In 1996, Charlie Munger gave a talk titled Practical Thought about Practical Thought? where he attempted to explain the success of Coca-Cola using the simplest, most fundamental academic models he could find. Ideas from the physical world, from biology, and from psychology and business. You can read the speech here.
He starts the speech by outlining “Five ultra-simple general notions that I find helpful in solving problems.” His algorithm is very much worth downloading into your own brain, and so we present it below.
Here are the five simple notions, found in Damn Right!: Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger and Poor Charlie's Almanack.
My first helpful notion is that it is usually best to simplify problems by deciding big “no-brainer” questions first.
2. Numerical Fluency
The second helpful notion mimics Galileo's conclusion that scientific reality is often revealed only by math, as if math was the language of God. Galileo's attitude also works well in messy practical life. Without numerical fluency, in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.
Inverting the problem won’t always solve it, but it will help you avoid trouble. Call it the avoiding stupidity filter.
The third helpful notion is that it is not enough to think problems through forward. You must also think in reverse, much like the rustic who wanted to know where he was going to die so that he'd never go there. Indeed, many problems can't be solved forward. And that is why the great algebraist, Carl Jacobi, so often said: “invert, always invert.” And why Pythagoras thought in reverse to prove that the square root of two was an irrational number.
4. Study The Basics
You need to understanding the big nuggets of wisdom in the three buckets of useful knowledge. Munger believes in using these regularly and in combination:
The fourth helpful notion is that the best and most practical wisdom is elementary academic wisdom. But there is one extremely important qualification: you must think in a multidisciplinary manner. You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject. Where elementary ideas will serve, your problem solving must not be limited, as academia and many business bureaucracies are limited, by extreme balkanization into disciplines and subdisciplines, with strong taboos against any venture outside assigned territory. …
If, in your thinking, you rely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity.
This happens in part because professional advisors are often undone, not by their conscious malfeasance rather by troubles found in their subconscious bias.
His cognition will often be impaired, for your purposes, by financial incentives different from yours. And he will also suffer from the psychological defect caught by the proverb: to a man with a hammer, every problem looks like a nail.”
5. Lollapalooza Effects
And you need to watch out for when really big ideas combine.
The fifth helpful notion is that really big effects, lollapalooza effects, will often come only from large combinations of factors. For instance, tuberculosis was tamed, at least for a long time, only by routine combined use in each case of three different drugs. And other lollapalooza effects, like the flight of an airplane, follow a similar pattern.
See how Munger applies these in this essay. Learn more about the wit and wisdom of Charlie Munger by picking up a copy of Poor Charlie's Almanack and Damn Right!: Behind the Scenes with Berkshire Hathaway billionaire Charlie Munger.