During decision-making, the brain is a memory prediction machine.
A lousy way to do memory prediction is “X happened in the past, therefore X will happen in the future.” It’s too based on specific circumstances. What you want is principles. You want mental models.
The best mental models I have found came through evolution, game theory, and Charlie Munger. Charlie Munger is Warren Buffett’s partner. Very good investor. He has tons and tons of great mental models. Author and trader Nassim Taleb has great mental models. Benjamin Franklin had great mental models. I basically load my head full of mental models. [4]
I use my tweets and other people’s tweets as maxims that help compress my own learnings and recall them. The brain space is finite—you have finite neurons—so you can almost think of these as pointers, addresses, or mnemonics to help you remember deep-seated principles where you have the underlying experience to back it up.
If you don’t have the underlying experience, then it just reads like a collection of quotes. It’s cool, it’s inspirational for a moment, maybe you’ll make a nice poster out of it. But then you forget it and move on. Mental models are really just compact ways for you to recall your own knowledge. [78]
EVOLUTION
I think a lot of modern society can be explained through evolution. One theory is civilization exists to answer the question of who gets to mate. If you look around, from a purely sexual selection perspective, sperm is abundant and eggs are scarce. It’s an allocation problem.
Literally all of the works of mankind and womankind can be traced down to people trying to solve this problem.
Evolution, thermodynamics, information theory, and complexity have explanatory and predictive power in many aspects of life. [11]
INVERSION
I don’t believe I have the ability to say what is going to work. Rather, I try to eliminate what’s not going to work. I think being successful is just about not making mistakes. It’s not about having correct judgment. It’s about avoiding incorrect judgments. [4]
COMPLEXITY THEORY
I was really into complexity theory back in the mid-90s. The more I got into it, the more I understand the limits of our knowledge and the limits of our prediction capability. Complexity has been super helpful to me. It has helped me come to a system that operates in the face of ignorance. I believe we are fundamentally ignorant and very, very bad at predicting the future. [4]
ECONOMICS
Microeconomics and game theory are fundamental. I don’t think you can be successful in business or even navigate most of our modern capitalist society without an extremely good understanding of supply-and-demand, labor-versus-capital, game theory, and those kinds of things. [4]
Ignore the noise. The market will decide.
PRINCIPAL-AGENT PROBLEM
To me, the principal-agent problem is the single most fundamental problem in microeconomics. If you do not understand the principal-agent problem, you will not know how to navigate your way through the world. It is important if you want to build a successful company or be successful in your dealings.
It’s a very simple concept. Julius Caesar famously said, “If you want it done, then go. And if not, then send.” What he meant was, if you want it done right, then you have to go yourself and do it. When you are the principal, then you are the owner—you care, and you will do a great job. When you are the agent and you are doing it on somebody else’s behalf, you can do a bad job. You just don’t care. You optimize for yourself rather than for the principal’s assets.
The smaller the company, the more everyone feels like a principal. The less you feel like an agent, the better the job you’re going to do. The more closely you can tie someone’s compensation to the exact value they’re creating, the more you turn them into a principal, and the less you turn them into an agent. [12]
I think at a core fundamental level, we understand this. We’re attracted to principals, and we all bond with principals, but the media and modern society spend a lot of time brainwashing you about needing an agent, an agent being important, and the agent being knowledgeable. [12]
COMPOUND INTEREST
Compound interest—most of you should know it in the finance context. If you don’t, crack open a microeconomics textbook. It’s worth reading a microeconomics textbook from start to finish.
An example of compound interest—let’s say you’re earning 10 percent a year on your $1. The first year, you make 10 percent, and you end up with $1.10. The next year, you end up with $1.21, and the next year $1.33. It keeps adding onto itself. If you’re compounding at 30 percent per year for thirty years, you don’t just end up with ten or twenty times your money—you end up with thousands of times your money. [10]
In the intellectual domain, compound interest rules. When you look at a business with one hundred users growing at a compound rate of 20 percent per month, it can very, very quickly stack up to having millions of users. Sometimes, even the founders of these companies are surprised by how large the business scales. [10]
BASIC MATH
I think basic mathematics is really underrated. If you’re going to make money, if you’re going to invest money, your basic math should be really good. You don’t need to learn geometry, trigonometry, calculus, or any of the complicated stuff if you’re just going into business. But you want arithmetic, probability, and statistics. Those are extremely important. Crack open a basic math book, and make sure you are really good at multiplying, dividing, compounding, probability, and statistics.
BLACK SWANS
There’s a new branch of probability statistics, which is really around tail events. Black swans are extreme probabilities. Again, I have to refer back to Nassim Taleb, who I think is one of the greatest philosopher-scientists of our times. He’s really done a lot of pioneering work on this.
CALCULUS
Calculus is useful to know, to understand the rates of change and how nature works. But it’s more important to understand the principles of calculus—where you’re measuring the change in small discrete or small continuous events. It’s not important you solve integrals or do derivations on demand, because you’re not going to need to in the business world.
FALSIFIABILITY
Least understood, but the most important principle for anyone claiming “science” on their side—falsifiability. If it doesn’t make falsifiable predictions, it’s not science. For you to believe something is true, it should have predictive power, and it must be falsifiable. [11]
I think macroeconomics, because it doesn’t make falsifiable predictions (which is the hallmark of science), has become corrupted. You never have a counterexample when studying the economy. You can never take the US economy and run two different experiments at the same time. [4]
IF YOU CAN’T DECIDE, THE ANSWER IS NO.
If I’m faced with a difficult choice, such as:
→ Should I marry this person?
→ Should I take this job?
→ Should I buy this house?
→ Should I move to this city?
→ Should I go into business with this person?
If you cannot decide, the answer is no. And the reason is, modern society is full of options. There are tons and tons of options. We live on a planet of seven billion people, and we are connected to everybody on the internet. There are hundreds of thousands of careers available to you. There are so many choices.
You’re biologically not built to realize how many choices there are. Historically, we’ve all evolved in tribes of 150 people. When someone comes along, they may be your only option for a partner.
When you choose something, you get locked in for a long time. Starting a business may take ten years. You start a relationship that will be five years or maybe more. You move to a city for ten to twenty years. These are very, very long-lived decisions. It’s very, very important we only say yes when we are pretty certain. You’re never going to be absolutely certain, but you’re going to be very certain.
If you find yourself creating a spreadsheet for a decision with a list of yes’s and no’s, pros and cons, checks and balances, why this is good or bad…forget it. If you cannot decide, the answer is no. [10]
RUN UPHILL
Simple heuristic: If you’re evenly split on a difficult decision, take the path more painful in the short term.
If you have two choices to make, and they’re relatively equal choices, take the path more difficult and more painful in the short term.
What’s actually going on is one of these paths requires short term pain. And the other path leads to pain further out in the future. And what your brain is doing through conflict avoidance is trying to push off the short-term pain.
By definition, if the two are even and one has short-term pain, that path has long-term gain associated. With the law of compound interest, long-term gain is what you want to go toward.
Your brain is overvaluing the side with the short-term happiness and trying to avoid the one with short-term pain.
So you have to cancel the tendency out (it’s a powerful subconscious tendency) by leaning into the pain. As you know, most of the gains in life come from suffering in the short term so you can get paid in the long term.
Working out for me is not fun; I suffer in the short term, I feel pain. But then in the long term, I’m better off because I have muscles or I’m healthier.
If I am reading a book and I’m getting confused, it is just like working out and the muscle getting sore or tired, except now my brain is being overwhelmed. In the long run I’m getting smarter because I’m absorbing new concepts from working at the limit or edge of my capability.
So you generally want to lean into things with short-term pain, but long-term gain.
What are the most efficient ways to build new mental models?
Reading science, math, and philosophy one hour per day will likely put you at the upper echelon of human success within seven years.