Bad decisions and silly mistakes are part of running a business. They're impossible to avoid. But we can implement safeguards, and one of the best ways to do this is by applying mental models.
After reading books like The Road Less Stupid, The Great Mental Models, and anything by Nassim Taleb, I've come to appreciate the role of frameworks in guiding our decisions. I've started using various mental models to help me make better business decisions. Here, I'll walk through my favorites, and you can decide if it makes sense to apply them to your decisions, too.
What is a mental model?
I've found that everyone describes mental models differently. I like to think of them as simple frameworks for how things work.
Mental models are cognitive tools that help us make sense of the world, analyze situations, and make informed decisions. They can be derived from all sorts of disciplines, including physics, engineering, psychology, philosophy, and economics. And they can be used in various situations, but I find them particularly helpful in business since the stakes are high and the decisions can lead to outsized consequences.
7 mental models to experiment with in your business
1. First principles
The first principles mental model is about deconstructing complex ideas into fundamental truths. It originated from the philosopher Aristotle, who defined first principles as "the first basis from which a thing is known." I learned about the concept from an interview with Elon Musk:
"Boil things down to the most fundamental truths and say, 'Ok, what are we sure is true, or as sure as possible is true?' And then reason up from there."
By leveraging first principles, Musk was able to learn that the cost of a rocket was two percent of the asking price—this basic thought exercise contributed to the success of SpaceX. Not that we should all aspire to be Elon Musk, but if you find yourself trying to solve complex problems, it could be worth approaching them from first principles and generating your own unique conclusions.
2. Second-order thinking
Second-order thinking is the ability to look past the immediate consequence of a decision and evaluate the longer-term effects by asking the question "And then what?"
Regardless of the size of the problem, thinking about the second-order consequences is invaluable, which is why I like to apply it to most decisions I make.
Of course, it's harder to be a second-order thinker when the problems are complex or unfamiliar. People know that the second-order consequence of eating too much sugar is, for example, diabetes or heart disease. But it's much more difficult to establish the second-order consequences of investing in a large marketing project that you haven't done before.
Read about the cobra effect—a great example of why second-order thinking is so important.
3. Inversion thinking
I learned this one from Charlie Munger (supposedly): "All I want to know is where I'm going to die, so I'll never go there."
Inversion thinking involves flipping the script and looking at the problem from the opposite view. Instead of focusing on how you can achieve success, you consider what would cause failure. It's a way of challenging your thinking to gain new insights.
For example, if your goal is to grow your business by 10% this year, you might ask: "What would cause my business to definitely not grow by 10% this year?" Then, do the opposite of those things.
4. Confirmation bias
Confirmation bias is our tendency to search for, favor, and give greater evidence to something that fits our beliefs. If you're subconsciously set on making a business decision, it's going to be much easier to find evidence convincing you to pull the trigger. This is why I like to ask:
Why might I be wrong?
Why do I want this to be true?
If I were on the other side, what arguments would I present?
I've also found it helpful to ask for a second opinion from someone who doesn't have any skin in the game.
5. Margin of safety
Your business idea might flop, the investment you made could tank, or you could waste years of your life on something. It's impossible to completely avoid, and it's exactly why having a margin of safety is so important, especially in business.
According to James Clear, the margin of safety is an engineering concept that describes the ability of a system to withstand greater loads than expected. Or as Keith Cunningham describes it: keeping some powder dry.
So before you make another business decision, evaluate what could go wrong, and how you'll hedge against it if it does.
6. Leverage
I think leverage is one of the most powerful mental models. It appeared on my radar through Naval Ravikant's tweetstorm on happiness and wealth and has stuck with me ever since.
Code and media are permissionless leverage. They're the leverage behind the newly rich. You can create software and media that works for you while you sleep.
— Naval (@naval) May 31, 2018
Leverage is a scientific term derived from the lever, a simple machine consisting of a beam pivoted at a fixed hinge, or fulcrum. The lever is used to amplify an input force to provide a greater output force. This concept is often applied to business settings as well. The idea is to make decisions where a small input or effort can result in a significant output or impact.
Understanding and applying leverage is critical in business since it helps us make leaps and bounds with fewer resources.
7. The map is not the territory
This mental model originated from the Polish-American scientist and philosopher Alfred Korzybski. He coined two phrases: "The map is not the territory" and "The word is not the thing." Both emphasize the distinction between a representation (the map) and the actual reality (the territory). The idea is that our mental models, beliefs, and perceptions are not the same as the external, objective reality they attempt to represent.
In business, I find it incredibly easy to look at a case study or interview and try to replicate the same thing and expect similar results. As you can imagine, this rarely happens—and if it does, it's not always directly attributed to the "map." This is because the map is not the territory. Someone else's route to success, which may have taken years, has been condensed into a map (i.e., a book or podcast), and we need to treat it as such.
Other mental models worth exploring
This isn't an extensive list of all the mental models available, of course. It might not even contain any models that resonate with you. (If you're looking for a more exhaustive list, consider reading The Great Mental Models.)
I'll leave you with a few more mental models I think are particularly helpful in a business setting—if they click for you, spend some time reading more about them.
The Pareto principle: This is the 80/20 rule, where 20% of your efforts lead to 80% of the results.
Parkinson's law: This rule suggests that work will always take the total allotted time to complete.
Opportunity cost: This is about understanding what you lose out on when you make a choice.
The Red Queen hypothesis: This one says staying in the same place actually means you're falling behind—evolution matters.
Circle of competence: This is the subject area in which you have an edge, and it's where you should operate.
Applying mental models in business
Having a list of mental models isn't helpful if you never apply them. So here are three ways you can remember to implement mental models in your business:
Create memorable soundtracks or phrases. It's hard to remember every single mental model and how it works. I find it more helpful to create sayings and phrases that are easy to remember—like "keep some powder dry," which refers to having a margin of safety.
Use Socratic questions. Socratic questioning is used to stimulate critical thinking through a series of open-ended questions. This method helps explore and uncover underlying assumptions and perspectives, and from there, you can reference your mental models to guide decision making.
Conduct frequent retrospectives. Retros are common practice in project management: a team spends time logically examining a past project and how it went. It's a great way to identify opportunities and potentially see flaws in your decision-making.
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