100 models. December 2024.
I recently read "A Lesson on Elementary, Worldly Wisdom As It Relates to Investment Management & Business.” by Charlie Munger. He mentioned that if you are able to pull a few of these models into your context window when faced with problems, decisions become easier.
Mathematics and Statistics (Core Quantitative Models):
Basic Arithmetic and Numeracy (accurate mental math)
Compound Interest (exponential growth)
Permutations and Combinations (Pascal-Fermat probability)
Probability Theory and Expected Value (decision-making under uncertainty)
Regression to the Mean (understanding reversion in outcomes)
Law of Large Numbers (predictability improves with sample size)
Statistical Distributions (normal distribution, power laws)
Bayesian Updating (improving estimates with new information)
Decision Trees (structured decision-making)
Margin of Safety (extra buffer against errors)
Physics, Chemistry, and Engineering (Models of the Physical World):
11. Newton’s Laws (inertia, action/reaction—analogy for persistence in systems)
12. Thermodynamics Basics (entropy, efficiency)
13. Conservation Laws (mass, energy; analogies for resource constraints)
14. Critical Mass and Tipping Points (threshold effects in markets and behavior)
15. Autocatalysis (self-reinforcing processes)
16. Leverage and Gearing (small inputs causing large effects)
17. Breakpoints and Limits (systems can suddenly change state)
18. Reliability Engineering & Redundancy (backup systems to reduce risk)
19. Feedback Loops (positive and negative)
20. Scale Effects and Diseconomies of Scale (bigger isn’t always better)
Biology and Physiology (Adaptation and Systems):
21. Darwinian Natural Selection (adaptation, survival of the fittest)
22. Ecosystems and Niches (organizations thrive in niches, like species)
23. Evolutionary Arms Races (competitive dynamics escalating over time)
24. Genetics vs. Environment (nature/nurture in business cultures)
25. Incentive-Driven Behavior (organisms do what they’re incentivized to do)
26. Biological Checks and Balances (countervailing forces in systems)
27. Survival Strategies (mimicry, symbiosis—business equivalents of alliances)
28. Critical Resources and Bottlenecks (limiting factors in growth)
29. Senescence and Renewal (why enterprises must reinvent to avoid decline)
30. Overpopulation and Resource Depletion (cautionary model for market overcapacity)
Psychology (Cognitive Biases & Decision-Making):
31. Incentive-Caused Bias (people respond to incentives, often irrationally)
32. Pavlovian Conditioning (classical conditioning—mere association effects)
33. Operant Conditioning (Skinner—reinforcement and habit formation)
34. Social Proof (people follow the crowd)
35. Authority Bias (deference to perceived experts)
36. Commitment & Consistency Bias (sticking to previous decisions)
37. Confirmation Bias (seeking evidence that confirms our beliefs)
38. Availability Bias (overweighing readily available information)
39. Contrast Bias (perception altered by juxtaposition)
40. Anchoring (relying too heavily on the first piece of information)
41. Reciprocity Bias (obligation to return favors)
42. Liking/Loving Bias (favoring people/products we like)
43. Disliking/Hating Bias (disfavoring those we dislike)
44. Envy/Jealousy Bias (distortions caused by comparisons)
45. Overconfidence Bias (overestimating abilities or predictions)
46. Hindsight Bias (seeing events as predictable only after they’ve happened)
47. Outcome Bias (judging decisions by outcomes rather than quality of process)
48. Incentive Superresponse Tendency (strong responses to incentives)
49. Survivorship Bias (focusing on winners, ignoring lost data)
50. Misjudgment by Mere Association (marketing’s use of happy images, etc.)
Microeconomics and Business (How Firms and Markets Work):
51. Supply and Demand (basic equilibrium in markets)
52. Opportunity Cost (value of the next best alternative)
53. Comparative Advantage (specialization and trade)
54. Economies of Scale (cost advantages with increasing output)
55. Diseconomies of Scale (bureaucracy and inefficiency at large scale)
56. Network Effects (value increasing with the number of users)
57. Switching Costs (barriers keeping customers from changing suppliers)
58. Barriers to Entry and Competitive Moats (durable competitive advantages)
59. Brand and Trademark Power (reputation and customer loyalty)
60. Principal-Agent Problem (incentive misalignment between owners/managers)
61. Pricing Power (ability to raise prices without losing business)
62. Elasticity of Demand (sensitivity of demand to price changes)
63. Cost-Benefit Analysis (weighing trade-offs for rational decisions)
64. Winner-Take-All Effects (markets that tip toward a single dominant player)
65. Creative Destruction (new technologies displace old industries)
66. Availability and Distribution Effects (product always accessible = less switching)
67. Information Asymmetry (when one party knows more than the other)
68. Sunk Cost Fallacy (don’t throw good money after bad)
69. Incentive Structures in Organizations (how pay and perks affect behavior)
70. Industry Lifecycle Models (introduction, growth, maturity, decline)
Accounting and Corporate Finance (Measuring and Valuing Businesses):
71. Double-Entry Bookkeeping (tracking assets, liabilities, and equity accurately)
72. Accrual vs. Cash Accounting (timing differences in recognizing revenue/costs)
73. Depreciation and Amortization (allocating the cost of long-lived assets)
74. Return on Invested Capital (measuring efficiency of capital use)
75. Discounted Cash Flow (valuing future cash flows in present terms)
76. Capital Allocation (optimally reinvesting earnings or distributing to shareholders)
77. Balance Sheet Strength and Liquidity (stability, ability to survive shocks)
78. Leverage (using borrowed capital for growth, with risks)
79. Working Capital Management (managing inventory, payables, receivables)
80. Cost of Capital (weighing debt and equity funding sources)
Social Sciences, Sociology, and Politics (Human Systems at Scale):
81. Tragedy of the Commons (overuse of shared resources)
82. Prisoner’s Dilemma and Game Theory (strategic interactions with others)
83. Information Cascades and Herding (group-think in markets)
84. Regulatory Capture (when industries dominate their regulators)
85. Cultural Norms and Mores (social context affects behavior)
86. Trust and Reputation Effects (long-term value of integrity)
87. Relative Status Seeking (humans compete for rank, affecting markets)
88. Role of Incentives in Governance and Public Policy (perverse incentives)
89. Emergence and Complexity (unexpected patterns from simple rules)
90. Adaptation to Technological Change (winners and losers in innovation cycles)
Miscellaneous Useful Models (General Thinking Tools):
91. Inversion (thinking problems through backward—Carl Jacobi’s “Invert, always invert”)
92. Occam’s Razor (simplest explanation that fits the facts is often right)
93. Circle of Competence (staying within areas you understand well)
94. Checklist Procedures (avoiding errors by systematic review—like pilots do)
95. Second-Order and Higher-Order Effects (considering downstream consequences)
96. The Map is Not the Territory (models are simplifications, not reality)
97. Lollapalooza Effects (multiple biases or forces acting together for a big result)
98. Margin of Safety in Decisions (allowing room for error)
99. Pareto Principle (80/20 rule in outcomes)
100. Long-Term Orientation (compounding benefits from patience and consistency)