Mental Models from the King

Mental models are ways to think about the world to better understand reality and how things actually work. They come in different forms and may also be called constructs, frameworks or principles. Naval Ravikant, Charlie Munger and so many other famous investors and wealthy people in general eat, drink and sleep MMs in one way or another as they are so key to success.

I was in awe when Naval shared Wisdom Theory on Gumroad and their package for going deep into MMs. It’s not free, although I’m sure you could find it somewhere online. But if you can afford it, it’s better to support creators and their work and the materials with full audiobook has been worth every penny. No paid promotions of course I’m sharing because of it’s relevance and I’ve went through the materials myself, having finished the audiobook just a couple weeks ago and being very happy I chose to do so.

Richard over the years has brought up tons of mental models himself when answering questions on live stream and otherwise. If you’re an avid follower, you may be familiar with a few of them already. We’ll try and cover ones he’s discussed, used in his projects like Hex, Pulse and PulseX or may be otherwise related.

1) 80/20 Rule (Pareto Principle)

80% of the profit comes from 20% of the work, 80% of the sales comes from 20% of the customers or even 80% of the bugs come from 20% of the code

2) Antifragility

Popularized by Nassim Taleb, it describes systems which which are geared to benefit from stress, such as your muscles or businesses that grow after black swan events, and also systems which tend to break under pressure, like the traditional financial system or the hospitality industry during a pandemic

3) Artificial Deadlines

Putting an artificial deadline on some event increases the likelihood that others will take steps to make a decision sooner than if there wasn’t one

4) Asymmetric Risk

Scenario where the opportunity for profit and loss aren’t equal, such as investments where risking $10 could make you at most lose $10, but you could gain $1000 — crypto is a great example

5) Compound Interest

Most things in life that have value come from compound interest, but in money terms it’s interest generated from capital and kept in the investment compounds over time and generates much more return, eg. 10% on $100 per year is $110 for year 1 and $121 for year 2 and after 40 years its worth $4500 instead of just $500

6) Critical Mass

The amount of necessary people for a rocket ship to depart and never come back to earth, as once something goes viral and stays around a while, it also tends to stay around even longer (also see Newton’s Law of Motion and The Lindy Effect)

7) Game Theory

The study of choice and optimal behavior of players when the exact costs and benefits are not known, because they change depending on the actions of other players, the most famous example being The Prisoner’s Dilemma but people play smaller, less elaborate games every day (also see Nash Equilibrium)

8) Gresham’s Law

“Bad money drives out good money” as people want to hold on to the more valuable currency, taking more of it out of circulation and leaving the less valuable one to be exchanged

9) Inversion

When trying to figure out how different ways to get better at something, write down all the ways you can get worse or fail at it and then invert those to fuel new answers, eg. if you want to get be a better driver, list all the traits of bad drivers and then avoid all of those

10) Opportunity Costs

The benefit that you could have received from one activity was given up for a different activity, so for example you spent all your time in Shib telegram and now are sad because you didn’t have enough to time to learn about jump in on the PulseX sacrifice.

11) Power Law

The bulk of something usually belongs to a few people and the rest of it is distributed to everyone else; eg. the world’s wealth has a few billionaires at the top and everyone else at the bottom or projects usually have a few key developers and everyone else makes small changes

12) Redundancy / Margin of Safety

“Redundancy is ambigious because it seems like a waste if nothing unusual happens. Except that something unusual happens, usually.” (Nassim Taleb)

This is why we have testnets!

13) Schelling Point

Exists within Game Theory but worth an exclusive mention, Schelling Point is how players take a default action without communication to the others, such as two people agreeing to meet in NYC without any time/place and they’ll probably choose to meet at Time Square at noon

14) Tragedy of the Commons

People’s self-interest is at odds with the longer term interests of the group, shared resource or common good with an example being that it’s in a company’s best interest to mine Bitcoin, but it’s in all of our best interest to keep pollution at a minimum

Bonus: Heart’s Law

Price movements for assets that can be exchanged with each other, eg. HEX/ETH are bonded by the pair’s liquidity. So it is advantageous during a bear market to have more liquidity in HEX/USDC so HEX’s price will be less correlated to a downturn when ETH and others are dumping.

Using mental models are such a healthy way to make decisions or reason about complex situations. It’s no wonder they are so popular in business, but they are basically universal in their application. If you want to be wise, seek wisdom. If you want to be rich, seek riches. If you don’t want these things, don’t worry about it, you probably won’t have them. Mental models are fundamental building blocks for making good decisions and developing good judgment. They tend to attract free and clear thinkers and those who prefer a fit body, mind and spirit.