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Circle of competence

Stick to the areas you understand

If you’re running a small business this one can be super tough. You’re often under pressure to put your hand to lots of things. Some in your field of expertise, others less so and some so far out you’d need binoculars to see them.

Sometimes there is time to pick up some books and learn, other times you should consider engaging a professional and use that time on your business.

For example, I have a very deep knowledge of backend development and how to translate business process to easy-to-understand systems. I’m fast, accurate and efficient. However, front end (photoshop/illustrator etc) is out of my area of expertise. I’ll always either outsource, consult or buy a template.

#Business, #Mental models

Inversion

Problems can be easier to tackle when looked at backwards

Inversion is a model often cited by Charlie Munger and is based around a couple of ideas:

• Problems can be easier to tackle when looked at backwards
• It's simpler to discount mistakes rather than discover something ingenious

Instead of trying to work through a problem as given, turn it on its head.

For example, imagine you are reorganizing the furniture in your living room. Instead of trying to figure out the perfect arrangement, invert the problem and look at the arrangements that wouldn't work.

or

If you're looking for ways to improve customer service, consider the things that wouldn't help and would make it worse.

Instead of adding inspired (and hard to find) solutions you start by discounting bad solutions.

So why does that help? It does a few things:

• Removes the pressure of identifying a hard-to-find ingenious solution and lets you quickly get traction
• Help to avoid stupid or harmful mistakes by identifying them early
• Makes you think about the problem differently, gives your brain a new approach vector.

Next time you have a problem, trying inverting it.

#Business, #Mental models

Question your beliefs

To a man with a hammer, everything looks like a nail

This model is nicely summed up by Mark Twain who said: "To a man with a hammer, everything looks like a nail."

When faced with a problem, make sure you're not forcing a specific solution just because you're good with that approach. There may be better solutions available, even if it means hitting the books.

Economist John Kenneth Galbraith puts it another way: "Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof."

#Business, #Mental models

Opportunity costs

Resources are limited, saying yes to one thing means saying no to something else

The opportunity cost is the price you pay to take a given opportunity, often cited by Charlie Munger.

If you hire person A the opportunity cost is that you didn't hire person B or C.

If you buy service A the opportunity cost is that you didn't buy service B or C, but additional opportunity costs are if you bought something cheaper and invested the money or just not bought it and invested the money. So the additional cost here is the compounded interest you missed.

An example might be a car with a deposit of 3k and a monthly payment of £300 over 3 years. You might consider this car has cost you £13,800 over three years. But if you hadn't bought the car and put the funds in an index fund at 6% interest you would have made £1,590.87. The opportunity cost was actually £15,390.87.

Consider the opportunity costs when making decisions.

#Business, #Mental models