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teshknowledgenotes · 4 years ago

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Charlie Munger: Academic Economics — Strengths and Weaknesses, after Considering Interdisciplinary Need - Notes

My personal history is interesting because it's deficiencies and my peculiarities eventully created advantages. For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn't stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else's discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that, I was just born with that yen. I was also born with a huge craving for syntheses. And when it didn't come easily, which was often, I would rag the problem, and then when I failed I would put it aside and I'd come back to it and rag it again. It took me 20 years to figure out how and why the Reverend Moon's conversion methods worked. But the psychology departments haven't figured it out yet, so I'm ahead of them.

But anyway, I have this tendency to want to rag the problems. Because WWII caught me. I drifted into some physics and the Air Corps sent me to Caltech where I did a little more physics as part of being made into a meteorologist. And there, at a very young age, I absorbed what I call the fundamental full attribution ethos of hard science. And that was enormously useful to me. Let me explain that ethos.

Under this ethos, you've got to know all the big ideas in all the disciplines less fundamental than your own. You can never many any explanation, which can be made in a more fundamental way, in any other way than the most fundamental way. And you always take with full attribution to the most fundamental ideas that you are required to use. When you're using physics, you say you're using physics. When you're using biology, you said you're using biology. And so on and so on. I could early on see that ethos would act as a fine organizing system for my thought. And I strongly suspected that it would work really well in the soft sciences as well as the hard sciences, So I just grabbed it and used it all through my life in soft science as well as hard science. That was a very lucky idea for me.

Let me explain how extreme that ethos is in hard Science. There is a constant, one of the fundamental constants in physics, known as Boltzmann's constant. You probably all know it very well. And the interesting thing about Boltzmann's constant in that Boltzmann didn't discover it. So why is Boltzmann's constant now named for Boltzmann? Well, the answer was that Boltzmann derived that constant from basic physics in a more fundamental way than the poor forgotten fellow who found the constant in the first place in some less fundamental way. The ethos of hard science is so strong

What’s Wrong with Economics

The nature of this failure is that it creates what I always all, “man with a hammer syndrome” And that's taken from the folk saying: To the man with only a hammer, every problem looks pretty much like a nail. And that works marvellously to sum up all professions, and all departments of academia, and indeed most practical life. The only antidote for being an absolute klutz due to the presence of a man with a hammer syndrome is to have a full kit of tools. You don't have just a hammer. You've got all the tools. And you've got to have one more trick.

You've got to use those tools checklist-style, because you'll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you've got a full list of tools, and go through them in your mind, checklist-style you will find a lot of answer that you won't find any other way. So limiting this big general objection that so disturbed Alfred North Whitehead is very important, and there are mental tricks that help do the job.

A special version of this “man with a hammer syndrome” is terrible, not only in economics but practically everywhere else, including business. It's really terrible in business. You've got a complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, yet there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well practically everybody 1) Over-weights the stuff that can be numbered, because it yields to the statistical techniques they're taught in academia, and 2) doesn't mix in the hard-to-measure stuff that may be more important. That is a mistake I've tried all my life to avoid, and I have no regrets for having done that.

My fifth criticism is too little synthesis in economics. Not only with matters outside traditional economics, but also within economics. I have posed at two different business schools the following problem. I say “You have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down, and when you reduce the price, the volume you can sell goes up. Is that right? That's what you've learned?” They all nod eyes. And I say “Now you tell me several instances when, if you want the physical volume to go up, the correct answer is to increase the price?” And there's this long and ghastly pause. And finally in each of the two business school in which I've tried this. Maybe one person in fifty could name one instance. They come up with the idea that occasionally a higher price acts as a rough indicator of quality and thereby increases sales volumes.

This happened in the case of my friend Bill Ballhaus. When he was head of Beckman Instruments it produced some complicated product where if it failed it caused enormous damage to the purchaser. It wasn't a pump at the bottom of an oil well, but that's a good mental example. And he realized that the reason this thing was selling so poorly, even though it was better than anybody else's product, was because it was priced lower. It made people think it was a low quality gizmo. So he raised the price by 20% or so and the volume went way up. But only one in fifty can come up with this sole instance in a modern business school, one of the business schools being Stanford, which is hard to get into. And nobody has et come up with the main answer that I like. Supposed you raise the price, and use the extra money to bribe the other guy's purchasing agent? Is that going to work? And are there functional equivalents in economics, microeconomics of raising the price and using the extra sales proceeds to drive sales higher? And of course there are a zillion once you've made that mental jump. It's so simple.

Berkshire had this former savings and loan company, and it had made this loan on a hotel right opposite to the Hollywood Park Racetrack. In due time the neighbourhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes, and there were people hanging around the hotel with guns, and nobody would come. We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem, microeconomics problem.

Now we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighbourhood. But instead, we put a sign on the property that said For sale or rent“ and in came, in response to that sign, a who said “I'll spend $200,000 fixing up your hotel, and buy it at a high price on credit if you can get zoning so I can turn the parking lot into a putting green.”

“You've got to have a parking lot in a hotel” we said.

“What do you have in mind?” he said.

“No my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don't care how bad the neighbourhood is going to be because my people are self contained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don't need a parking lot they need a putting green.” So we made the deal with the guy. The whole thing worked beautifully and the loan got paid off, and it all worked out.

Well I've taken you part way through the synthesis. It gets harder when you want to figure out how much activity should be within private firms, and how much should be within the government, and what are the factors that determine which functions are where, and why do the failures occur, and so on and so on.

It's my opinion that anybody with a high IQ who graduated in economics ought to be able to sit down and write a ten page synthesis of all these ideas that's quite persuasive. And I would bet a lot of money that I could give this test in practically every economics department in the country, and get a perfectly lousy bunch of synthesis. They'd talk about transaction costs. They'd click off a little something that their professors gave them and spit it back. But in terms of really understanding how it all fits together, I would confidently predict that most people couldn't do it very well.

By the way if any of you want to try and do this, go ahead. I think you'll find it hard. In this connection, one of the interesting things that I want to mention is that Max Planck, the great Nobel laureate who found Planck's Constant, tried once to do economics. He gave it up. Now why did Max Planck, one of the smartest people who ever live, give up economics? The answer is he said “It's too hard. The best solution you can get is messy and uncertain” It didn't satisfy Planck's craving for order, and so he gave it up. If Max Planck early on realized he was never going to get perfect order, I will confidently predict all of the rest of you are going to have exactly the same result.

Extreme counterproductive psychological ignorance in economics. Here I want to give you a very simple problem. I specialize in simple problems. You own a small casino in Las Vegas. It has fifty standard slot machines. Identical in appearance, they're identical in function. They have exactly the same payout ratios. The things that cause the payouts are exactly the same. They occur in the same percentages. But there's one machine in this group of slot machines, no matter where you put it among the fifty, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine. Now surely I'm not going to have a failure here. What is different about the heavy winning machine? Can anybody do it?

Male: More people play it.

Charles Munger: No, no, I want to know why more people play it. What's different about that machine is people have used modern electronics to give a higher ratio of near misses. That machine is going bar, bar, lemon. Bar, bar, grapefruit, way more often than normal machines, and that will cause heavier play. How do you get an answer like that? Easy, obviously there's a psychological cause: That machine is doing something to trigger some basic psychological response.

If you know the psychological factors, if you've got them on a checklist in your head, you just run down the factors, and boom! You get to one that must explain this occurrence. There isn't any other way to do it effectively. These answers are not going to come to people who don't learn these mental tricks. If you want to go through life like a one-legged man in an ass-kicking contest, why be my guest. But if you want to succeed, like a strong man with two legs, you have to pick up these tricks, including doing economics while knowing psychology.

My ninth objection. Not enough attention to virtue and vice effects in economics. It has been plain to me since early life that there are enormous virtue effects in economics, and also enormous vice effects. But economics get very uncomfortable when you talk about virtue and vice. It doesn't lend itself to a lot of columns of numbers. But I would argue that there are big virtue effects in economics, and also enormous vice effects. It doesn't lend itself to a lot of columns of numbers. But I would argue that there are big virtue effects in economics. I would say that the spreading of double-entry bookkeeping by the Monk, Fra Luca de Pacioli was a big virtue effect in economics. It made business more controllable and it made it more honest. Then the cash register. The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that's very hard to defraud, like a cash register, helps the economic performance of civilization by reducing vice, but very few people within economics talk about it in those terms.

Religion. I say economic systems work better when there's an extreme reliability ethos. And the traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt. We have a charming Irish Catholic priest in our neighbourhood and he loves to say, “Those old Jews may have invented guilt, but we perfected it” And this guilt, derived from religion has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man.

When I was young, everybody was excited by Godel who came up with proof that you couldn't have a mathematical system without a lot of irritating incompleteness in it. Well, since then my betters tell me that they've come up with more irremovable defects in mathematics and have decided that you're never going to get mathematics without some paradox in it. No matter how hard you work, you're going to have to live with some paradox if you're a mathematician.

Well, if the mathematicians can't get the paradox out of their system when the're creating it themselves, the poor economists are never going to get rid of paradoxes, nor are any of the rest of us. It doesn't matter. Life is interesting with some paradox. When I run into a paradox I think either I'm a total horse's ass to have gotten to this point, or I'm fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is.

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nrpin · 3 years ago

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Multidisciplinary at Play in Solving Complex Problem

For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work. – Charlie Munger Multidisciplinary or interdisciplinary approach means to draw ideas from…

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#Climate Change #complex problem #different domains #Interdisciplinary #knolwedge #Learning #Multidisciplinary #multiple disciplines #Pandemic #Perspective #solution design

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moneypedia · 3 years ago

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things2mustdo · 3 years ago

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alertreadingquotes · 7 years ago

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Quickly Eliminate the Big Universe of What Not to Do, Follow up with a Fluent, Multidisciplinary Attack on What Remains, Then Act Decisively When, and only When , the Right Circumstances Appear.

Peter D. Kaufman ,in summarizing Charlie Munger’s approach in Poor Charlie’s Almanack

#charliemunger #peterdkaufman #life #philosophy

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topicprinter · 6 years ago

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Finding startup ideas is a subtle business, and that's why most people who try fail so miserably. It doesn't work well simply to try to think of startup ideas. If you do that, you get bad ones that sound dangerously plausible. The best approach is more indirect: if you have the right sort of background, good startup ideas will seem obvious to you. But even then, not immediately. It takes time to come across situations where you notice something missing. And often these gaps won't seem to be ideas for companies, just things that would be interesting to build. Which is why it's good to have the time and the inclination to build things just because they're interesting.- Paul GrahamAlmost every advice here in this community full of biases. I'm referring to the "What should I do with x?", "What business x do you recommend to get y?" posts. Some will advise starting a local business, some say that creating a tech startup is a waste of time. "BeCaUSE aLl S3lf-M4de MiLli0NaiRes i Kn0W st4rTed w1Th X aNd Y!"If all self-made millionaires started with x and y then it's clear that there was enough demand or they provided something people needed but didn't know it yet, at scale (shoutout to naval). But a higher failure rate in other industries is not a rational reason for avoiding it. And tech is very popular for having a high failure rate with startups. But what's the reason for it? Because people in tech are more logical and think more abstract but stupid when it comes to understanding basic psychology and humans. I don't need a fucking blockchain AI email client for $99/month. Nobody cares, if it ain't saving my fucking time or money (or makes me money), I don't want it.Let's look at the most successful SaaS companies. Dropbox, Shopify, SAP, Salesforce… None of them have a product that is difficult to use. Even someone with an 80 IQ understands it. The technology that's making the product work is very difficult to develop. It must scale & perform well. But none of the customers give a fuck about the technology. All they care about is how easy it is to use and how much value it provides. Technology is still a people game. It's all about the UX and customer service. You can easily reach a 6 figure revenue with an average product but an amazing customer service and UX + marketing. Amazon, Uber, Twitter etc. it's all easy to duplicate. You don't need a tech genius to develop these products on small scale. And if you start scaling your business, you can always hire competent people.There is always a way to provide a better customer service, there are always ways to improve existing products and services. Let it be in local business or tech or commerce. THERE ARE ALWAYS THINGS ONE COULD DO TO IMPROVE OR DO THINGS DIFFERENTLY (such as marketing).So, now the question is: Why do some businesses in the same industry rise faster than others? Connections are useful but it's not everything when you think long-term. You can always build a network as you're building a business (better if you do before).You need to have mental models in your head. There dozens, but only a handful have the biggest impact on decision making. (https://fs.blog/mental-models/) They help you to stay rational and not act stupid.Wesco continues to try more to profit from always remembering the obvious than from grasping the esoteric. … It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying, `It’s the strong swimmers who drown.’- Charlie MungerCharlie Munger (one of the most intelligent people you'll ever read about) doesn't try to be the most intelligent businessman. All he's focusing on is simplicity, obviousness and not letting emotions affect his decision making. He understand that humans on average are very simplistic creatures and it doesn't require a blockchain AI email client to make big bucks. It's just about having a multidisciplinary thinking. Taking basic concepts from physics, economics, biology, psychology and being able to apply them in business. (elon musk uses his expertise from industry X to solve a problem in industry Y)Focus on the most important 3-5 variables in your business and maximize/minimize them to achieve the greatest results. Figure out what matters and what doesn't. And that's the best way to build a business without luck.When you think about the most successful business, then it should be clear that most of the time, they are very simple and obvious but complex in the execution.Also, once you've found your niche, stop spreadsheet-fucking and pull the fucking trigger.

#/r/entrepreneur #reddit

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thedeadshotnetwork · 8 years ago

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I've studied billionaires and interviewed neuroscientists, and I've created the ultimate framework for making better decisions Spencer Platt/Getty Images This post from Matt Bodnar originally appeared on Quora as an answer to the question " Which decision-making strategies yield the best results? " Billionaires like Warren Buffett believe in the power of compounding knowledge through constantly learning and studying. Charlie Munger believes that a successful entrepreneur needs to be multidisciplinary. Successful people tend to use mental models, psychological concepts or tidbits of wisdom that in some way explains how the world works. I've studied billionaires, talked with neuroscientists, psychologists, astronauts, and more — and from all of those conversations — I've put together a framework I call "the Art of Decision-making." The Art of Decision-making has 4 key components: Harness the power of compounding by building on your knowledge and getting 1% smarter every day Focus on and study things that don't change or change very slowly over time — master the principles and you can invent the tactics Follow the path of worldly wisdom and focus on acquiring multidisciplinary knowledge across academic disciplines like psychology, mathematics, and biology Build a toolkit of mental models so that you can better understand reality and achieve your goals. The more time and energy you invest in your decision-making ability, the more it continues to build and build on itself by harnessing the power of compounding Becoming a master at the Art of Decision-making cascades through everything you do. It's not incremental growth in your knowledge, it's exponential growth. Einstein described the power of compounding as the "eight wonder of the world" — and if you've ever crunched some numbers on a compound interest calculator you know how powerful compounding can be over time. If you get 1% better at thinking — at understanding how the world works, how human behavior works, how economic systems function, and understanding your own brain — that 1% improvement impacts everything you do. You're not just going to benefit at work, but when you deal with your spouse, or negotiate the purchase of a new car, or decide where to invest your savings. You're entire life is essentially a long chain of decisions. These small incremental improvements in decision-making aren't noticeable at first, but they eventually result in a huge transformation in how you think, act, and understand the world. Here's a quote from our dear friend Warren Buffett, when asked what the key to success was he pointed to a stack of books and said: "Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it." Nati Harnik/AP S pend your time mastering the core principles that underpin psychology and human behavior, because those things never change A key piece of building a compounding machine of knowledge — that over time will let you vault over almost everyone on the planet in terms of sheer brain power — is focusing on knowledge that doesn't change or changes very slowly over time. Many people focus their time and energy on learning rapidly changing tactics, the minutiae, highly specific actions and pieces of advice without a broader context. As Sun Tzu once said "tactics without strategy is the noise before defeat" and Ralph Waldo Emerson said: "As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble." People gobble up the latest article "10 Things You Can Do To Improve Your Email Opt-In Rate" but the problem with studying knowledge like that is that it changes — it doesn't give you something to build up and build upon over time — in 18 months all of the advice in that article will be useless. If you spent a year in 2004 reading every book on high performance banner ads — none of that knowledge would be relevant today. But if you flip that, if you study the strategy — spend your time mastering the core principles that underpin psychology and human behavior, reading things like the book Influence by Robert Cialdini — you can invent marketing tactics on the fly — because you understand the bigger picture. And that knowledge changes very slowly over time — it's a core foundation that you can build upon and grow from. This also means that the best kind of knowledge to focus on and spend your time investing in is not ephemeral junk like facebook, twitter, and buzzfeed, but the core pillars of human knowledge and the major academic disciplines, which brings us to the principle of Worldly Wisdom. Cultivate worldly wisdom by collecting knowledge from lots of different disciplines and areas of life The next key component of The Art of Decision-making is cultivating what Charlie Munger (the billionaire business partner of Warren Buffett) called Worldy Wisdom. Here's a great description of the concept of worldly wisdom from Robert Griffin's book " Charlie Munger: The Complete Investor: " Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines — psychology, history, mathematics, physics, philosophy, biology, and so on — a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts. Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art, in which he states that "each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom." Being multidisciplinary means collecting knowledge from lots of different disciplines and areas of life and building an approach to understanding the world that integrates all that knowledge into a cohesive framework. In order to get what you want you have to understand how to get there, and in order to do that, you have to understand how things work — things like human behavior, economic systems, money, biology, and mathematics. Josh Kaufman explains this beautifully in The Personal MBA : "Every business fundamentally relies on two factors People and Systems…To understand how businesses work, you must have a firm understanding of how people tend to think and behave — how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others. Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it's possible to find ways to improve existing systems, whether you're dealing with a marketing campaign or an automotive assembly line." The problem is that too many people have a very narrow focus — they master one piece of the puzzle, say marketing or finance, and think that has all the answers. But reality is messy and complex and interwoven. Most big events in our lives aren't caused by one simple explanation; they are the result of an interplay of factors. A multidisciplinary approach intertwines and strengthens itself by enabling you to pull from different disciplines of knowledge and bring the exact tools necessary to understand and solve tough challenges and to achieve complicated and difficult goals. As Peter Bevelin writes in Seeking Wisdom : "Since no single discipline has all the answers we need to understand and use the big ideas from all the important disciplines: Mathematics, physics, chemistry, engineering, biology, psychology, and rank and use them in order of reliability." Mark Brake / Getty Images A mental model is a concept, an idea, a tidbit of wisdom that in some way explains how the world works Now its time to go deeper into Mental Models, which we briefly touched on earlier. A mental model is simply a concept, an idea, a tidbit of wisdom that in some way explains how the world works. Mental models are one of the cornerstones of high leverage thinking. In fact, Charlie Munger puts it pretty bluntly: "Developing the habit of mastering the multiple models which underlie reality is the best thing you can do." When a billionaire tells me something is "the best thing I can do" — I listen. And I've spent a tremendous amount of time studying billionaires, people like Charlie Munger, and mental models so that you don't have to. A few examples of mental models would be concepts like the 80/20 principle and compounding , both of which we discussed earlier, as well as concepts like expected value and base rates from mathematics, notions such as confirmation bias, anchoring, and social proof from psychology, the prisoner's dilemma from game theory , or the concept of natural selection from biology. Elon Musk has another great way of describing this. "One bit of advice: it is important to view knowledge as sort of a semantic tree — make sure you understand the fundamental principles, ie the trunk and big branches, before you get into the leaves / details or there is nothing for them to hang on to." – Elon Musk While this may seem a bit overwhelming, the good news is that you don't have to become an expert in physics and chemistry. The whole idea is to master the big ideas. Take the major principles from a 101 textbook and combine them into a framework of mental models that offers a rich and deep tool kit to look at, understand, and manipulate reality to your ends. Checklists and decision journals both allow you to step outside your head, use an external system to eliminate bias from your thinking I will also share two specific strategies for making better decisions. Checklists Decision journals Checklists and decision journals both allow you to step outside your head, use an external system to eliminate bias from your thinking and make sure you cover all possible mental models that may address a particular problem. "No wise pilot, no matter how great his talent or experience, fails to use his checklist." - Charlie Munger Checklists are a vital tool to get out of your own head and make sure you haven't missed anything. Even experts like doctors routinely miss basic things like washing their hands, and implementing checklists in hospitals has saved thousands of lives as a result. Decision journals help make your thought process clear and mitigate cognitive biases. Biases like hindsight bias and creeping determinism can disrupt your thinking and make your analysis of an event incorrect after the fact. Michael J. Mauboussin, the Global Head of Strategy for Credit Suisse, describes decision journals as follows: "Most professionals and businesspeople don't keep track of how good their decisions were. They keep track of how things turned out as the result of their decisions. Over the long haul, of course, good decisions provide a much higher chance of desirable outcomes. But in the short run the link between decisions and results can be very loose. The primary way to focus attention on the decision-making process is to keep a journal that documents your thinking. This is how you impose accountability on yourself. Here's what you do. Go out and get a notebook. When you are making a consequential decision in your portfolio, business, or life, write down what you expect to happen, why you expect it to happen, and attach probabilities to your views. If you are so inclined, also jot down how you feel physically and emotionally. Make sure you note the date and time." A decision journal freezes your thoughts in time so you can go back later and see where you went wrong, and what you could have done instead. This provides you with an opportunity to improve your thinking in an iterative way. Months after a decision has taken place, you can go back and review what you thought, see where your thinking was wrong, and start correcting it. Combine all these factors to become a high-level thinker When you combine all of these factors, you are putting your brain on a high leverage rocket ship — and with the power of compounding you will start leaving other people in the dust and be well on your way to mastering The Art of Decision-making. NOW WATCH: 'Shark Tank' star Barbara Corcoran: How I went from a 10-kid household and more than 20 jobs to become a real estate mogul November 14, 2017 at 03:46PM

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tortuga-aak · 8 years ago

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I've studied billionaires and interviewed neuroscientists, and I've created the ultimate framework for making better decisions

Spencer Platt/Getty Images

This post from Matt Bodnar originally appeared on Quora as an answer to the question "Which decision-making strategies yield the best results?"

Billionaires like Warren Buffett believe in the power of compounding knowledge through constantly learning and studying.

Charlie Munger believes that a successful entrepreneur needs to be multidisciplinary.

Successful people tend to use mental models, psychological concepts or tidbits of wisdom that in some way explains how the world works.

I've studied billionaires, talked with neuroscientists, psychologists, astronauts, and more — and from all of those conversations — I've put together a framework I call "the Art of Decision-making."

The Art of Decision-making has 4 key components:

Harness the power of compounding by building on your knowledge and getting 1% smarter every day

Focus on and study things that don't change or change very slowly over time — master the principles and you can invent the tactics

Follow the path of worldly wisdom and focus on acquiring multidisciplinary knowledge across academic disciplines like psychology, mathematics, and biology

Build a toolkit of mental models so that you can better understand reality and achieve your goals.

The more time and energy you invest in your decision-making ability, the more it continues to build and build on itself by harnessing the power of compounding

Becoming a master at the Art of Decision-making cascades through everything you do. It's not incremental growth in your knowledge, it's exponential growth. Einstein described the power of compounding as the "eight wonder of the world" — and if you've ever crunched some numbers on a compound interest calculator you know how powerful compounding can be over time.

If you get 1% better at thinking — at understanding how the world works, how human behavior works, how economic systems function, and understanding your own brain — that 1% improvement impacts everything you do. You're not just going to benefit at work, but when you deal with your spouse, or negotiate the purchase of a new car, or decide where to invest your savings. You're entire life is essentially a long chain of decisions.

These small incremental improvements in decision-making aren't noticeable at first, but they eventually result in a huge transformation in how you think, act, and understand the world.

Here's a quote from our dear friend Warren Buffett, when asked what the key to success was he pointed to a stack of books and said:

"Read 500 pages like this every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it."

Nati Harnik/AP

Spend your time mastering the core principles that underpin psychology and human behavior, because those things never change

A key piece of building a compounding machine of knowledge — that over time will let you vault over almost everyone on the planet in terms of sheer brain power — is focusing on knowledge that doesn't change or changes very slowly over time.

Many people focus their time and energy on learning rapidly changing tactics, the minutiae, highly specific actions and pieces of advice without a broader context. As Sun Tzu once said "tactics without strategy is the noise before defeat" and Ralph Waldo Emerson said:

"As to methods, there may be a million and then some, but principles are few. The man who grasps principles can successfully select his own methods. The man who tries methods, ignoring principles, is sure to have trouble."

People gobble up the latest article "10 Things You Can Do To Improve Your Email Opt-In Rate" but the problem with studying knowledge like that is that it changes — it doesn't give you something to build up and build upon over time — in 18 months all of the advice in that article will be useless. If you spent a year in 2004 reading every book on high performance banner ads — none of that knowledge would be relevant today.

But if you flip that, if you study the strategy — spend your time mastering the core principles that underpin psychology and human behavior, reading things like the book Influence by Robert Cialdini — you can invent marketing tactics on the fly — because you understand the bigger picture. And that knowledge changes very slowly over time — it's a core foundation that you can build upon and grow from.

This also means that the best kind of knowledge to focus on and spend your time investing in is not ephemeral junk like facebook, twitter, and buzzfeed, but the core pillars of human knowledge and the major academic disciplines, which brings us to the principle of Worldly Wisdom.

Cultivate worldly wisdom by collecting knowledge from lots of different disciplines and areas of life

The next key component of The Art of Decision-making is cultivating what Charlie Munger (the billionaire business partner of Warren Buffett) called Worldy Wisdom.

Here's a great description of the concept of worldly wisdom from Robert Griffin's book "Charlie Munger: The Complete Investor:"

Munger has adopted an approach to business and life that he refers to as worldly wisdom. Munger believes that by using a range of different models from many different disciplines — psychology, history, mathematics, physics, philosophy, biology, and so on — a person can use the combined output of the synthesis to produce something that has more value than the sum of its parts. Robert Hagstrom wrote a wonderful book on worldly wisdom entitled Investing: The Last Liberal Art, in which he states that "each discipline entwines with, and in the process strengthens, every other. From each discipline the thoughtful person draws significant mental models, the key ideas that combine to produce a cohesive understanding. Those who cultivate this broad view are well on their way to achieving worldly wisdom."

Being multidisciplinary means collecting knowledge from lots of different disciplines and areas of life and building an approach to understanding the world that integrates all that knowledge into a cohesive framework.

In order to get what you want you have to understand how to get there, and in order to do that, you have to understand how things work — things like human behavior, economic systems, money, biology, and mathematics. Josh Kaufman explains this beautifully in The Personal MBA:

"Every business fundamentally relies on two factors People and Systems…To understand how businesses work, you must have a firm understanding of how people tend to think and behave — how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others.

Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it's possible to find ways to improve existing systems, whether you're dealing with a marketing campaign or an automotive assembly line."

The problem is that too many people have a very narrow focus — they master one piece of the puzzle, say marketing or finance, and think that has all the answers. But reality is messy and complex and interwoven. Most big events in our lives aren't caused by one simple explanation; they are the result of an interplay of factors.

A multidisciplinary approach intertwines and strengthens itself by enabling you to pull from different disciplines of knowledge and bring the exact tools necessary to understand and solve tough challenges and to achieve complicated and difficult goals. As Peter Bevelin writes in Seeking Wisdom:

"Since no single discipline has all the answers we need to understand and use the big ideas from all the important disciplines: Mathematics, physics, chemistry, engineering, biology, psychology, and rank and use them in order of reliability."

Mark Brake / Getty Images

A mental model is a concept, an idea, a tidbit of wisdom that in some way explains how the world works

Now its time to go deeper into Mental Models, which we briefly touched on earlier. A mental model is simply a concept, an idea, a tidbit of wisdom that in some way explains how the world works. Mental models are one of the cornerstones of high leverage thinking. In fact, Charlie Munger puts it pretty bluntly:

"Developing the habit of mastering the multiple models which underlie reality is the best thing you can do."

When a billionaire tells me something is "the best thing I can do" — I listen. And I've spent a tremendous amount of time studying billionaires, people like Charlie Munger, and mental models so that you don't have to.

A few examples of mental models would be concepts like the 80/20 principle and compounding, both of which we discussed earlier, as well as concepts like expected value and base rates from mathematics, notions such as confirmation bias, anchoring, and social proof from psychology, the prisoner's dilemma from game theory, or the concept of natural selection from biology.

Elon Musk has another great way of describing this.

"One bit of advice: it is important to view knowledge as sort of a semantic tree — make sure you understand the fundamental principles, ie the trunk and big branches, before you get into the leaves / details or there is nothing for them to hang on to." – Elon Musk

While this may seem a bit overwhelming, the good news is that you don't have to become an expert in physics and chemistry. The whole idea is to master the big ideas. Take the major principles from a 101 textbook and combine them into a framework of mental models that offers a rich and deep tool kit to look at, understand, and manipulate reality to your ends.

Checklists and decision journals both allow you to step outside your head, use an external system to eliminate bias from your thinking

I will also share two specific strategies for making better decisions.

Checklists

Decision journals

Checklists and decision journals both allow you to step outside your head, use an external system to eliminate bias from your thinking and make sure you cover all possible mental models that may address a particular problem.

"No wise pilot, no matter how great his talent or experience, fails to use his checklist." - Charlie Munger

Checklists are a vital tool to get out of your own head and make sure you haven't missed anything. Even experts like doctors routinely miss basic things like washing their hands, and implementing checklists in hospitals has saved thousands of lives as a result.

Decision journals help make your thought process clear and mitigate cognitive biases. Biases like hindsight bias and creeping determinism can disrupt your thinking and make your analysis of an event incorrect after the fact.

Michael J. Mauboussin, the Global Head of Strategy for Credit Suisse, describes decision journals as follows:

"Most professionals and businesspeople don't keep track of how good their decisions were. They keep track of how things turned out as the result of their decisions. Over the long haul, of course, good decisions provide a much higher chance of desirable outcomes. But in the short run the link between decisions and results can be very loose.

The primary way to focus attention on the decision-making process is to keep a journal that documents your thinking. This is how you impose accountability on yourself. Here's what you do. Go out and get a notebook. When you are making a consequential decision in your portfolio, business, or life, write down what you expect to happen, why you expect it to happen, and attach probabilities to your views. If you are so inclined, also jot down how you feel physically and emotionally. Make sure you note the date and time."

A decision journal freezes your thoughts in time so you can go back later and see where you went wrong, and what you could have done instead. This provides you with an opportunity to improve your thinking in an iterative way.

Months after a decision has taken place, you can go back and review what you thought, see where your thinking was wrong, and start correcting it.

Combine all these factors to become a high-level thinker

When you combine all of these factors, you are putting your brain on a high leverage rocket ship — and with the power of compounding you will start leaving other people in the dust and be well on your way to mastering The Art of Decision-making.

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