The Powerful Mental Models you must know:

Revanth Goud
6 min readAug 20, 2022

A mental model is an explanation of how something works. It is a concept, framework, or worldview that you carry around in your mind to help you interpret the world and understand the relationship between things.

Mental models guide your perception and behavior. They are the thinking tools that you use to understand life, make decisions, and solve problems. Mental models are imperfect, but useful. All perspectives hold some truth. None of them contain the complete truth.

“If our small minds, for some convenience, divide this universe, into parts — physics, biology, geology, astronomy, psychology, and so on — remember that nature does not know it”. — Richard Feynman

You need to know and connect them.

The first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. - Charlie Munger

I basically load my head full of mental models. — Naval Ravikant

Some of the Powerful Mental Models are:

1. Inversion: Inversion is a powerful mental model to improve your thinking because it helps you identify and remove obstacles to success. Inverting the problem won’t always solve it, but it will help you avoid trouble. Spend less time trying to be brilliant and more time trying to avoid obvious stupidity.

"All I Want To Know Is Where I’m Going To Die So I’ll Never Go There" - Charlie Munger

2. First Principle Thinking: The first principle thinking was used by the philosopher Aristotle and is used now by Elon Musk and Charlie Munger. First principles thinking is the act of boiling a process down to the fundamental parts that you know are true and building up from there.

In a nutshell First Principle Thinking means "You break things down into the core parts and reassemble them in a more effective way".

  • Over two thousand years ago, Aristotle defined a first principle as “the first basis from which a thing is known".

3. Regret Minimization Framework: Jeff Bezos used regret minimization framework, so he got courage to quit his high paying job and started Amazon Company. Regret Minimization Framework is a simple yet powerful mental model for making important decisions and unlocking growth in your career, startup, business, relationships, or life. The goal is to minimize the number of regrets in life because Regret is more Painful than failure.

"I wanted to project myself forward to age 80 and say, “Okay, now I’m looking back on my life. I want to have minimized the number of regrets I have.” I knew that when I was 80 I was not going to regret having tried this. I was not going to regret trying to participate in this thing called the Internet that I thought was going to be a really big deal. I knew that if I failed I wouldn’t regret that, but I knew the one thing I might regret is not ever having tried. I knew that that would haunt me every day, and so, when I thought about it that way it was an incredibly easy decision" - Jeff Bezos

4. Compounding: Compounding occurs when something begins to grow at a faster rate as it gets bigger and has more time. Compounding is a double edged sword, it can make you or break you.

"Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it".Albert Einstein

5. Pareto Principle: The Pareto principle is also known as the 80/20 rule, is a concept that many have adopted for their life and time management. It is the idea that 20% of the effort, or input, leads to 80% of the results or output. The point of this principle is to recognise that most things in life are not distributed evenly.

6. Incentives: The incentives mental model says that all living things are inherently incentive-driven. You can motivate people to do something by promising to reward them with something they desire.

7. Circle of Competence: The circle of competence describes the skills that a person has mastered throughout their careers or lives. Outside of this circle are interests, skills, or abilities that they do not competently understand. To be successful, you must know the boundaries of your circle of competence and stick within these boundaries at all times.

8. Second Order Thinking: Second-order thinking is a mental model that considers all future possibilities. It allows individuals to travel beyond their comfort zones and objectively analyze the consequences of future decisions. It is most rigorous when second, third, and fourth-order consequences are analyzed objectively using feedback loops. These loops provide valuable feedback on whether a given solution might be viable.

9. Margin of Safety: The margin of safety is an important component of some decisions and life. The core idea is to protect yourself from unforeseen problems and challenges by building a buffer between what you expect to happen and what could happen.

10. Occam's Razor: Occam’s razor is a philosophical principle that states the simplest explanation is usually the best one. Simple explanations are more likely to be true than complicated ones. Instead of trying to disprove complex scenarios, base decisions on explanations with fewest moving parts.

11. Opportunity Cost: Opportunity cost is the loss of the benefit of the best foregone option that you could have chosen. There is an opportunity cost for everything we do. "Intelligent people make decisions based on opportunity costs." - Charlie Munger

Warren Buffett sold IBM after 7 painful years in 2018. Realizing there is a better opportunity available in Apple, bought more than 75 million shares using the capital that made him very good profits. It's one of the example of opportunity cost.

12. Reciprocity: If you want something, give something. People tend to return a favour. If you want respect, give respect first. If you want love, give love first.

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Revanth Goud

Books, Self-Development and Finance. Keep Learning and Keep Growing.