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Last week, Christensen gave a talk at Apple’s headquarters as part of a Duke in Silicon Valley event. \u00a0Talking with Christensen at the reception, the similarity struck me between Christensen’s frameworks and the ideas explained by Munger. \u00a0When I took Christensen’s class in 2001 or 2002, I remember being handed at the beginning of class a couple of summary papers with maybe 15-20 different hieroglyphic-like symbols representing different theories and models that are “true” in some circumstances.<\/div>\nSome of the Christensen frameworks from his class containing investment wisdom:<\/h2>\n
Some of the Christensen frameworks from his class containing investment wisdom:<\/h2>\n\n\n- Disruptive innovation model<\/strong> — his classic model where “crummy” products get better over time and take over market segments the incumbents are happy to abandon<\/li>\n
- Intended vs. emergent strategies<\/strong> — I love this one as it throws out the idea of a CEO as the master strategist divining the best path forward and dictating from on-high. \u00a0In my experience, good strategy and competitive advantage more often emerges from the daily activities of the organization and evolves over time. \u00a0The CEO’s job is more to be a great observer of what’s already happening to find a way to encourage the activities that are building long-term competitive advantage and discourage bad habits in the organization.<\/li>\n
- Culture and capabilities framework<\/strong> — culture is a learned experience from solving problems. \u00a0Through those experiences, an organization develops a shared belief system on how to approach and solve problems. \u00a0Please see all these posts on culture.<\/a><\/li>\n
- Integration vs modularity<\/strong> — In some industries, the profits are in the integration and in others, the profits are in modules (Microsoft or Intel in the PC era versus IBM).<\/li>\n<\/ul>\n<\/div>\nFor Munger, his ideas of “worldly wisdom” have been circulated from talks he gave in the 1990’s. \u00a0The idea is that a wise person needs a “latticework of mental models” rather than the ability to crunch numbers in his head or regurgitate facts. \u00a0He explains that multiple models are better (shades of Christensen emphasizing a collection of frameworks rather than the singular focus of some academics), the models should be cross-disciplinary, and the best people can figure out which models are relevant to which situation.<\/div>\n
Some Munger mental models related to investment success:<\/h2>\n\n\n- Compound interest<\/strong> —<\/li>\n
- Math of combinations and permutations<\/strong> — he mentions how our brains are not wired for our instincts to be accurate in these calculations<\/li>\n
- Accounting<\/strong> — “one hell of an invention” but everyone knows it is at best a crude approximation<\/li>\n
- Back-up systems<\/strong> — it is wise to build a bridge for more weight than expected<\/li>\n
- Ask ‘why’ multiple times<\/strong> — helps reveal true reasons and clear thinking<\/li>\n
- Impact of subconscious on human decision-making<\/strong> — he often examines a situation on two levels, on one level are the more obvious industry or market dynamics and on a secondary level are his attempts to understand the subconscious and psychological effects that may be at work<\/li>\n
- Experience curve and advantages of scale<\/strong> — please see this post<\/a> and Munger makes the simple analogy that as the size of a tank increases, the steel only increases by the square but the volume increases by the cube<\/li>\n
- How human institutions and bureaucracies behave<\/strong> —<\/li>\n<\/ul>\n<\/div>\nIn fact, business school itself is a gathering of theories\/mental models\/frameworks to help one recognize situations and respond. \u00a0Of course, there is a risk that some of the models taught as gospel turn out to be more harmful than helpful (at the top of that list I would put ‘beta’ as a measure of risk and the efficient market theory).<\/div>\n\n
\n- Classic: Michael Porter’s Five Forces of Competition (see this post about it)<\/a><\/li>\n
- Classic: experience curve, or economies of scale (see this post about it)<\/a><\/li>\n
- 4 P’s of Marketing (Product, Price, Place, Promotion) — don’t think I have ever used this, but it sounds good<\/li>\n<\/ul>\n<\/div>\nOur brains are assisted by thinking in frameworks or models to help us remember important concepts, recognize the patterns where those concepts may apply, and provide ourselves a hint of what action to take. \u00a0To work on understanding and being able to apply many models is great advice from two great thinkers.<\/div>\n
- \n
- Disruptive innovation model<\/strong> — his classic model where “crummy” products get better over time and take over market segments the incumbents are happy to abandon<\/li>\n
- Intended vs. emergent strategies<\/strong> — I love this one as it throws out the idea of a CEO as the master strategist divining the best path forward and dictating from on-high. \u00a0In my experience, good strategy and competitive advantage more often emerges from the daily activities of the organization and evolves over time. \u00a0The CEO’s job is more to be a great observer of what’s already happening to find a way to encourage the activities that are building long-term competitive advantage and discourage bad habits in the organization.<\/li>\n
- Culture and capabilities framework<\/strong> — culture is a learned experience from solving problems. \u00a0Through those experiences, an organization develops a shared belief system on how to approach and solve problems. \u00a0Please see all these posts on culture.<\/a><\/li>\n
- Integration vs modularity<\/strong> — In some industries, the profits are in the integration and in others, the profits are in modules (Microsoft or Intel in the PC era versus IBM).<\/li>\n<\/ul>\n<\/div>\n
For Munger, his ideas of “worldly wisdom” have been circulated from talks he gave in the 1990’s. \u00a0The idea is that a wise person needs a “latticework of mental models” rather than the ability to crunch numbers in his head or regurgitate facts. \u00a0He explains that multiple models are better (shades of Christensen emphasizing a collection of frameworks rather than the singular focus of some academics), the models should be cross-disciplinary, and the best people can figure out which models are relevant to which situation.<\/div>\nSome Munger mental models related to investment success:<\/h2>\n
\n- \n
- Compound interest<\/strong> —<\/li>\n
- Math of combinations and permutations<\/strong> — he mentions how our brains are not wired for our instincts to be accurate in these calculations<\/li>\n
- Accounting<\/strong> — “one hell of an invention” but everyone knows it is at best a crude approximation<\/li>\n
- Back-up systems<\/strong> — it is wise to build a bridge for more weight than expected<\/li>\n
- Ask ‘why’ multiple times<\/strong> — helps reveal true reasons and clear thinking<\/li>\n
- Impact of subconscious on human decision-making<\/strong> — he often examines a situation on two levels, on one level are the more obvious industry or market dynamics and on a secondary level are his attempts to understand the subconscious and psychological effects that may be at work<\/li>\n
- Experience curve and advantages of scale<\/strong> — please see this post<\/a> and Munger makes the simple analogy that as the size of a tank increases, the steel only increases by the square but the volume increases by the cube<\/li>\n
- How human institutions and bureaucracies behave<\/strong> —<\/li>\n<\/ul>\n<\/div>\n
In fact, business school itself is a gathering of theories\/mental models\/frameworks to help one recognize situations and respond. \u00a0Of course, there is a risk that some of the models taught as gospel turn out to be more harmful than helpful (at the top of that list I would put ‘beta’ as a measure of risk and the efficient market theory).<\/div>\n\n- \n
- Classic: Michael Porter’s Five Forces of Competition (see this post about it)<\/a><\/li>\n
- Classic: experience curve, or economies of scale (see this post about it)<\/a><\/li>\n
- 4 P’s of Marketing (Product, Price, Place, Promotion) — don’t think I have ever used this, but it sounds good<\/li>\n<\/ul>\n<\/div>\n
Our brains are assisted by thinking in frameworks or models to help us remember important concepts, recognize the patterns where those concepts may apply, and provide ourselves a hint of what action to take. \u00a0To work on understanding and being able to apply many models is great advice from two great thinkers.<\/div>\n - Classic: experience curve, or economies of scale (see this post about it)<\/a><\/li>\n
- Math of combinations and permutations<\/strong> — he mentions how our brains are not wired for our instincts to be accurate in these calculations<\/li>\n
- Intended vs. emergent strategies<\/strong> — I love this one as it throws out the idea of a CEO as the master strategist divining the best path forward and dictating from on-high. \u00a0In my experience, good strategy and competitive advantage more often emerges from the daily activities of the organization and evolves over time. \u00a0The CEO’s job is more to be a great observer of what’s already happening to find a way to encourage the activities that are building long-term competitive advantage and discourage bad habits in the organization.<\/li>\n