Useful Mental Models
Three Things #60: March 19, 2023
Over the years I’ve developed a number of mental models to help navigate life, process information and make decisions. Some of these are quite straightforward and common, while some are probably a bit more quirky and unique.
I find that a small number of models can explain a surprising amount about the way the world works. No model is perfect and no model is complete, but a useful model is an extraordinarily powerful tool to help understand the world and aid in decision making. I want to share three of my favorite such models.
Thing #1: 80/20
Otherwise known as the Pareto principle, the “80/20 rule” is probably the single most useful mental model I know. Put simply, it says that 80% of the outcome can be achieved through 20% of the work. By extension, squeezing out the last 20% actually takes 80% of the work. The underlying math has to do with power law distributions (most things are not linearly distributed!) and the fact that, in a Pareto distribution (a classic “long tail” distribution) you can cover 80% of cases with just the first 20% of the distribution. This is also known as rapidly diminishing marginal returns.
Nearly everyone reading this is probably familiar with the Pareto Principle in one form or another, so rather than explaining it further—there really isn’t a whole lot more to say about the model itself!—I’ll give some examples of ways in which I find it useful.
When attending a conference or other social gathering, you only need to meet 20 people to achieve 80% of the outcome you’d achieve from meeting 100. Note that I’m intentionally leaving “outcome” undefined and vague, since the rule works regardless of your personal preferences and goals. It could be the breadth of subject matter of conversations, the diversity of interlocutors, or the quality of connections. The rule applies equally to all such cases, because they’re all more or less subject to a Pareto distribution.
For that matter, you also don’t need to attend dozens of conferences per year. Pick the top few and you’ll achieve 80% of what you would’ve if you’d attended all of them, for 20% the cost. This same principle is true of dating, market research and customer feedback, raising money, and of all sorts of scenarios involving meeting people. The first 20 people you speak to will tell you a lot, and nearly all of them will have something interesting and novel to say. But once you’ve spoken to those first 20, you’ll begin hearing the same things again and again, and will learn a lot less from the next 80 interviews than you did from the first 20.
It also works for investing. Modern portfolio theory dictates that you’ll get 80% of the benefits of diversification if you invest in 20 different assets, e.g., stocks, that you would from investing in 100. It’s true for health. Your diet and workout regimen don’t need to be perfect, and you don’t need a perfect eight hours of sleep every single night. Eat reasonably well, sleep well most of the time, let yourself cheat from time to time, and you’ll achieve 80% of what you’d get from a perfect, optimal diet and sleep regimen for much less work (and a lot more fun). Do a strenuous, 20-30 minute workout each day and you’ll get 80% the benefit you’d get from working out 5x as much.
Learning the first 80% of what there is to know about a thing, or a field, will take you 20% of the time that it would take to become a world class expert. Think about the difference in time and energy required to complete a master’s degree vs. a doctorate. Similarly, you can achieve an 80% level of skill in a task in 20% of the time it would take to become a world class master. (This is how I feel about my running. My goal is to achieve speed that’s 70-80% that of professional runners; anything more than this would be too enormously time consuming to fit into my busy schedule.)
In almost every task you set yourself to, your goal should be 80% perfection. The simple reason is that you can do much, much more and be way more productive overall if your goal is 80% perfection rather than 100%. You can do around five things 80% perfectly in the same time it would take you to do one thing perfectly.
To be clear, I’m not saying that you should never pour your heart and soul into something 100% and try to achieve perfection. But you should do this sparingly and be fully aware of the commitment of time and energy, and the inefficiency, involved. You should pick one or two things to be world class at and pour yourself into them; for literally everything else you should stop at 80%! If you’re unwilling or unable to do this (as I used to be), you must understand that it will hinder you and severely limit the breadth of what you’re able to accomplish.
As a perfectionist, one of the hardest facts for me to accept as I’ve progressed in my career is that I cannot do everything perfectly, and if I want to get anything at all done, I need to be satisfied with 80%. With practice I’ve been able to overcome this substantial mental obstacle. To be clear, I wouldn’t even be writing this if I hadn’t, since there’s no way I can achieve 100% satisfaction with these articles before publishing them without a much greater time commitment to writing than I can possibly muster at the moment.
I apply this principle every day in nearly all the things I do, and I recommend that you do the same. Once you understand this and begin putting it into practice there’s no turning back. You begin seeing and making use of this model everywhere.
Thing #2: Going Against the Grain
It’s easy to say, “don’t follow the crowd” or “go against the grain,” but doing so in practice is anything but easy for a thousand reasons! It should be self-evident but the tradeoff is one between risk and opportunity. Following the crowd is the conservative choice. Most people are risk averse social creatures. Most people don’t want to make bold, contrarian decisions; they’re content to go along with majority social consensus. It’s easier and less risky. Following the crowd means you won’t achieve an optimal outcome, but nor will you get in real trouble—since most people are unlikely to choose a really bad course, and even if they do you’ll be definition have many others there to support you either way.
Following the crowd means driving during rush hour. It means taking busy flights at the start and end of the workweek and during peak summer and holiday travel season to overcrowded, touristy destinations. It means buying the meme stock that everyone else is buying (after it’s already oversold). It means driving the same car as everyone else, going to the same university, working in the same industry. None of these decisions will ruin your life, but nor will they expose you to great opportunity or to a full experience of everything that life has to offer (the discovery of which requires deviating from the majority).
By contrast, going against the grain is scary. There’s something about our human nature that makes us want to do what the people around us are doing, even when that behavior isn’t rational or optimal, or when we may disagree with it. You have to have a great deal of confidence to boldly go against the grain and deviate from the behavior of your family, friends and peers.
For those who are willing and able to deviate, the rewards can be large. The most obvious examples are financial. You don’t want to be investing in the same things at the same time as everyone else, nor do you want to be selling when everyone else is selling. The most profitable investments nearly always involve making contrarian decisions like buying when others are afraid to do so, or selling during a period of irrational exuberance when everyone else is buying. While these contrarian decisions can often pay off in the long run, I speak from plenty of experience when I say that they’re always a bit frightening in the moment.
By the same token it makes sense to join a high-potential industry or company ahead of the crowd. That way, if the bet pays off, when others arrive you’ll already be in a comfortable, established position and, other things equal, the more other people arrive the better off you’ll be. It makes sense to invest early not only in stocks and opportunities but in people, too. Find the rising star, the diamond in the rough, the high-potential talent, before the world discovers them. Become friends, offer advice and a helping hand, and your “investment” might pay off handsomely later.
Of course not every investment pays off and not every bet works out in your favor. The point is to make diversification and the law of large numbers work in your favor. If you place enough such “early stage” bets and learn from the ones that don’t pay off, over time your “portfolio”—whether it be actual securities, relationships, or areas of expertise and a social network you’ve developed—will grow into something valuable. This is precisely the venture capital model of portfolio construction. Many or most such risky bets will fail, but you only need one or two home runs to make it big.
While not exactly rocket science, this is one of the most useful mental models that I use more or less every day. It works well in spite of hardly being a secret because actually putting it into practice is so hard and most people are too lazy or too afraid to do so most of the time. Whenever possible I take early or late flights and travel off-season. I visit out of the way destinations and stay in unpopular neighborhoods when I visit popular places. In general I don’t care much what the world thinks of me or my work; I’m excited when people tell me I’m crazy or out of my mind because it means I’m doing something few others have tried or would dare. That’s usually a sign that I’m onto something. Being contrarian has become not only an investment strategy but in fact a way of life for me, to the point where I’m uncomfortable in crowds and crowded markets!
This strategy won’t work for everyone all the time, but even when staying well within the mainstream it’s a helpful mental framework. It’s helpful to be cognizant of the decisions we’re making every day, and in particular of how mainstream or contrarian they are and of how this affects our appetite for risk. If you claim to have a high risk tolerance but are consistently making mainstream decisions, consider acting a little more contrarian! I promise it makes life more interesting and it might just pay off socially and economically.
Thing #3: Rocking the Boat
As far as I know this model doesn't have a well-known name, but it's not complicated and I suspect many will have thought of it themselves or know it by a different name. It's another model that I use every day and find exceptionally useful in understanding and responding to the world around me. The basic model could be derived from network theory and theory of complex systems, but I developed it before I'd heard of either of those things.
Our lives are complex systems that by definition involve lots of moving parts. These include the people around us, organizations and institutions, financial markets, the technology tools we use and rely on every day, and of course mother nature, each of which is a complex system in its own right. (A complex system may itself be composed of multiple other complex systems, in recursive or fractal fashion.)
These systems each have a current state, and a desired state: i.e., the way they are today and the way we'd like them to be. Sometimes—not often, but every once in a while—one or more of these "subsystems" may actually enter into our desired state. In more mundane terms, this means "getting our way": passing a test, getting the job or the date we want, winning the lottery, that sort of thing.
However, this is never the case for very long for two reasons. One, because the world is a volatile place and nothing remains the same for long. (Actually, if you look closely enough, you'll see that everything is always, constantly in a state of flux, but I don't want to get too low-level or metaphysical here! That's the topic of another issue.) Two, because our desires are also constantly changing, largely in response to the state of the world around us. In concrete terms, if you get that raise, you're going to more or less immediately start thinking about the next one—you’ll move the goal posts! So even if the complex system that we inhabit is in a good place today, tomorrow that's very likely not to be the case.
The thing is, these systems—our work, our relationships, our health, our environment, and our lives in general—don't change in random ways. They don't tend to go from amazing one day to absolutely horrendous the next! Each system is a little different, but overall things tend to be mean-reverting: on average, things that are good tend to get worse, and things that are bad tend to get better. You shouldn't have to think very hard to come up with lots of examples. (And there are sound mathematical principles underlying this idea.) This is like a sine curve: it swings back and forth about a mean, like a pendulum.
Perhaps a better metaphor is a boat. When you first step into a boat, it tends to wobble back and forth violently from the sudden imbalance. Over time, once you steady yourself and find balance, the back and forth motion subsides until a new equilibrium is established, a new center of gravity.
This, then, is the model that I find so useful: one of many boats, each representing one of the complex systems of our lives, each searching for its own equilibrium. Sometimes, all of the boats may be rocking violently, as in reaction to a storm. (In other words, a really bad day when it feels like everything is going wrong and everything is out of kilter.) Other times, most of the boats are quiet but one or two are unsteady. In this metaphor, life is all about the challenge of keeping all of the boats as steady as possible. (Or not! Sometimes it's absolutely necessary to rock a couple of boats to escape a local maximum and find a better equilibrium!)
The forces that tend to rock the boats in my life the most are things like travel and financial markets. I can establish a perfect routine, a form of equilibrium, where I'm sleeping and waking at a healthy time each day, eating well, working out, being productive, etc. A single trip to a different timezone can throw me off completely and set all of my boats rocking; jet lag and the stress of travel can break all of those things in a few hours. And I can then spend days or, in extreme cases, weeks trying to find a new equilibrium. Turmoil in financial markets can have a similar effect—especially in the volatile cryptocurrency industry. Seeing one’s net worth fluctuate by double-digit percentage in a single day is guaranteed to rock a few boats! My best laid plans can come to naught (or succeed beyond my wildest dreams) due to effects far beyond my control or even understanding.
I think the most important use of this model is understanding that, other things equal, if one is patient the rocking boat will find its equilibrium and calm down. No matter how bad things get, I keep reminding myself of this, and inevitably things always do eventually quiet down. It's extremely helpful in dealing with stress and reducing anxiety. All boats rock, and when they're all rocking at once I remind myself of how wonderful life was when things were steady, and that I'll get back there before long if I will it.