- In business and life,
there are so many decisions that you need to make.
All successful people have one thing in common.
They use mental models to guide their decision-making.
Hey everyone, Davie here.
My brands have done over $270 million and I'm only 27.
Here are my favorite mental models
that you can use in any profession.
One of the most famous people
that always speaks about mental models is Charlie Munger.
He's a billionaire that attributes most of his success
to mental models themselves.
Charlie Munger once said,
"all I wanna know is when I'm gonna die
"so then I won't go there."
This is the perfect example of inversion.
Inversion put simply is basically reversing a problem.
It's a mental exercise that can reframe
what you're trying to achieve.
Imagine for example, you're trying to make an office chair,
the best office chair in the world.
You're probably thinking,
what makes the best office chair in the world?
What kind of features should I be adding?
Another way to reframe that
is what makes the worst office chair in the world?
By simply flipping the question,
you'll get answers that you weren't going to get previously.
Inversion is one of the most simplest mental models
that all successful people use.
I've used the inversion a lot over the years.
One of the main places that we use it
is in product development.
If you're looking to enter a niche,
then look at all the other competitors in that niche
that solve a similar problem.
Look at their negative reviews.
Now reverse it in your product development.
Margin of safety.
Margin of safety is an investment principle
that dates back to the 1930s.
Benjamin Graham made this really famous in his book,
"Intelligent Investor."
The premise is, where there's some level of uncertainty,
you're looking for a certain margin of safety.
In stocks, this is when something is undervalued.
So you're calculating the initial value of the stock
and where you think it's gonna be.
In between is the margin of safety.
If you were crossing a bridge
and it could only handle 30 tons
and you knew your car weighed up to 28 tons,
would you cross the bridge?
What if it was only 10 tons?
Chances are you want that margin of safety
before crossing that bridge.
You can use this concept in everything in business and life.
Are you driving around without a spare tire in your boots?
You have no margin of safety asides from calling a service
to come pick you up if you get a flat tire.
I use mental models mainly when launching new businesses
or acquiring them.
When you're launching a product
and you do a product validation,
so you get an initial rate on how successful it's gonna be,
does it have a huge margin?
Did you get lots of customers
for a very little advertising spent?
Chances are that's created a margin of safety
for that product.
That margin of safety can erode over time
through competitors entering the market,
but you can still make a lot of profit in the meantime
and get ahead of it.
If you're just starting out,
you need to use margin of safety in your own savings.
If you wanna be entrepreneurial one day,
you don't wanna spend all your paycheck.
So many expenses can pop up
which can erode that business investment
that you're willing to make soon.
Circle of competence.
This is one of my favorite mental models,
simply because it's humbling.
It makes you recheck what you think you know.
It's best described with a story.
Say a businessman goes to Japan
and he spends two months there
going around to local restaurants, meeting the local people.
When someone comes and visits that businessman,
he may feel very competent in the town.
He'll look at it and think that he knows
everything he needs to know about that town.
Now compare that with someone that's lived there
for 95 years.
That person would know every single person's name.
He would also know the history,
he would know how the weather behaves in certain seasons.
Now all you need to do
is compare their circle of competence.
One person can make correct decisions
with all the information,
one person thinks they know all the information
and will probably make wrong decisions about the town.
I constantly look at this concept around everything I do.
While I feel that I have a circle of competence
around e-commerce, I certainly at this stage
don't have a circle of competence around cryptocurrency
or investing as a whole.
While I feel like I have a circle of competence
in e-commerce and can make correct decisions
because I have all the information that I need
through historic behavior,
I'd certainly wouldn't have that around cryptocurrency.
This is even though I listen to lots of podcasts
and smart people around cryptocurrency,
and I generally understand the premise of it.
(shouts loudly)
- We went to zero.
- I shouldn't feel confident in making large bets
like I would in e-commerce.
It's very easy to fool yourself to think
that if you understand the basic concepts of something,
you understand the same amount as everyone else
and can make better decisions than them.
In short, Charlie Munger said it best,
he doesn't wanna play a game where others are smart
and he is stupid.
This is a great way to look at things.
The Pareto principle.
This principle is also known as the 80 20 rule.
It's another way to say that your results
aren't distributed evenly.
It's amazing how much this ratio actually turns up
even in nature.
To put it simply if you're working 100 hours a week
to create 100% of your output,
chances are that is not evenly distributed.
One hour of your week does not equal 1% of output.
There are certain tasks that are more high leverage,
as in they produce more results.
People often say the ratio of this is that 20% of your work
creates 80% of those results.
You need to find ways to figure out
what tasks is actually creating those 80% of the results.
You're trying to find the 20.
Once you identify the 20, you can focus on it
and do more of that to create more results.
Alternatively, you can work less
and you can only work the 20 hours
and still get 80% of your results.
One of the best examples I have of this
is one of my friends.
He had just started a business
and it was starting to pick up.
He's an incredibly good marketer.
80% of his results was him getting behind his sales funnels
and all of his marketing.
He got to a point where he was ready to hire someone.
He reflected exactly where he should be spending his time.
The first hire rather than an operations person,
funnily enough was actually an assistant.
He spent so much time in his personal life
taking him away from things that were creating results
in the business.
He checked his time throughout the week
and he realized things like scheduling, guarding the shops,
paying bills all added up to so much time
that were really creating no results for him.
Once hiring the assistant,
he was able to focus on those tasks
that were able to compound his success.
Another a good example of this is your iPhone apps.
I bet you 80% of your time is spent on 20% of those apps.
Stop procrastinating.
Opportunity cost.
This model is stolen from economics.
Opportunity cost explains that resources are limited.
By choosing to do one thing, we're missing out
on an opportunity cost to do another thing.
You may have felt in your personal life.
For example, wanting to stay home rather than go to a party.
The opportunity cost is going to have fun at that party.
A good example of this that I know a lot of my viewers
and myself had to deal with
was the opportunity cost of university versus business.
If you have a side hustle but you're at university,
you need to make the judgment call
whether you stay in university
or focused on your side hustle full time.
This is a great opportunity for us to talk about
our other mental models.
The first one is the 80 20 rule
where 80% of my future results is going to come from.
Is it the university degree or is it the business?
The next is circle of competence.
Do I have the circle of competence,
the full environmental knowledge to make the right decision
in this process?
Perhaps you don't actually fully understand
the business yet.
Perhaps you fully don't understand
what the university degree is actually going to bring you
in the future.
If we do feel that we've got the circle of competence
to make the right decision,
then we can safely analyze the margin of safety.
Is the business volatile?
Is it a flash in the pan?
Is it the next fidget spinner?
By using all of these models together,
we can really make the right decision.
First principles.
This mental model is designed for the dreamers out there.
When tasked with an impossible task,
you need to break it down to first principles.
If those principles are sound,
then chances are that goal is achievable.
Well, we can thank Aristotle for this concept.
The most famous person that uses first principles
is Elon Musk.
When confronted with a problem,
the batteries were too expensive to make electric cars
at scale.
He broke it down to first principles.
He looked at the materials that go into batteries.
He broke down the unit economics of the product
and said electric tires at scale is possible.
He constantly refers things back to the laws of physics
to make sure that his ideas are fetched in reality.
He's even using this principle to guide his team
to put people on Mars with SpaceX.
While this mental model might not get applied to you
very much in the early stages of business,
it's still really important to understand
that lots of people have assumptions
that aren't actually grounded in reality.
People will tell you that you can't do something
just because someone's told them they can't do it.
Constantly remember this, and you'll make better decisions.
Hanlon's razor.
This one is pretty simple and it might help you
be more peaceful in life.
The phrase is, "never attribute to malice
"what could be attributed to carelessness."
It's basically saying humans are flawed, they make mistakes.
Don't always just default that their actions
were based on anger or malice,
they might have just made a mistake.
If you're ever going to become an employer,
you need to understand the difference between this
and just a lack of accountability.
A good example of this
is if you didn't get invited to something.
(laughs loudly)
It sounds like I didn't get invited to a party.
(laughs loudly)
A good example of this is you didn't get invited to a party.
A good example of this
is if you didn't get invited to something.
We often just assume that the person is malicious
and doesn't actually like us.
There is a chance
that they actually just forgot you off the list.
By reflecting on people's intent and being less judgmental
about them being judgmental,
we can both come more mindful with our relationships
and reinforce the positive ones.
The final mental model we'll discuss today
is the flywheel effect.
This is incredibly important to understand properly.
The concept was made famous in the book, "Good To Great"
by Jim Collins.
Imagine you have a big flywheel,
it's really impossible to move.
You have to get a lot of force to make it start moving.
As you push it, it gathers momentum.
Every single push that you do, it slowly goes faster
until eventually it's starting to spin really fast.
It gets to a point where its momentum just keeps gathering
and it gets easier and easier to push along.
This is exactly how big businesses get really, really big.
One of the best examples is Amazon.
Amazon had one simple concept to start their flywheel,
create the best customer experience possible.
By reinforcing this, they were able to get lots of traffic
and sales on their website.
This then incentivized more sellers to come onto the website
and sell their goods to those customers.
More products and more customers
allowed them to lower prices.
These lower prices then came all the way back up
to the top of the flywheel,
which is to give the customers the best experience possible.
This concept can be used outside of business as well
with your personal life.
Positive actions no matter how small,
whether it's for your fitness or your mental health
will compound over time.
We really try to practice these concepts with The Oodie.
We focused on a really great product
and really great customer experience.
This then creates lots of customers
which allow us to reinvest into more products
and great customer experience.
This is how I built The Oodie.
I hope you enjoyed today's episode.
It is actually our last episode for the year.
I just wanna say a huge thank you
for everyone that has watched over the past eight months.
It's been a crazy year
and the support that we've received on this channel
is overwhelming.
We look forward to 2022 and constantly helping you
along your journey.
Make sure you like and subscribe.
Have a good Christmas.