come across that help to succeed in business, investments.
Again, it is one thing to know the mental model and altogether a different level to apply it. Everyone has to go through their own journey in applying the mental model.
But having an understanding is the first step for anything to begin.
Opportunity Cost
In economics, one of the most important concepts is “opportunity cost”, the idea that once you spend your money on something, you can’t spend it again on something else. This applies very much to time also.
Not many businesses understand this. It is a tradeoff when you make a choice. For example, you can choose to spend money on building an internal team or decide to outsource work.
You can work on your own and save some money or hire a freelancer to get work done and save time.
You can remain with the status quo of acquiring customers in the traditional way of acquiring customers or decide to go with a new way of marketing!!
What is the cost of each decision?
Both take up money and time, and both having different opportunity costs. Every decision has an opportunity cost. If you decide to do “A” you can’t also do “B” at the same time.
Future businesses will confront more and more this decision-making. Earlier the number of factors to choose was far less, but the world is changing so fast that quick decision making is key and to make a quick and yet right decision, you must know the opportunity cost.
Opportunity cost is a huge filter in life. If you’ve got two suitors who are really eager to have you and one is way hell better than others, you do not have to spend much time with the other. That is why we filter out opportunities
Charlie Munger
Spacing effect
When I was in college many times I faced the exams by just cramming for the last 2 weeks and sometimes even the last day. I had all the time to study, but postponed and only until the final deadline came, didn’t want to put the effort.
The problem is be it in business or for that matter anything in life this kind of cramming doesn’t work. Instead what is required is spacing. We aren’t wired to learn everything in last 1 week. Instead, the best learning and retention happens when we space out our study lessons.
Spacing repetitions over longer duration of time produces better recall than doing the same number of repetitions over a shorter duration of time. Space Effect
In the career or business, you will need to keep learning. You don’t want to do like exams. Instead, make a habit of continuous learning and reflecting on the same repeatedly.
Gamification
If you are hooked to any app like Facebook, TicToc, WhatsApp, just know that you are gamified!
The games are the only force that can make people take action against their self-interest, in a predictable way without using force.
Game Zimmerman
Reason gamification works because it leverages many of our innate human motivations. We are all motivated by being part of
- Community
- When there is Risk/Reward for any action taken
- Feedback, as long feedback exists people love to do the action always
I have always tried to explore this. I realized that by learning from sports we can unlock team productivity and bring team performance to a different level.
To do this, it all comes down to understanding how sports teams vs. business teams set goals and measure those and get frequent unbiased feedback.
We can take up any activity and it can be made engaging provided it involves reasonably challenging goals and clear, frequent feedback.
This is what happens in team games like cricket, football, or any other sport. There are clear but challenging goals, there is instant feedback for every player on how he is performing.
Now, add these elements of setting challenging goals, measuring those, and getting instant feedback, then we can turn a chore into something that feels more like a game. You can read more on this here
Circle of Competence
This is something I came to know as part of my learning on investment but very much applies to any walk of life.
If you can avoid doing stupid mistakes, you are 99% better than most. Most of the stupid mistakes we commit are because we do things that are outside of our circle of competency.
There is no doubt, we have to keep increasing the circle of competency, but knowing the outer edge where our competency lies gives us a high advantage. The scope of succeeding is very high as long as we operate within our own competency levels and keep increasing the circle of competence.
Circle of Competency
This is very much relevant when you are in business, investments. As there are so many areas of business that one cannot be good or has the time to develop competency, knowing your core competency is key.
Build the competency over time by hiring other experts or seeking coaching. You can learn more on this here
Everybody has got a different circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle
Warrent Buffer
Strategy vs Tactics
Many have confusion on what is a strategy and what is a tactic. Even I had the same for quite many years until I read the book Thinking Strategically By Avinash Dixit & Barry Nalebuff.
Understanding the difference itself can be a great mental model
Strategy: Describes the goal and how to reach it
Tactics: The specific actions to take on the way to the goal
The simple way to see strategy vs tactic is, imagine you want to run a marathon. The strategy part involves completing a marathon, deciding is it 10km, 21km(half marathon), or 42km (full marathon).
The tactic part involves mostly incremental decisions, actions you need to take to practice and implement this strategy. Strategy is key, but without the tactics, the strategy will remain there and you won’t achieve it.
In business, for example, want to get new leads. The strategy part involves deciding to acquire leads with either
- Marketing using inbound
- Building Partners network
- Doing with outbound and sales
You can choose one or multiple strategies but each strategy involves again many different sub-strategies as well 100’s of tactics that are required. Some of the key differences b/w strategy and tactics are
- Strategy is long-term and fixed whereas tactics are short-term and flexible
- The tactics must be aligned with strategy, else just executing tactic on its own has no relevance.
- Strategy and tactics are again must be connected to a larger goal.
Being too rigid on either the strategy or tactic can become counterproductive.
For example, in our example of the marathon, you start practicing for 42 km, and halfway you realize that your body is not ready for the 42 km and needs more practice. Good to change the strategy. Decide to run a half marathon at 21Km or plan the next year with more practice instead of being stuck with the original strategy.
As you have read so far, there are many mental models that can be learned and practiced. In today’s fast-paced world, mental models are extremely useful to help in thinking fast and making decisions.
For those interested, there are great books available to read to learn more about mental models. Few are,
- Thinking, Fast and Slow (Daniel Kahneman)
- Influence: The Psychology of Persuasion (Robert Cialdini)
- Metaphors We Live By (George Lakoff)
