General Models Flashcards
Mental models in general
Occam razors
Among competing hypothesis one with fewer assumptions SHLD be selected.
In short simplest solution is correct.
Afertall extraordinary claims demand extraordinary proofs.
When u have 2 theory that make exactly same prediction the simpler one is better.
Map is not territory
Description of things is nt things itself.
Eg success of Johnson at Apple and failure at JC Penny.
Bcz he had an excellent theory abt retail Ong thy apply in some circumstances but to no other.
U don’t understand a model,map or reduction unless u understand and respect it’s limitations.
Don’t confuse the model with reality.
Second order thinking
It requires
- what is range of possible outcome
- what d probability of me being right
- whats d follow on?
- how could I be wrong?
2nd order thinker push harder and don’t accept first conclusion.
Hanlon razor
Never attributes to malice (ill will) which can be adequately explained by neglect(incompetence,carelessness).
But dont be blind to behaviour which are intended to be harmfull.
Hanlon razor works best when combined with other knowledge eg availability (recent malicious intent cloud our judgements) bias,confirmation bias,bias from liking and disliking.
Feeeback loop
Its created when reaction affect themselves and can be positive or negative.
There are 2 types
1.positive feedback loop amplifies production or system output,resulting in growth or decline.
Negative feedback dampens output stablises the system around an equlibrium point.
Positive are effwctive for creating changes.
Negative are effective for resisting to change.
In feedback loop output itself becomes an input.
In feedback loop input comes from within system not from outside system.
SUPERLINEAR SYSTEM
When you add more u create more..eg network effects.
SUBLINEAR
its concerned with maximizing efficiency per unit in industries that are relatively mature.
Leverage
How to gain disproportionate strength
Leverage point is where small difference can make a large difference.
KEY PRINCIPLES
Leverage is based on perceptions.
Levrage is dynamic
Leverage is situation specifics.
Leverage is social or realtional constructs.
Dont ask barber whether u need haircut doing so will transfer leverage to him
Money is not equal to each and everyone a strong pwrsonal brands will add more leverages.
Related mental model
- critical mass
- power laws
- pareto principal
- tribal leadership
- outsourcing
- consistent and committment bias
- activation energy.
Circle pf competence
How warren buffet avoids problems
U dont have to be an expert on many companies .u only havee to be able to evaluate companies within ur circle of competence.
Its simple..each one of us yhrough experience or study has built a useful knowledge on certain areas of the world.some areas are understood by us while sone requiees lot more s peciali
ty to evaluate.
U have to honestlt define what u know abd stick to those areas.
U have to figure to what ur aptitudes are.if u play ganes where other people have aptitudes and u dont ur going to loose.u have to figure out where u have an edge and u have to play to ur circle of competence…munger
First principles thinking
Building blocks of true knowledge
Idea is to break down complicated problems into basic elements and to reassemble them from grounds up.
U have to learn things by understanding.
In every systematic enquirt when there r first priciples or causes or elements knowledge nd science resultsbfeom acquiring knowledge of these..aristotle.
Si much of what we bekieve is based on some authority figurea telling us that something is true.
Adapting to change is an incredibly hard thing to do when ut comes into conflict with very things that caused too much success.
If we never learn to take sonething apart test the assumptions and reconstruct it we will end up trapped in what other people tell us.
Techniques to establish first principles
Socratic questioning process
- clarifying thinking…why do I think this?what exactly do I think
- challenging assumptions (how do I know this is true,what if I thought d opposite)
- looking for evidences (how can I back this up,what r the sources)
- consider alternative prospectives(what might others think,how do I know I am correct)
- examine consequences and implications of being wrong
- questioning the original question (why did I think that?was I correct?what conclusion can I draw from reasoning process)
2.always ask 5times WHY to get to root cause
Ur thinking process shouldnt be bound by convention prior experience or by analogy.
As to methods there might be millions but principles are few the man who grasps principles can successfully select his own methods. The man who tries methods wills urely have troubles.
Thoughts experiments
It consists in reasoning from a supposition that is not accepted as true perhaps even known to be false but is assumed provissionly in the interest of making a point or resolving a conclusions.
Probabilistic thinking
There are 3 importnce aspect of probability
1 Bayesian updating
2.fat tailed curves
3.assymetries
Bayesian thinking..Bayesian thinking allows us to use all relevant prior information in making decisions.statiscian might call it as base ratestaking on outside information abt past situations.
It’s important to remember that prior themselves are probability estimates.for each bit of prior knowledge ,u r not putting in a binary structure saying it’s true or not .u r assigning it a probability of true
Any new information that u encounter that challenge. the prior simply means that probability of prior being true may be reduced.
When making a uncertain decision u SHLD always ask what r relevant priors? What might I already know that I better understand reality of situations.
Fat tailed curves
Bell curves i.e normal distribution and fat tailed distribution are different
The difference is in tails .in bell curves extreme are predictable.in fat tailed there is no real cap on extreme events.
Think ..in bell curve eg.height and weight extremes are there but outliers have fairly well defined scope.
But in fat tailed like wealth,central tendency does not work same way.
Asymmetries..
Probability that ur probability estimates are themselves are any good.
Ur estimation errors are symmetries
Skewing in single direction.
Successfully thinking in shades of probability means roughly identifying what matters, coming up with a sense of the odds,doing a check on our assumptions, and than making a decisions.
Probabilistic thinking
There are 3 importnce aspect of probability
1 Bayesian updating
2.fat tailed curves
3.assymetries
Bayesian thinking..Bayesian thinking allows us to use all relevant prior information in making decisions.statiscian might call it as base ratestaking on outside information abt past situations.
It’s important to remember that prior themselves are probability estimates.for each bit of prior knowledge ,u r not putting in a binary structure saying it’s true or not .u r assigning it a probability of true
Any new information that u encounter that challenge. the prior simply means that probability of prior being true may be reduced.
When making a uncertain decision u SHLD always ask what r relevant priors? What might I already know that I better understand reality of situations.
Fat tailed curves
Bell curves i.e normal distribution and fat tailed distribution are different
The difference is in tails .in bell curves extreme are predictable.in fat tailed there is no real cap on extreme events.
Think ..in bell curve eg.height and weight extremes are there but outliers have fairly well defined scope.
But in fat tailed like wealth,central tendency does not work same way.
Asymmetries..
Probability that ur probability estimates are themselves are any good.
Ur estimation errors are symmetries
Skewing in single direction.
Successfully thinking in shades of probability means roughly identifying what matters, coming up with a sense of the odds,doing a check on our assumptions, and than making a decisions.
Probabilistic thinking
There are 3 importnce aspect of probability
1 Bayesian updating
2.fat tailed curves
3.assymetries
Bayesian thinking..Bayesian thinking allows us to use all relevant prior information in making decisions.statiscian might call it as base ratestaking on outside information abt past situations.
It’s important to remember that prior themselves are probability estimates.for each bit of prior knowledge ,u r not putting in a binary structure saying it’s true or not .u r assigning it a probability of true
Any new information that u encounter that challenge. the prior simply means that probability of prior being true may be reduced.
When making a uncertain decision u SHLD always ask what r relevant priors? What might I already know that I better understand reality of situations.
Fat tailed curves
Bell curves i.e normal distribution and fat tailed distribution are different
The difference is in tails .in bell curves extreme are predictable.in fat tailed there is no real cap on extreme events.
Think ..in bell curve eg.height and weight extremes are there but outliers have fairly well defined scope.
But in fat tailed like wealth,central tendency does not work same way.
Asymmetries..
Probability that ur probability estimates are themselves are any good.
Ur estimation errors are symmetries
Skewing in single direction.
Successfully thinking in shades of probability means roughly identifying what matters, coming up with a sense of the odds,doing a check on our assumptions, and than making a decisions.
Do something syndrome
Why we feel compelled to act
Sole cause of man unhappiness is that he does nit know hiw to stay quitky in his room.
It is not enough to be busy so are ants question is ..what are we busy about?
Dont confuse activity with results..
They are not same things .there is no point working hard at sonething u shoudnt we doing in first place.
One of great advantages I n decision making is ability not to do sonething to be active.
Butterfly effect
Its an idea that small things can have non linear effects on a complex systems
Sone syatems r very sensitive to their starting conditions so a tiny differnce in initial push u gave them causea big difference in where thy end up.
Point of butterfly effect is not to give up leverage.
Things tht changed world are tiny things. Even smallest errors in an initial setup renders models useless as inacuuracies compound overtime. For most Businesses incessant small changes are moat efficnt way to produce metapgorical typhoon.these iteratiins keep consumers engaged while preserving brand idenity.if succeds and compound rewards can be monumental. Initial conditions (*economic,social,political,cultural)in which business setup are vital influences on its failures or success.
