Charlie Munger: The 30 most important thinking models, thought-provoking, recommended for collection!

The author of this article has selected 30 of Charlie Munger's 100 thinking models that are most commonly used by ordinary people and analyzed them with examples. It is worth collecting and reading repeatedly for careful appreciation.

I heard the news that Mr. Charlie Munger, Buffett's investment partner, passed away on November 28 at the age of 99. I can't help but feel sad that a wise man of the times and a generation of investment masters have passed away.

I have also read "The Poor Charlie's Almanack" and benefited from his wisdom in entrepreneurship and life.

Mr. Munger once said: "The thinking model will give you a perspective or thinking framework, which determines your perspective on things and the world. The top thinking model can increase your chances of success and help you avoid failure."

For a wise man, the best way to remember him is to practice his wisdom.

Today, I have selected 30 of the most commonly used models by ordinary people from Charlie Munger’s 100 thinking models. They are worth collecting and studying repeatedly and savoring carefully.

Below, enjoy:

1. Sunk Cost Thinking Model

Refers to expenses that occurred in the past but are not related to current decisions. We call these irrecoverable expenses, such as time, money, and energy, "sunk costs."

For example: When we establish a romantic relationship with someone, even though this relationship is not what we want, we are still reluctant to give up because we have invested a lot of time and energy in this relationship.

2. Opportunity Cost Thinking Model

It refers to the opportunity to give up one business activity in order to engage in another business activity, or the income that is given up when using certain resources to obtain a certain income.

The basis for enterprises to correctly choose business projects in their operations is that actual benefits must be greater than opportunity costs, so that limited resources can be optimally allocated.

For example, if you spend 100,000 yuan to invest in the stock market instead of depositing it in a bank, the opportunity cost of this stock investment is the interest rate of the 100,000 yuan deposited in the bank.

3. Fast and Slow System Thinking Model

People have two thinking systems. System 1 is unconscious thinking, automatic driving, and inertial thinking. System 2 requires energy, focus, and concentration.

One of the most basic principles of the brain is that you should avoid using your brain if possible, and sometimes you should prevent your brain from making instinctive thinking and decisions.

For example: When seeing a brand new Tesla, System 1 says, "Beautiful! Premium! You will definitely get lots of attention when driving this car!" System 2, however, says, "How much does it cost? How much is the annual maintenance cost? Compared to a Mercedes, is it worth it?"

4. Scarcity mentality thinking model

It is a scarcity mentality formed by the scarcity of things, and this process is unconscious. When our brain is captured by scarcity, we will focus on solving the scarcity situation, which will lead to two phenomena: focus bonus and tunnel vision burden.

Benefits: When we feel we are lacking something, our minds focus on the immediate needs, which makes us more focused and helps us solve problems. Studies show that lonely people are better at reading facial expressions and poor people are better at controlling costs.

Disadvantages: First, it narrows your vision, reduces your insight, lacks foresight, and makes you "see the trees but not the forest", which narrows your attention "bandwidth". Second, it makes people lack planning and make wrong decisions. Always reflect on the root cause of your scarcity mentality.

For example: After a day of work, I finally have a break. I don’t want to read or study, but just want to watch short videos. (Time scarcity mentality)

5. Antifragile thinking model

According to certain standards, things can be divided into three categories: fragile, strong, and anti-fragile.

Fragile things will break or be damaged when they come under external pressure, just like a glass will break when it falls to the ground; strong things will not be affected by external pressure.

Anti-fragile things can evolve with pressure in this volatile world and make themselves stronger.

For example: When a crab grows, it must shed its old shell and grow a new, stronger shell. During the molting period, the crab is weak. However, it is through this process that it becomes stronger.

6. Non-stimulus-response thinking model

Many people think based on stimulation and then react, lacking the intermediate process. This intermediate process is one's own choice, which is to turn passivity into initiative, from the stimulus reaction of stress to the choice after stimulation thinking, and then react.

For example: When the host in the live broadcast room shouted "The lowest price on the entire network, only for this day", consumers placed an order without thinking.

7. Nash equilibrium thinking model

A strategy combination is called a Nash equilibrium when each player's equilibrium strategy is to maximize his or her expected return, and at the same time, all other players also follow this strategy.

For example: Two prisoners chose to confess while being detained because they were afraid that the other would betray them.

8. Loss Aversion Thinking Model

It means that when people face the same amount of gains and losses, they find the losses more unbearable.

For example: You picked up 100 yuan in the morning and lost it later. Although your total assets have not changed, your mood has become bad.

9. Endowment Effect

It means that once a person owns an item, his evaluation of the value of the item will be greatly increased compared to before he owns it. Out of fear of loss, people often ask for too high a price when selling goods.

This irrational behavior often leads to reduced market efficiency, and this phenomenon will not disappear as traders gain more trading experience.

For example: Although the prices of goods in the second-hand market are usually much lower than new goods, when you sell your second-hand goods, you often value them much higher than others.

10. Herd mentality

It is usually used to describe the herd mentality of economic individuals. For investment, once the bubble bursts, everyone will find that in the frenzy of the market atmosphere, only the leaders will profit, and those who follow the trend will become victims.

For example: When we are walking on the road and see some people crossing the road in front of us, we will think it is safe, even if the traffic light is still red.

11. Disposition Effect

That is, investors tend to hold losing stocks for too long and sell profitable stocks too quickly. The disposition effect is a common irrational behavior of investors in the capital market.

This means that investors are risk-averse when they are in a profitable state and risk-seeking when they are in a losing state.

For example: Let's say we buy a stock at $50 per share. If the stock price rises to $70 per share, we might be satisfied and sell the stock to lock in profits. However, if the stock price falls to $30 per share, we would hold on to the stock and hope that it will eventually rebound.

12. Occam’s razor

The core idea is that "entities should not be added without reason." In simple terms, when explaining a thing or phenomenon, we should try to avoid introducing unnecessary assumptions.

If two explanations can explain a phenomenon, then choose the simplest and most economical one. For example, automatic transmission cars are gradually replacing manual transmission cars because automatic transmission meets the "simple and effective principle" for most users.

For example, if a patient has symptoms such as fever and fatigue, doctors will generally first suspect that it is caused by a cold rather than some rare disease. Only after excluding common causes will they further consider other possibilities.

13. Pareto Principle

The "80/20 rule" was discovered by Italian economist Pareto in the late 19th and early 20th centuries.

He believed that in any group, the most important ones only account for a small part, about 20%, while the majority of the rest account for 80%, but are secondary. Therefore, it is also called the 80/20 rule, or the Pareto principle.

For example: 80% of a company's turnover is contributed by 20% of its users.

14. Margin of safety

The difference between intrinsic value and price, using a deeper moat, purchasing the target at the lowest possible price to create greater room for error and reduce risk.

For example, when building a bridge, even if the maximum load capacity of the bridge is 30,000 pounds, only 10,000-pound trucks are allowed to pass through it.

15. Circle of Competence

If you know where the boundaries of your circle of competence are, you will be much richer than someone whose circle of competence is five times larger than yours but who doesn’t know where the boundaries are.”

Munger and Buffett tell us that the concept of the circle of competence is very simple, which is to understand the boundaries of your own abilities, and to work within these boundaries so that you can have an advantage over others.

For example: Buffett never touches technology stocks because the technology industry is changing with each passing day and it is not easy to foresee and judge.

16. Reaction force thinking model

Force and reaction exist at the same time. In an organization, if a system wants to change, it will inevitably be subject to reaction.

It requires prior prediction, adequate preparation, leveraging the opponent's force, and turning passivity into initiative in order to achieve greater breakthroughs.

For example: when we are rowing, if the oars are pushed backwards, the boat will move forward; if the oars are pushed forwards, the boat will move backwards.

17. Magnifying Glass Thinking Model

When thinking, if you magnify an object, you can see many details.

Actively magnify. We need to consciously use magnifying glass thinking to discover problems, predict problems, and solve problems.

For example: In business negotiations, the two parties often face differences and find it difficult to reach a consensus. At this time, the magnifying glass thinking model is needed to help both parties focus on the key points and find common interests.

18. Zooming Glass Thinking Model

When you are deeply involved in a situation, it is often difficult to look at many things rationally.

At this time, you need to use a magnifying glass to look at yourself and the world around you. The ultimate is to have a God's perspective.

For example: If you want to quit your job and start your own media, you should use a magnifying glass to judge the future prospects of self-media from a macro perspective, and whether you can support yourself simply by doing self-media.

19. Replicable thinking model

If the world did not have the ability to be irreproducible, it would be difficult for humans to survive to this day. There are many things that can be copied, including: cognition, genes, products, etc.

The advantage of replication is that it can quickly reduce the requirements for dynamic factors and can be continuously achieved with the highest (or as high as possible) standards. In addition to surface replication, the more powerful one is cognitive replication.

For example: If you write an article that becomes a hit, immediately copy the title and structure of the hit article to improve efficiency and mass produce it.

20. Reverse thinking model

The reverse thinking model is a very useful thinking model. Many times, we think things are simple and take them for granted.

At this time, we need to think about it the other way around, and think about where the bottlenecks are and what points are not in line with reality.

For example: If a company spends a lot of effort on sales but sees no results, it can try to think in reverse and think about whether its products are not good enough, resulting in poor sales.

21. Golden Circle Thinking

The Golden Circle is a way of understanding the world, and it has three levels.

The thinking mode is to start from (Why), why should we do this, stimulate emotional emotions from the heart, generate driving force, and then think about (How) how to do it, set goals and solve them step by step, and the final result is (What) that is more in line with the original concept.

The process of thinking about why for a company or an individual is a determination of principles, boundaries, and values, providing a general model for solving problems.

For example: Jack Ma’s mission when he founded Alibaba was to “make it easy to do business anywhere”, and the subsequent birth of Taobao and Alipay were extensions of this mission.

22. Prioritization Mental Model

Do the most important things, establish priorities, form habits, execute firmly, and avoid bad habits. 20/80 principle. Do the hard and right things, do the hard and important things.

For example: I need to write a report and watch a movie this weekend. I will prioritize writing the report over watching the movie, because compared to the two, writing the report is more difficult and more important.

23. Decision Tree Thinking Model

It consists of a decision diagram and possible outcomes (including resource costs and risks) to create a plan to achieve goals. Decision trees are built and used to assist in decision making and refer to a special tree structure.

For example: In loan risk assessment, a decision tree can predict whether a borrower is able to repay the loan based on factors such as the borrower’s financial status and credit history, and then decide whether to lend to the borrower.

24. Multidimensional Perspective Thinking Model

Avoid being a blind man groping in the dark, look at the problem from different angles, and grasp the key contradictions.

A person who can see through the essence of things in half a second and a person who cannot see through the essence of things in his entire life are destined to have two completely different fates.

For example: When the blind men touched an elephant, each of them only touched part of the elephant, so their description of the elephant was one-sided and should be viewed in combination.

25. Path Dependence Thinking Model

Technological evolution or institutional changes in human society have inertia similar to that in physics.

Once you enter a certain path, whether it is good or bad, you will continue to develop along that path. The force of inertia will make this choice constantly reinforce itself and make it difficult for you to get out.

For example: If we eat a bowl of beef noodles downstairs from our home, we will most likely choose to eat there next time, even if the taste and price of the beef noodles are not better than those in other restaurants.

26. Daily evaluation thinking model

We should evaluate and reflect on ourselves every day, and many people have this awareness. However, many people's reflection and evaluation are fragmented, lacking continuity, and are intermittent.

Therefore, we need a system to continuously get our own feedback. This kind of feedback, accumulated over time, will bring huge benefits.

For example: After completing work each day, review and summarize the day's work content. In the long run, this will significantly improve your work ability.

27. Systematic review of thinking models

System thinking is a basic way of thinking that organically combines principle and flexibility. The principle of integrity is the core of system thinking.

This principle requires people to base themselves on the whole no matter what they do, and to understand and grasp the whole from the interaction process between the whole and its parts, and the whole and the environment.

For example: In order to research stocks, Buffett studied all 5,000 U.S.-listed companies before holding any positions.

28. 101010 Observer Thinking Model

When planning to make a decision, imagine how you will feel about your decision 10 minutes later, 10 months later, and 10 years later.

It can be applied to temporary judgments, major decisions, predicting the future, etc. Keep in mind long-term thinking.

29. Competitive Evolutionary Thinking Model

Many people may think that business should avoid competition as much as possible, and superficially believe that competition means wasting resources, price wars, mutual attacks, etc.

However, in fact, the other side of competition is a way to promote self-evolution. Either die in competition or grow in competition. The so-called "catfish effect" is about this principle.

For example: Taobao and JD.com may seem to be competitors, but it is precisely because of their existence that people have become completely accustomed to online shopping, allowing the companies to gain huge profits.

30. God’s Perspective Thinking Model

When we do something or judge something, our first reaction, or instinctive reaction, is to look at everything from our own perspective. If we are more advanced, we can look at it from the perspective of the relevant people.

If we now look at things from a higher, more objective, and more rational perspective, we will have new discoveries and new areas.

For example, some actions of the protagonist in a movie seem "stupid" to us because we are standing from a global perspective and have a grasp of the actions and information of every character in the movie. However, the perspective of the protagonist in the movie is single and the information he obtains is also one-sided.

Thank you Mr. Munger, you have enlightened the world with your infinite wisdom and insights into life. Salute to a generation of investment masters.

Author: Yan Tao WeChat public account: Yan Tao Sanshou