The power of mental models for better decision-making
We all face the challenge of making decisions with limited data. Some will say it’s the nature of leadership jobs, but there must be ways to help you improve your decision-making skills in the face of incomplete data and uncertainty! I’ve personally experienced many nail-biting situations when handling complex problems. Here’s one from the past few years:
We’re six months from the holiday season, securing our products’ retail placement. The internal war over forecasts is raging:
- Product management is bullish and wants to increase the forecast based on the favorable reaction from major retailers. It’s worth taking the risk as we have the best product out there, and it will save a lot in expedited freight if we build now, not in September.
- Sales are more conservative. They fear their quota will increase if they show too much enthusiasm this early in the process. We can always expedite freight later if customer demand is truly here later in the year. It doesn’t impact our commission, and we’ll look like heroes for beating the plan.
- Operations are ultra-conservative. The CFO asked them to tighten inventory metrics in the light of our latest earnings showing a deteriorating balance sheet.
Who’s right? If you follow product management, you’ll have to accept the risk of unsold inventory at the end of the season and the financial consequences. If you follow Operations, you’ll risk stock-outs and disgruntled retailers with no products on their shelves, exposing you to lost market share.
The truth is, decision-makers need to place “educated” bets one way or another, and it becomes quickly overwhelming. That’s where mental models come in handy and simplify your options. Mental models are not necessarily the panacea, but let’s look at the best ways you can apply them to your thinking framework:
Why are mental models important?
First, let’s define further what mental models are. Probably the best definition I found out there came from Julian Shapiro on Julian.com and his excellent blog deconstructing how things work:
“Mental models are frameworks for thinking. They simplify complex things so your brain can reason through them. They are shortcuts through the noise. You use them to make good decisions without needing to know everything about a situation.”
Julian Shapiro
You can quickly see the power of mental models in simplifying a problem. Using the right combination of mental models, you can ask yourself the right questions, understand how things work, and become a better decision-maker. But I trust you’ve also noticed the risk of oversimplifying or missing the mark if you stick to the wrong model for a specific situation or don’t look at both sides of the equation.
Some great mental models for business leaders
Mental models exist in a variety of domains like numeracy (Compounding, the law of large numbers…), physics (relativity, thermodynamics…), biology (evolution, ecosystems…). There are as many mental models as there are ways to think about our world!
Here’s a shortlist of a few mental models to consider when you’re trying to optimize a system or need to decide as a business leader:
- First Principles: the idea is to break down complicated problems into essential elements and then reassemble them from the ground up. It helps avoid thinking by analogy. That’s a fundamental principle people like Elon Musk and teams followed when they tackled the SpaceX project.
- The Pareto rule (80/20): I already referenced it a lot as it saved me more than once, at least directionally. The principle is that things in life are not evenly distributed, and typically 20% will provide 80% of the output (like 20% of your customer base, bringing 80% of your profit).
- First-Conclusion Bias: our tendency to settle on first conclusions leads to accept erroneous results and cease asking questions; you can counter it with some useful and straightforward mental routines.
- Opportunity Costs: doing one thing means not being able to do another. It’s a world of trade-offs, and the concept of opportunity cost rules all. In other words, “there is no such thing as a free lunch.”
Mental models in practice
There are excellent resources for you to consult if you want to dig further into established mental models. If I were to choose ONE, I’d recommend Farnam Street’s comprehensive work, digging into more than 109 models (and counting). It’s an imposing work that will help you ranging from general thinking concepts to more specialized physics, biology, or numeracy models.
Also, please note, you too can come up with your mental models. Here’s a way for you to go about it:
- List the decisions you’re making that typically take you longer and are more complex.
- Write down how and why you made these decisions
- Highlight the (positive) outcome typically reached.
That’s it! You now have another mental model for the next time you have to make a similar decision. You will become a better thinker and speed things up considerably.
Conclusion and "ONE TO-DO" for you
“To a man with a hammer, every problem looks like a nail”
Charles T. Munger
I like this quote a lot, as it sums up nicely how limited your decision-making can be if you only use one or two mental models. Mental models are such remarkable frameworks to approach any problem faster and better. The more models you have, the more equipped you’ll be to assess any situation. The secret is the discipline of adding and practicing more mental models so that you don’t end up like the man with the hammer!
One simple thing you can do today is think of which mental model you should add to your own toolset. Just think of recent decisions you’ve made on complex problems that led to a positive outcome and try to extract the associated model. Write down how and why you decided and keep this new mental model handy for the next time a similar decision to make comes your way. Make it a regular practice, and you’ll soon become a much stronger thinker!