16 Mental Models for Founders and Leaders
Make High Quality Decisions with these Frameworks
Think of mental models as the operating systems (OS) that run in the background of your brain. They’re always running — and you’ve put them together, either consciously or subconsciously, from your experiences and information.
Mental models give you a perspective or a frame of mind with which to view the world. They also increase your likelihood to succeed and avoid mistakes.
The idea for building a “latticework” of mental models come from Charlie Munger, who was Warren Buffett’s right-hand man. Here’s a great primer from Farnam Street:
It’s your mind’s toolbox for making decisions. The more tools you have, the more equipped you are to make good decisions.
Mental models have been crucial for me to make important decisions, lead the team, and strategize how to win in the market. As such, here are 15 mental models I’ve used to lead the team at Skillshare.
Decision Making
1. Warren Buffett’s Two-List System
Once the Top 5 planning session was over, Warren then asked “but what about these other 20 things on your list that you didn’t circle? What is your plan for completing those?”
Steve replied confidently “Well the top five are my primary focus but the other twenty come in at a close second. They are still important so I’ll work on those intermittently as I see fit as I’m getting through my top 5. They are not as urgent but I still plan to give them dedicated effort.”
To Steve’s surprise, Warren responded sternly, “No. You’ve got it wrong Steve. Everything you didn’t circle just became your ‘avoid at all cost list’. No matter what, these things get no attention from you until you’ve succeeded with your top 5.”
Such a great reminder on how to prioritize your priorities. I’ve modified this from 5 to 3 priorities, which forces me to focus further. The first priority being the most important thing.
2. 10/10/10 Rule
Most of us have been guilty of making decisions without thinking about the long term consequences, and the 10/10/10 rule can be used to reflect on the long-term by asking yourself:
- How will we feel about it 10 minutes from now?
- How about 10 months from now?
- How about 10 years from now?
This exercise helps take the emotions out of the decision (very important for making good decisions), while forcing you to think through the long-term implications of the decision.
I found the 10/10/10 rule helps clarifies the right decision that results in a win/win/win.
3. Outcome Blind
The biggest trap they fall into is that they judge their performance based on outcomes. “If they win, it’s because they made good decisions. If they lose, it’s because they were unlucky.”
In a previous lifetime, I was a very competitive poker player. This was one of the most important lessons I learned about decision making that I carried over to the business world.
You’ll always have imperfect information but your decision making process is always in your control.
For any big decision, I get input from everyone — our management team, our board, employees, customers, etc to get everyone’s perspective. The rigorous process allows me to de-risk decisions in a timely fashion.
It’s also important to hold steady when things are going extremely well and when things are not going extremely well. By being even throughout both scenarios, it allows you to avoid attribution bias.
By approaching decisions with an outcome blind approach, it allows you to have a higher probability of making high quality decisions.
4. Right and Non Consensus
“I think that every single day there are many decisions that people make and they all have consequences. And your life essentially depends on the cumulative quality of the decisions you make.”
“You have to be an independent thinker in markets to be successful because the consensus is built into the price. You have to have a view that’s different from the consensus.”
“To win at stocks or entrepreneurship, you must bet against the consensus and be right.” — Ray Dalio
In order to produce exponential results, you have to both bet against convention and be right.
This is harder than it sounds as you’ll be wrong majority of the time. If you happen to be right, the market will reward you similar to a power law distribution.
5. Rule of Three
Here’s one pro-tip that I learned from one of my mentors at McKinsey: The Rule of 3. Whenever you’re trying to persuade a senior person to do something, always present 3 reasons. Not 2, not 4, but exactly 3.
I love the rule of three. I use it as a framework for everything from prioritizing priorities to making recommendations.
Strategy
6. Competitive Moat
In days of old, a castle was protected by the moat that circled it. The wider the moat, the more easily a castle could be defended, as a wide moat made it very difficult for enemies to approach. A narrow moat did not offer much protection and allowed enemies easy access to the castle. To Buffett, the castle is the business and the moat is the competitive advantage the company has. He wants his managers to continually increase the size of the moats around their castles.
I like this diagram because it specifies moat sources. You can see Facebook exploit each of these — high switching costs, network effects, and efficient scale (now powered by machine learning).
When thinking through competitive advantage and strategy, it’s important to think through the moat that you’ll create over time. This allows your business to defend against any competitors and win in the long-run.
7. Network Effects & Critical Mass
“The effect that one user of a good or service has on the value of that product to other people. When a network effect is present, the value of a product or service is dependent on the number of others using it.”
Nothing scales as well as a software business, and nothing creates a moat for that business more effectively than network effects.
Network effect is now becoming table stakes for any strategy. Typically, companies that reach critical mass on the Internet result in a winner-take-all market — the holy grail of startups.
8. Centralized, Decentralized & Distributed
Blockchains are politically decentralized (no one controls them) and architecturally decentralized (no infrastructural central point of failure) but they are logically centralized (there is one commonly agreed state and the system behaves like a single computer) — Vitalik Buterin, Ethereum
One of the key factors in reaching network effects is to build a distributed and decentralized model that shifts power back to the individual.
Understanding the differences between these three will give you the understanding of how Bitcoin and the underlying technology around the Blockchain works.
9. Game Theory
Game theory is the study of how people behave in strategic situations. By “strategy” we mean a situation in which a person, when choosing among alternative courses of action, must consider how others might respond to the action he takes. Strategic thinking is crucial not only in checkers, chess, and tic-tac-toe but in many business decisions. — Greg Mankiw
Game theory basically states that you should pick the strategy where the maximum advantage of your opponent is minimized.
10. Economies of Scale
Economies of scale allow a company to grow exponentially without growth in their fixed costs or overhead.
Software startups are huge beneficiaries of this rule. Companies like Google, Facebook, and Twitter can add customers or users without adding any fixed costs. Service businesses are more difficult to scale.
Here’s an example of how it works with a company like Amazon:
Leadership
11. Pyramid Principle
The Pyramid Principle advocates that “ideas in writing should always form a pyramid under a single thought.”
The key take-aways from the Pyramid Principle:
1. Start with the answer first.
2. Group and summarize your supporting arguments.
3. Logically order your supporting ideas.
When thinking through communicating, I always lead with this pyramid principle. Lead with the answer first instead of having a “grand unveiling” at the end. It gets to the conclusion quicker, allowing everyone to get aligned and have a candid conversation.
12. 99/50/1
The method is a framework for when you should check in with your product teams. I’ve taken it and adapted it to my own studio.
If you want to use this method, you should check in with your product team at these critical points:
- During the beginning of the project, when there’s still 99% of the work left to be done
- The halfway point, where there’s around 50% of the work left
- Just before the finish line, where there’s 1% left to complete
One of my favorite sayings is to “sync early and often”. This means being heavily involved at the beginning of the process and getting less involved as the project moves through execution.
13. Directly Responsible Individual (DRI)
A management concept, originally championed by Apple, that good things come if someone is explicitly responsible for something.
If there’s more than one DRI, then there is no DRI. Often times, I find that decision making speeds up when clarifying the DRI to heighten ownership and accountability. This also cuts down on unnecessary meetings.
14. Team of Teams
Team of Teams is an operating model that pulls together different teams — and their members, into a seamless network of organization.
In a Team of Teams, decision-making authority is pushed out to each team leader instead of residing only with the very top leadership of an organization. The role of upper leadership changes from one focused on making every decision throughout the organization to a role of providing information and context to each team so that they are all connected to a common purpose and have the best information on which to make their own decisions.
15. Radical Candor
If the vertical axis is caring personally and the horizontal axis is challenging directly, you want your feedback to fall in the upper right-hand quadrant. That’s where radical candor lies.
16: Listen, Decide, Communicate
So when you’re making a decision as an executive, a CEO, or any leader, this listen, decide, communicate sequence is really important. You once told me that it’s important to do those three things in that order. You listen first, then you decide, then you communicate it, and in close proximity with one another.
This is a communication model from Dick Costolo (former CEO of Twitter). The key is to always listen first, never do the steps out of order, and shorten the gap between each step.
These mental models might not make the decisions any easier — but they will give you a framework to think through them clearly. I hope you use them to go and do something you’re proud of.
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