Develop a Winning Mindset
Mental Models | How to to change the way you think and act to grow in trading and investing | Part 1
Mental Models
Having a winning mindset is not a given. Most high achievers work tirelessly at their mindset to achieve their goals.
Every action starts with a thought and approach. The better the approach, the better the action and the more knowledge you will be able to collect from it. It is a never ending cycle of approach, action, feedback, refine. A circle of progress.
Developing this thinking approach to problem solving is something you achieve through trial an error, slowly but surely eradicating all bad approaches and ending up with a few, extremely efficient ways to grow. Simply put, we are learning to think better. We start thinking in themes and use the fitting models to interact with information to create our own reaction and value from it.
These approaches to problem solving are called mental models.
The more models we have, the better able we are to solve problems. But if we don't have the models, we become the proverbial man with a hammer. To the man with a hammer, everything looks like a nail. If you only have one model, you will fit whatever problem you face to the model you have.
-Charlie Munger
In this post, I will take you through the way I interact with reality in order to maximize the opportunities and information thrown at me. It has taken me from a small town in France to being a successful trader, an investor and now allows me to partake in international Real estate, private equity, Venture capital and more.
The goal with mental models is to increase your awareness also called mindfulness as well as introspection. Nothing is left to chance.
Take advantage of the partnership with my broker!
Structure Models
The first step in our journey for better learning lies in the structure we create for it. Think of controlling the wild flow of water that is information by building a dam. The water flows a certain way to end up creating electricity. Creating structure to tame the water allows you to create a net positive, here energy.
The same way as in the analogy above, our goal is to create an information stream right into our structure. The result is pure thinking and knowledge alpha.
I will highlight 3 mental models to start this series.
Competence rank Model
When encountering new information, the first question a bucket needs to be created:
Do I have expertise in this matter and will it strengthen it?
Is this bad information or can I not check if it is?
Is this just noise to my journey or too complicated?
The amount of time people waste looking at random information, argue over unimportant information not relevant to their journey is greatly underestimated. Know what you can not be an expert in, it will save you time as well as protect you from shortcomings and risks within these areas, just like Warren Buffett has 3 piles:
Good, Bad, Too complicated.
“Charlie says we have three boxes: In, Out, and Too Hard. You don’t have to do everything well. At the Olympics, if you run the 100 meters well, you don’t have to do the shot put.”
-Warren Buffett
We spend an average of about 7 hours per day on the internet. Now imagine if all that time was used in a productive way. This mental model is here to increase your awareness about the type of information you encounter.
“Can this information help me to either gain in expertise or gain a new ability/new expertise?“
The Map model
Maps represent a summary of the geographic reality. A map does not include every tree, forest path and details. A map can also be zoomed in and out, which shows you less but more important information as you zoom out.
The same can be done with information you receive. Building a hierarchical view or a zoomable map gives you a deeper knowledge and builds neural connections. You start to save your knowledge effectively where you can use as much details as you need to solve an issue or teach it.
Maps also have a timestamp. A map might not look the same after 10y or 100y. In order to think through situations, it is often beneficial to go through snapshots in time.
A map may have a structure similar or dissimilar to the structure of the territory.
Two similar structures have similar ‘logical’ characteristics. Thus, if in a correct map, Dresden is given as between Paris and Warsaw, a similar relation is found in the actual territory.
A map is not the actual territory.
An ideal map would contain the map of the map, the map of the map of the map, etc., endlessly…We may call this characteristic self-reflexiveness.
Use maps to order your thoughts and tactically use the knowledge you acquire to best solve an issue, teach and save energy. It creates a sort of topographic map where x is the date and y is the detail level.
Probabilistic Thinking
How often is something actually black or white? The grey shades matter in real life!
Probabilistic thinking understands this nuance and and looks at approaching problems and making decisions that takes into account the fact that many things in the world are uncertain.
Instead of trying to determine a single, definite answer, probabilistic thinking involves assessing the likelihood of different outcomes and making decisions based on those probabilities.
One key aspect of probabilistic thinking is understanding and working with randomness. Most things in the world, such as weather patterns and especially the stock market , are hard to predict. Probabilistic thinking acknowledges this uncertainty and allows us to make decisions even in the face of it.
‘It is better to be roughly right than precisely wrong.’
-John Maynard Keynes
Mathematical models can help to analyze uncertain situations. These models, such as probability distributions or Bayesian networks, provide a framework for understanding and quantifying the likelihood of different outcomes. Overall however this is a call to think of odds rather than winging it. Successful individuals look at situations from a probabilistic standpoint.
‘How much can I win if I am right and how will I loose if I am wrong’
This mindset continually presents you with a positive skew.
Overall, probabilistic thinking is a powerful tool that allows us to make decisions and understand the world in the face of uncertainty. By using mathematical models and understanding the role of randomness, we can gain a deeper understanding of the risks and potential rewards of different actions.
Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That is what we're trying to do. It's imperfect, but that's what it's all about.
-Warren Buffett
I think this is a good start into what I consider to be the foundation of how I think. I have not invented all of them, they are old models that the best have used forever. Finding these models on my own or through research and implementation is in integral part of my daily life.
Let me know if you liked this theme and want more on it:
Just wanna say this format is 1000x better than the old Twitter threads. Felt like you were trapping yourself in a box with the character limits and whatnot. This lets you really flesh out your ideas. Thanks!
Keep it coming!