If The Joker in The Dark Knight was an agent of chaos, then entrepreneurs are the exact opposite of that, Chaos Managers. Entrepreneurs deal with chaos every single day and try to find the best possible outcomes for their businesses. And since every situation is so varied that it would be beneficial if there were an framework that would help an entrepreneur make better decisions.
These 5 mental models have helped us immensely in our journey of bootstrapping TFTH. They have guided us in making the right decisions and always stay the course, even when things got really challenging.
5 Mental Models that Helped Us in Better Decision Making
- Occam’s Razor –There are many interpretations to this model but the best one that we like is “The simplest solution tends to be right or put differently, pick the one that has the least number of assumptions”. We find this to be extremely useful whenever we don’t have enough data to make informed decision. And in such situations we always take that route that has minimum assumptions for every assumption introduces error into the decision model. This comes in handy whenever we designing a user flow for our product.
- Compounding – This is one mental model that is perhaps used by finance guys more than the entrepreneurs. It is so powerful that Einstein once said —
“Compound Interest is the Eighth Wonder of the World. He who understands it, earns it… He who doesn’t… pays it.”
One would wonder how compounding helps in better decision making. It helps by making us realize that if we keep on doing good habits (in business), then those will compound over time to take us closer to our goals. A lot of times when we are in deep execution, we lose sight of the fact that our daily small efforts will result into something monumental. Compounding helps us stay focussed. It also helps us take a long term view of business much like Jeff Bezos.
- Inertia – Inertia would perhaps be the least loved concept when it comes to first principles of physics but if applied judiciously, it can help generate positive and better outcomes in business. In the book Nudge, author Richard Thaler refers to it by Status Quo Bias. Put simply it means that we tend to remain on a course of action even if that course might not be in our best interest. For example if we subscribe to Netflix and don’t watch it beyond one month, we would still not cancel its subscription even though it is costing us financially every month. All the subscription services around the world play on people’s inertia to cancel the subscription hence raking in huge amount of recurring money. We put it to use to design our product better. Since we know that people don’t take too much hassle to change the default settings (due to inertia), we keep our product default settings to benefit our users.
- Tragedy of the Commons – No one captures tragedy of the commons better than Aristotle who remarked –
“What is common to the greatest number gets the least amount of care. Men pay most attention to what is their own; they care less for what is common; or at any rate they care for it only to the extent to which each is individually concerned. Even when there is no other cause for inattention, men are more prone to neglect their duty when they think that another is attending to it”
What Aristotle said way back is still relevant today. In an organisation, if a task is to left to be shared among 2 or more people then it always almost result in sub-optimal output. This model doesn’t go against teamwork but asks for pinning accountability of the task to one person.
- Margin of Safety – If you are a fan of Warren Buffett, then you would already know this. In financial terms, Margin of Safety is the difference between intrinsic value of stock and its share price. And any value investor would love to buy that stock that has good margin of safety for that allows cushion against loss of capital. We use the same theory to design our business models and product/service offerings. While preparing our annual financial plan, we always keep that cushion in case things don’t go our way, we don’t lose our sleep. Similarly we always try to build our margin of safety (from other competitors) through 4Ps framework.
These mental models have helped us immensely in making better decisions throughout our entrepreneurial journey. Do you use any mental model that you would like to share?
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Erin shows overscheduled, overwhelmed women how to do less so that they can achieve more. Traditional productivity books—written by men—barely touch the tangle of cultural pressures that women feel when facing down a to-do list. How to Get Sh*t Done will teach you how to zero in on the three areas of your life where you want to excel, and then it will show you how to off-load, outsource, or just stop giving a damn about the rest.