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11 Game-Changing Mental Models from Finance

There’s no doubt that mental models are powerful. Whether rules-of-thumb, more elaborate heuristics, or complete scaffolds on which to hang components of knowledge, each mental model serves as a framework to better understand the world. That’s why, amongst others, Charlie Munger stresses their utility across all professions.

In this post, I want to talk about several related mental models from finance that have been invaluable in all parts of running a business (GoStudy) and scaling the G2M organization of another (CB Insights).

The eleven models covered here are:

  • Opportunity costs
  • Time Value of Money (+ compound interest)
  • Net Present Value
  • Expected Value and Tree Diagrams
  • Utility
  • Sunk Costs vs. Thinking on the Margin
  • The Normal Distribution
  • Comparative vs. Absolute Advantage
  • Game Theory & Prisoners Dilemma
  • Pareto Principle and Power Laws
  • Economic Moats

Let’s dive in.

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What do you do after work?

A few days ago, one of the most junior people on my team: a bad-ass, intelligent, driven woman asked the team what we do when we’re not working.

I half-jokingly said, ‘do more work.’

The team laughed (thank god), but their laughter seemed to acknowledge that there was more than a little truth in the boss’s line. The laughter spoke to me that for the most part this is a team of vets. We all work really hard, none of us measure our productivity in hours, and therefore you’ll often find us going above and beyond to get where we feel we should be. Hitting world class isn’t free.

Which sometimes means we work after work.

Jerry Seinfeld’s Fake Visual Hack for Habits Actually Works

You’re only reading this because this habit has helped me and I think its worth you trying it.

It’s a simple visual hack, and it has exponentially increased my ability to stick with a habit. This is hack is popularly attributed to Jerry Seinfeld and I first found it through some blog or another. But Jerry literally wrote on reddit in an AMA that

This is hilarious to me, that somehow I am getting credit for making an X on a calendar with the Seinfeld productivity program. It’s the dumbest non-idea that was not mine, but somehow I’m getting credit for it.

So Jerry is a hater, but the idea worked for me wherever it came from.

It basically says put a calendar or piece of paper up somewhere very visible to you. That could be a bathroom mirror, kitchen sink, whatever. In my case it’s on a pin board near the kitchen.

This simple piece of paper is your goal tracker. Put it up.

Currently I have three daily actions I want to take in three columns. Every day I do that thing gets a green mark. Every day I fail to take this action I put a red X.

That’s it. No excessive incrimination. No extra “work” involved really. Pick important goals and track if you’re actually spending your time and energy in achieving them. If you’re not, the red and green visuals will gently let you know about it. At least, they do for me.

Last comment about this, I actually thought that if I didn’t keep the markers right at the board I might miss recording a day and that would derail everything. So I literally leave the two markers right under the board in a little holder to combat that excuse. Whatever it takes right?

Takeaways

I kind of intuitively thought this would work. But I didn’t realize how powerful it was in actually getting me to do the things I wanted/needed to do more often. It is weirdly effective which is why I’m even sharing that it worked for me.

I literally have nights where I’m tired, and it’s so easy to make an excuse to not: write, work on GoStudy, rehab my ankle or whatever the goals are at that time. But then I think, the board won’t lie. It’s going to show me this moment of weakness over and over for a few weeks. In contrast to seeing that red X break up I can probably do a few minutes. I can push through. The board isn’t measuring a lot of time, it’s not measuring how great the session is. It’s just if you did it or not.

Or sometimes, it’s not about the red X at all. It’s about the string of green marks you’ve earned in the past few days.  If you’re like me and you’re NOT like Jerry, you’re going to like putting together these streaks of compliance. You’ll say, this pain isn’t worth breaking the contract I made with my past self AND future self. The fake Seinfeld story writer quotes Jerry as saying:

“After a few days you’ll have a chain. Just keep at it and the chain will grow longer every day. You’ll like seeing that chain, especially when you get a few weeks under your belt.”

Wise words  “Jerry”, wise words.

The chain is where the magic happens. Consistency compounds over time. The 15 minutes I “force” myself to sit down and do work often changes into 30 minutes, or two hours. Sometimes it is a slog, other times you get into the flow. The habit, the muscle, and the time will compound.

Now I’m not saying I hit 100% compliance. I’m far from that. But as Jerry says just “don’t break the chain. That’s your only job.”

Still here? Here’s a list of articles that talk about this lesson while assuming it is actually from the comedian. All in all, someone’s pulled off a good joke on every level.

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Thoughts on Being Effective

I recently read Peter Drucker’s The Effective Executive. Like so many others before me the book had a large impact. There was much for me to learn, even more for me to re-center on. It was also a welcome articulation of a concept I think I’ve known and gravitated to for a long time: (1) find and work with effective individuals because (2) they’re rarer than you want to believe.

This post isn’t a summary of the book. I think there are plenty of good examples out there including this one and this one.

Instead it’s a reflection of where some of these principles also appear and are echoed, along with perhaps a running introspection on where I embody and where I most certainly don’t (yet) carry forward some of these principles. I freely acknowledge it’s an incomplete list. Drucker is Drucker for a reason after all.

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Losing Someone Great From Your Team

Losing someone great from your team is a hard blow.

Hopefully when this person tells you they are moving on your initial reaction is one of excitement for them. After all, this is an all-star. They might be one of your go-to people. That means they’ve busted their butt day in and day out to deliver results. They are, as Drucker would say, an effective executive.

You should be proud that your work with them has helped create a new path for them. And you are. Or rather, you will be proud, excited, and happy for them.

But when you first hear them say “I’m taking a job at another company” the first thing that will happen is a sharp “oh shit” moment of emotional pain. It will be personal, and man will it hurt, especially when it’s a surprise.

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The Humility of Injury

Right before Labor Day I fractured my ankle in two places and partially tore three ligaments. It was obviously painful as hell, but it could have been a lot worse.  Three months later, with the end of summer looming, I am still rehabbing. Walking around a city is fine, but running, tennis, and hiking are still distant. It’s been a process.

One constant in this that I am proud of has been my positive mental attitude. I anchored this in the hope that weeks on crutches would heal my plantar fasciitis (it didn’t fully) and a resolution to focus on what I could or would do while my injury limited more habitual routines.

This started with a handwritten entry in my journal: a practice I love and at times have done more frequently but which I hadn’t touched in YEARS.