mental model

• Circle of competencemental model

  How much you know matters less than knowing where your knowledge ends. Studies show that people judge their standing relative to others poorly, especially weak performers. How large the effect is and where it comes from are still debated.

• Compoundingmental model

  When gains are added to the base and go on to earn gains of their own, growth is exponential, not linear. Studies show that people think linearly by intuition and badly underestimate this kind of growth, which leads them, for example, to put off saving.

• Cost of action vs cost of inactionmental model

  Doing nothing is also a choice, with its own costs. Research shows that we judge harm caused by an action more harshly than the same harm caused by inaction, even though, looking back, we more often regret what we didn't do.

• Diminishing returnsmental model

  Each extra unit of a good thing usually brings less than the one before. For money, large studies show that well-being rises with income, but by roughly the same step for every doubling, not for every extra amount.

• First-order negative, second-order positivemental model

  The immediate consequences of a decision (first-order) often pull in the opposite direction from the ones that follow them (second-order). Dalio argues that those who judge only by the first rarely reach their goals.

• Maximizing vs satisficingmental model

  Some people look for the best possible option (maximizing), others choose the first option that clears their bar (satisficing). Studies by Schwartz and colleagues show that maximizers sometimes get objectively better outcomes but are less satisfied with them.

• Opportunity costmental model

  The real cost of a choice is the best alternative you give up. Studies show that people rarely think of that alternative on their own, but that a simple reminder of it changes their decisions. The effect is real, but smaller than first thought.

• Regression to the meanmental model

  An extreme result is usually followed by one closer to the average, even if you do nothing. If you don't account for this, you end up believing that praise hurts, criticism helps or a treatment worked, when it was only chance.

• Via negativamental model

  Sometimes the best improvement is to take something away, not to add. Studies show that people reflexively look for additive solutions and miss subtractive ones, but that a simple reminder that they can also remove things changes their ideas.