Investing and business books are complicated. Picture doodles are not.


Charlie Munger may have the answer. After all, he convinced Warren Buffett, originally a value investor in the style of Graham and Dodd, to change his method of investing.

Munger describes how he collects fundamental mental models - tools - from various fields (economics, psychology, biology, physics). They are fundamental in the sense that they can be applied across disciplines and problems.

By using mental models in combination, he pushes out the boundaries of what can be discerned and forecast about a company's behaviour and the success of a business model. This avoids the 'man with a hammer' problem of inappopriately trying to apply a single model when multiple tools are required.

Consider for example the interplay of mental models to describe why Coca-Cola has been successful since it first started in 1884:

1) From psychology:
The goal can be viewed as creating and maintaining conditioned reflexes, where the brand acts as a stimulus to promote purchase and ingestion. Conditioned reflexes can come from operant conditioning and pavlovian conditioning.

Operant conditioning rewards from the product includes flavor, aroma, sugar stimulus, and cooling effect.

In terms of pavlovian conditioning, Coca-Cola benefited from design characteristics that associated with it the attributes of other high value beverages, such as wine and champagne. For example, it's dark artificial colouring makes it look like wine rather than sugared water, which would be clear or translucent. Carbonation makes the product seem like champagne.

2) From physiology:
There is no impediment of a strong aftertaste to prevent continual consumption. In addition, there are no after effects like from alcohol that would limit the quantity that could be consumed.

3) From economics:
Coca-Cola started with a first mover advantage in 1884. The product is generally scalable as the key input is a formula. It is relatively easy to follow a formula and reproduce large quantities. The product can be produced in a concentrated syrup form, and then sent to local bottling plants which mixes it with water, which saves on space and distribution costs. There are few constraints on adding new bottling plants, and maintaining volume of syrup to them.

Ease of distribution supports a "volume creates power" effect, where the company gains cost advantages from size and potential new competitors would face disadvantages of scale. For example, an advantage would be a high level of advertising spending that strengthens associations through pavlovian conditioning that new competitors can't match.

4) Further reinforced by psychology:
Social proof: as scale is further achieved, seeing people consume Coca-Cola encourages other people to consume the same product.

5) From chemistry:
All of these factors interact and feed off each other, and continues on its own momentum. In some ways, this bears similarity to autocatalytic effects.

What makes this approach important is that it reduces naive projection since you are considering more interdependencies. Extreme events occur due to combinations. In the same fashion, having multiple mental models allows you to predict and see the interplay of combinations.