Mental models for entrepreneurs

Mental models are concepts or processes that can be applied across industries and to real life. I use my toolbox of mental models to more quickly shift my mindset and keep my core values at the forefront while approaching complex problems.

Starting a business is one of the most difficult things I’ve done. Here are some mental models applied to entrepreneurship I use to make better decisions. (P.S. This is a running list so I’m adding and changing things regularly!)

Inversion Thinking

Inversion thinking is approaching a situation from the opposite end of what is the natural starting point. First, define the problem you are trying to solve. Now, how can you make that problem worse? I’m listing this first because I believe knowing what you shouldn’t do is much easier than knowing exactly what to do (and because this exercise is fun!).

“Avoiding stupidity is easier than seeking brilliance” ~ Charlie Munger

The map is not the territory

What makes a map useful is its reduction of time and space into a snapshot. A map is not all encompassing and your perspective is not all encompassing. Especially at the idea-stage we have many assumptions and many models we’ve constructed to help understand the problem and market. Explicitly pointing those out can help you find the gaps between your map and the territory. What are you simplifying without knowing it? Is it an accurate similifaction? How is it shaping your product or service?

Circle of competence

Some say “You don’t know what you don’t know”. But, what if we could know what we don’t know and use it to ask better questions and make better decisions. Charlie Munger is a big proponent of staying relatively within the bounds of what you know because it

First Principles Thinking

Start with the essentials. At some point in your entrepreneurship journey you will probably be a one person (or few people) team. This means wearing many hats and constantly having something to do. First principles thinking means simplifying your product or solution into a “Minimum Viable Product” or MVP and getting a solid foundation. This can also be applied to learning anything.

Thought Experimenting

Though experimenting is using your imagination to encourage speculation, change paradigms, and remove boundaries. It’s like a testing environment inside your mind! This is especially important in new spaces like machine learning or quantum computing where the future is less concrete.

Second Order Thinking

A second-order system is one described by responses. Using second-order thinking means you think about the responses, or consequences, or your 1st order decision. Then, you can evaluate the likeness of the response to make better longterm decisions.

Bayesian Thinking

Bayesian analysis is a method of statistical inference that combines prior knowledge with new evidence to guide the inference process. When we find new information about our market or target audience or investors we must use prior knowledge to better understand the new datapoint and adjust our thinking. When presented with new information it’s easy to put prior points into binaries — but it’s important to know that everything is true to some %.

Oscar’s Razor / Law of Parsimony

Simple explanations are more likely to be true than complicated ones. For an entrepreneur this means designing for simplicity. How do you know if something is “simple”? Find the path with the fewest assumptions. This also means your solution will be easier to execute and easier to test.

Arbitrage

If a good can be bought in one market and sold in another for profit it’s an arbitrage. The best ideas come at an intersection of industries or markets. Look outside your market for inspiration.

Supply and Demand

Supply and demand is the basic equation of economic life: a limited supply of neccessary goods and the competition for these goods. The factors of demand include:

• Social Proof
• Incentives
• Envy & Jealousy
• Feedback loops
• Association
• Commitment & consistency

How do these factors (and others) play into the mind of your target personas?

Scarcity

When resources are limited the mindset is desperate and needy. It often reveals the deepest human and market needs. Ask, “What decisions are consumers likely to make when resources are low in my market?”

Mr. Market

Mr. Market is an analogy for the stock market first introduced by Ben Graham. Warren Buffet explains, “Imagine … Mr. Market your friend who has emotional problems and will name very unstable prices. He also doesn’t mind being ignored. Mr. Market is there to serve you, not guide you. It is in his pocketbook, not his wisdom that you will find useful. You are free to ignore him or take advantage of him but it will be disastrous if you fall under his influence.”

There is a lot of learn from this analogy. One piece of advice I take from it is listen to people, the market, your consumers, etc. but don’t let them control you. Don’t fall under their influence. Be conscious.