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Latticework of Mental Models: Benford’s Law

On 25 November 2003, Kevin Lawrence was sentenced to 20 years in prison for pulling off possibly the biggest financial fraud in Washington State’s history. Here’s the backstory.

Kevin Lawrence graduated from high school in 1984. After a brief stint with a brokerage firm Lawrence bought a bowling alley and converted it into a fitness gym. He equipped the gym with modern exercise equipment, computers and hired chiropractors, masseuses and a nutritionist for the facility. But that was just the beginning of his entrepreneurship dreams. Soon he started working on an ambitious business plan to create a chain of high tech health clubs. He pitched the idea to a lot of investors.

Lawrence claimed that his startup would be an industry innovator that integrated fitness and health care into one business model, i.e., consumers could do fitness workouts and obtain health care within the same facility. His proposition also included offerings for design, manufacturing, and marketing of fitness equipments. Plus, he planned to build software to analyze the club member’s physical performance.

Lawrence must have been a good storyteller for he was able to convince more than two thousand investors and raise close to $100 million.

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Latticework of Mental Models: Thinking From First Principles

First principles thinking is one of the most effective mental tools for solving problems, especially the hard ones. And no one embodies this philosophy of first principles thinking better than Elon Musk, founder of PayPal, SpaceX, Tesla Motors and SolarCity.

Musk, in one of his interviews, said –

It’s most important to reason from first principles rather than by analogy. The normal way we conduct our lives is we reason by analogy. We’re doing this because it’s like something else which was done or it’s like other people are doing. It’s mentally easy to reason by analogy rather than by first principles. First principles is the Physics-way of looking at the world. What that really means is that you boil things down to the most fundamental truths and then reason up from there. That takes a lot more mental energy.

For example, somebody could say that battery packs are really expensive and that’s just the way they’ll always be because that’s the way they’ve always been in the past. No! That’s pretty dumb. If you apply that reasoning (analogy) to anything new then you won’t be able to get to that new thing.

For batteries people say, historically it has cost $600 per kilowatt hour and it’s not going to be much better than that in the future. First principles thinking would say, what is the market price of the basic constituents of the battery? It’s got Carbon, Nickel, Aluminium, and some polymers for separation. So breakdown on the material basis and ask, “If we bought that in London metal exchange, what each of those things cost?” Oh! It’s like $80 per kilowatt hour. Clearly, you need clever ways to take those material and combine them into the shape of a battery cell and you can have batteries much much cheaper than anyone realized.

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Latticework of Mental Models: Hot Hand Fallacy

One of the most embarrassing moments of my childhood was the day when my class teacher asked me something about Sachin Tendulkar. I replied, “Who is Sachin Tendulkar?”

I was in 6th standard. The entire class, including the teacher, burst into laughter. That was the day when I started taking an active interest in cricket. Of course, the motivation was to avoid looking like a fool in a cricket crazy nation.

“Dravid is not in form these days.” Claimed one of my friends.

“I hope he comes back in form soon else they will drop him from the national team.” Argued other friend.

I nodded in agreement. I was faking because one thing that still baffled me was the idea of a player being “in-form” or “out-of-form.”

“What’s this in-form and out-of-form business?” I asked my best friend. Typically, looking-like-a-fool fear goes away when you’re with your best buddies, right? He was the only one who I didn’t feel the need to impress with my cricket knowledge.

Well, if a player plays consistently well for many innings, we say he is in good form. Otherwise, he is considered out of form, he explained, “An in-form player is always in demand because he’s expected to continue playing well.”

Why does an in-form player play well? If it’s the past performance that determines the present form then how does it ensure the future performance? Isn’t this form business based on circular logic?

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Latticework of Mental Models: Naive Realism

Let me start by inviting you to have an intellectual and emotional experience. Take a few seconds and stare at the picture below.

Image-1 (Source: The Seven Habits of Highly Effective People by Stephen Covey)

Observe closely. What do you see?

You’d probably see a woman who is looking away from you. You may notice that she is wearing a necklace. She seems to have high cheekbones, long eyelashes, and a pointy nose.

Now I ask you to take your eyes off her and focus on the second picture below –

Image-2 (Source: The Seven Habits of Highly Effective People by Stephen Covey)

What do you see now? Another woman? What does she look like? How old do you think she is? What is she wearing? In what kind of roles do you see her?

You probably would describe this second woman as beautiful as the first one. You might guess that she is about 25 years old and fashionable. In fact, the second image looks like a lower resolution version of the first image.

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Latticework of Mental Models: Domain Dependence

Imagine this. You are escorted into a room. On one corner there’s a table with three items on it: a box of board-pins, a matchbox, and a candle. Your task is to attach the candle to the wall, so the wax doesn’t drip onto the table.

A psychologist named Karl Duncker first designed this experiment in 1945.

About seventy-five percent of the participants who take part in this experiment try following solutions.

First, they try to pin the candle onto the wall. It doesn’t work. Then they try to light the candle and use the dripping wax to attach it to the wall, but that’s usually not strong enough to hold the candle. So that doesn’t work either.

What about you? How would you solve this? Take a moment and think about it.

Very few people see the solution at once. Some people find it after only a minute or two of thought. Others see it after stumbling through several unsuccessful attempts. Most fail to solve it without some outside help.

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Latticework of Mental Models: Manufactured Memories

Yesterday when I logged into my Facebook account, it showed a picture I had posted six years back. In the frame, I was having lunch with an old school friend.

It brought a smile on my face.

Interestingly, I had completely forgotten about the lunch. I just couldn’t remember being present when that picture was taken. My brain had conveniently erased that incident from memory.

I am sure it happens to others too. Also, Facebook knows it, so they introduced this feature. Bringing back those lost memories creates a pleasant experience which isn’t much different from the one when you find money in your old pant pockets.

How would it be if we never forgot anything? Why does our brain choose to remember something and spaces out on others? Is there an evolutionary reason behind this behavioural quirk? Let’s explore these questions today.

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Latticework of Mental Models: Fundamental Attribution Error

The first impression is the last impression. I am sure you’ve heard this advice numerous times especially from the communication skill experts. But the more I studied psychology, stronger became my belief that there’s quite a bit of truth in this saying. However, if you’re into the business of working with people, it’s the first impression you shouldn’t trust.

Had I gone with my first impressions about some of the strangers I met in my life, I wouldn’t have found my best friends. If you look back in your life and trace the history of your relationships with your best buddies, you would tend to agree with me on this. In fact, go ahead and ask your old friends about how they thought of you (in the first meeting) as a prospective candidate for a long-term friendship.

Whenever we meet someone for the first time, we have a natural tendency to attribute his behaviour to his personality. If that stranger’s behaviour is cold and unresponsive, we jump to the conclusion that he is either shy or introvert or perhaps arrogant. Whereas an individual who seems warm and lively makes you believe that the guy is an extrovert.

Sometimes you may be right, but often you are falling for what is known as the Fundamental Attribution Error. This error is the result of people’s tendency to place an overemphasis on internal characteristics (personality) to explain someone else’s behaviour in a given situation rather than considering the external factors guiding that situation.

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Latticework of Mental Models: Echo Chamber Effect

A few weeks back I was reading a report penned by Amay Hattangadi and Swanand Kelkar from Morgan Stanley. In that report, I came across a very intriguing word called “Echo Chamber”. The authors wrote –

The most telling reaction post Brexit was from a London based friend who apart from lamenting the outcome went on to say that he didn’t know of a single person who was likely to have voted “Leave” and hence felt that the outcome was rigged. This is what we called the “echo chamber” in one of our earlier essays. We tend to be surrounded by people who are like us and share our world view. Social media accentuates this by tailoring our news and opinion feeds to match our pre-set views. To avoid falling into this homogeneity trap, one needs to seek out and dispassionately engage with people whose views differ from your own and that’s true not just for current affairs but your favourite stocks as well.

The word ‘echo chamber’ painted such a vivid picture in my mind that I decided to give it a permanent place in my mental attic. Echo chamber has thus become an important node in my latticework of mental models.

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