50+ Shades of Gray: Opinions, Mental Models, & Probability

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I never allow myself to have an opinion on anything that I don’t know the other side’s argument better than they do.

— Charlie Munger, Vice Chairman of Berkshire Hathaway

Opinions

Since no one really talked about this past election, and politics are rarely an emotive topic, let’s use that to introduce the subject of today’s conversation (trust me, we won’t stay long). Whether you voted for the Mad Mango, The Criminal, or Francis Underwood, I am indifferent. What is much more interesting is the step before: our decision making framework, and how it affects what we do and choose. Before the election, across different states, countries, people, and age groups, I heard similar sentiments and shockingly similar sentences used to describe why people were voting for a particular person. Some people talked about rationally-considered pros and cons of the situation. Many more had an opinion on topics that not only appeared to be insignificant in relation to the country’s real issues (if someone starts talking about bathrooms, I start wondering what they are distracting me from thinking about) or seemed to ignore a candidate’s ability to execute on promises (classic), but those opinions seemed to be immovable the moment they left the lungs. The rhetoric & villains were getting all too predictable. The first thing we must acknowledge is that this is a complicated system we are in and it absolutely requires latitude in our thought. An inflexible thinker in life is comparable to an inflexible gymnast in the Olympics.

If stubbornness were wine, ignorance would be the grapes. Have you noticed you cannot reason someone out of something they did not reason themselves into? Given that each of us is more likely to be persuaded by the ideas we discover on our own than from other people, if there is one area where we can hold our proverbial horses, it is in the initial formation of our opinions and ideas. Let’s become comfortable with saying “I don’t know” for a while. Why? First, Munger’s quote above; it should be on the ticker of every news station and inside every fortune cookie (in bed). Second, with seven billion people on the planet, there are simply too many things happening to have an opinion on each of them. Third, the easy problems have been solved, leaving us with the harder ones with less clear answers. Fourth, once we form an opinion, we hold onto it and the only way we let go is if someone pries it from our dead, lifeless fingers. Finally, I think the truth is often difficult and that any improvement in our appreciation for nuance makes our society better. I am not talking about a better society in the abstract Let’s Love Everyone sense. I am suggesting that we have a responsibility to spend adequate time and energy developing our ideas and to effectively commit to lifelong learning, because my guess is that the average reader here has a long life to live, and we are not going to get very far based on what we already know. If we do this we will each receive a (yuge) personal benefit, sure. But it will generally be a net positive for everyone else, too. We will reduce the number of people who confidently answer questions about which they don’t have any real knowledge.

When I talk about this idea, occasionally I’ll hear the fingernails on the chalkboard: “Everyone is entitled to their opinion.” No. No, they are not. If this is a belief of yours, spend 10 minutes on Facebook and get back to me. Let’s say someone asks you and me what the marginal tax rates should be and you have spent 30 years trying to figure this out and this is the first time I have thought about it. Our opinions are not equal and I haven’t earned the right to say much on the topic. “Well that is just my opinion” requires no further justification when we’re talking about the best burger in Dallas (Maple & Motor), but more serious things require more homework.

As more time is spent on any one thought, serious thinkers start bumping into paradoxes. Have you tried getting a black and white answer on a topic from an expert? It is harder than convincing your friend not to text their ex. Easy example: Is coffee good for you? The answer is unexciting: it depends (on several things, including the definition of good). Wars don’t get started and magazines don’t get sold over “it depends” though. Of course, many things have objective answers. DNA carries the genetic information of a cell. A balance sheet must balance. La La Land Moonlight won the Oscar for Best Picture. The key, and potentially uncomfortable, realization we have to face is: Many areas outside of the hard sciences do not have answers and facts in the traditional sense, but instead entail a series of options along a continuum, with trade-offs (shades of gray). The more objective answers we accumulate, the more equipped we are to assess those trade-offs.

There are two main risks to walking down this path of deliberation and open-mindedness:
1) We eventually have to do something. We can’t just keep all of this in our heads indefinitely, we want to use it. This one is easier because we’ll often be told we need to do something faster than we do. You don’t just get in the car and drive to Chick-Fil-A. You avoid a lot of pain and agony if you first think about whether it is Sunday or not.
2) Many people are trying to fool you. This is the bigger one – If we are too open-minded we will end up in a cult with a lot of product warranties, organic pet rocks, and free cruises. So we should be skeptical of experts and marketing (future post), but we also must be mindful that if it is an area largely unfamiliar to us, we have some old-fashioned work to do. I wish there was another way around this.

You may be thinking: he wasted 900 words (and we are not done yet) to suggest we should know what we are talking about and consider the other side of an argument. There is more to it, and the thing that makes this polite suggestion effectively worthless is Confirmation Bias. We seek out information that (wait for it) confirms what we already believe. You don’t see protesters with signs that read: “EXCELLENT POINT! I HADN’T THOUGHT ABOUT IT THAT WAY BEFORE!!!!!” Those people have pounded the same ideas into their head for so long and only surrounded themselves with people like them that they have ruined their mind. I am not in love with too many ideologies, but I can kind of empathize: if avocado availability were threatened, I would be doing more than protesting.

The better, yet emphatically less popular, strategy is to seek out information that disconfirms what we believe. Now why in the hell would we do that? Because we want to be rational. How else are we going to figure out the truth if we are only exposed to a partial amount of information? This is a tall order considering new information is usually rejected due to an emotional or financial conflict, the tendency is to hold onto a belief long after it is proven wrong, and the author F. Scott Fitzgerald’s most famous quote is about the rarity of people being able to function while holding two conflicting ideas in their head at one time. But we are Generation Snowflake. We are special.

In a previous post I said the number one book I would recommend is Poor Charlie’s Almanack and I mentioned mental models, but I didn’t define them. In the book, Charlie shares how he believes acquiring worldly wisdom through the primary academic disciplines creates a “latticework of mental models.” Now, his principal reason for doing this is to appropriately value the future prospects of businesses better than other people so that he can make billions of dollars, primarily in the stock market. He has been doing this successfully for 50+ years.

Now, I assume many of you are more noble than I am. But, if making money is your cup of Kombucha and primary inspiration for this, we will probably expand on that in the future. Meanwhile, what guys & girls (& even gender-undecided) can get on-board with is the wide application of this concept beyond investing. It is impossible to say exactly what a business is “worth” because there are so many uncertainties, variables, and judgments required about the future, but its intrinsic value can arguably be estimated within a range. In investing, you would rather be approximately right than precisely wrong. Paraphrasing legend Benjamin Graham, you don’t need to know a guy’s weight to know he is fat.

How about we apply this same mindset to everything? We may not know exactly what something like the minimum wage should be, but maybe we can understand the consequences and possible implications of it being $5/hour (riots) and the ones when it is $20/hour ($50 cheeseburgers).

What are the models?

To the man with a hammer, every problem looks like a nail.

— Charlie Munger

A model is a representation of reality, not reality. Every idea in our head is just a model. We cannot at one time imagine the world, everything in it, and the functional relationships between those things. We have perspectives of the way we see it, which are based on a limited number of concepts.

Why should we care? The idea, concisely captured in the quote, is that one-dimensional thinking leads to us “torturing reality” to fit our current worldview (using our hammer on a screw). Developing a mental toolkit allows us to have more than one way of viewing the world, which gets us closer to reality. The latticework implies the concepts must lie on top of one another so that they are being used simultaneously (hard AF). If we have the most fundamental models, we basically create filters for the information we are increasingly flooded with while using the least amount of energy. Someone who spends a couple of months studying the underlying principles of economics is better suited to interpret new economic information than someone who has spent years reading shallow/topical economic news articles.

Here is a list of the key disciplines and an example of a model from each that has broad applications (most of which can be found in a freshman level college textbook except the one I added at the end — don’t worry, I sold most of my $300 books back to the bookstore for $7, too):

  • physics (critical mass)
  • biology (genetics)
  • psychology (the 28 psychological biases & reasons for misjudgment)
  • economics (information asymmetry)
  • engineering (feedback loops)
  • history (patterns)
  • accounting (cash flow statement)
  • business (Porter’s 5 Forces)
  • chemistry (uncertainty principle)
  • computer science (if-then statements)
  • probability/statistics (normal distribution)
  • math (systems thinking)
  • law (burden of proof)
  • travel (culture & politics)

You and I are too busy to dedicate a meaningful portion of our lives studying physics, computer science, and chemistry. We need to be at brunch, checking memes on IG, or doing whatever else it is we want to be doing. So the obvious (only?) downside to this idea is the time commitment. But Rome didn’t learn mental models in a day. If we make a reasonable effort to nail down the most fundamental concepts at first and give ourselves a realistic timeline of maybe 5-10 years, we should be able to plant a pretty good set of intellectual seeds before our mid-thirties that we will reap benefits from for the rest of our lives. We only need to learn how to ride a bike once.

(If this idea is an absolute non-starter for you, you are reading this at LIV in Miami trying to come down while people are shouting ANOTHER ONE at you in a DJ Khaled voice and you are more likely to ask for a pay cut than learn about “mental models,” at least do yourself the favor and learn the 28 psychological biases.)

Probability

The correctness of a decision can’t be judged from the outcome.

— Howard Marks

You would think I’d stop after coming up with a 5-10 year syllabus for us, but let’s briefly touch on one of the important models relevant to our discussion: probability. Another old rich white guy whose writing I like is Howard Marks of Oaktree Capital. He influenced one of the biggest changes in the way I perceive the world: thinking about the future as a probability distribution (gray) rather than a fixed outcome that can be knowable in advance (black & white). He says, “Not being able to know the future doesn’t mean we can’t deal with it. It is one thing to know what’s going to happen and something very different to have a feeling for the range of possible outcomes and the likelihood of each one happening. Saying we can’t do the former doesn’t mean we can’t do the latter.” Take for instance YouTube sensation King Curtis from Wife Swap with his chicken-nugget-heavy diet and “Bacon is good for me!” declaration. We don’t know what will happen to him, but we can safely assume his range of outcomes is unlikely to set any longevity records.

Take any situation that you can think of and how it worked out. Even though only one thing did happen, a lot of other things could have happened and those are important to appreciate. This concept is referred to as alternative histories. Let’s say we play a game where you have a 90% chance of winning and I have a 10% chance of winning. We play the game one time and I win. If a crowd was watching us without understanding the game, they may think I am better than you because I won. This is obviously a mistake. It doesn’t matter whether we play the game 1, 10, or 1,000 times, you are correct in playing against me every time regardless of the outcome. The only time this wouldn’t make sense is if there was a wager offered to me with greater than 9-to-1 odds (9x my money) if I win and/or you are unable to risk the wager (e.g. the bet was for everything you owned, in which case anything less than 100% certainty of winning would be unacceptable).

The process is more important than the outcome. Think about if our boss took our paychecks on pay-day and bought lottery tickets instead of putting them in our bank accounts. Even if we all won $10 million we should have the same reaction as if we survived a skydive and someone didn’t pack our parachute. Imagine if we replay this scenario 1,000 times and we start to think differently. If we borrow this line of thinking, it may shift the way we judge the actions of others in any field and lead to us slowing down the formation of our opinions based solely on the outcome. Further, it may make our own lives less stressful because although we can never guarantee an outcome, our intuition can take us a long way when we are asking ourselves whether we are doing the right thing that gives us the highest chance of getting what we want. We can ask: if I repeated this 1,000 times, what would likely occur?

We have covered enough ground for one day. Hopefully, I have demonstrated how mental models, and an example of one, can enhance our cognition and lead to more constructive ideas and opinions. Human nature is unlikely to change, so strong opinions and internet trolls are here to stay. But knowledge is a tide that raises all rafts, sailboats, yachts & ships.

I want to make it abundantly clear, that while your blogger here believes quite passionately that mental models are likely the best bread crumbs on the path to understanding and insight, I am a comically long way from mastering a single one of them.

Does any of this mean we are going to change overnight? No, Anastasia it doesn’t.

Firstly, it is hard. Secondly, there is a lot more paperwork to do, and thirdly, you don’t know what you are in for. You could still run for the hills. Come, I want to show you my classroom.


Additional Reading: