Latticework of Mental Models: Checklist

Few months back, I was visiting a friend in the hospital. He was getting discharged after a minor surgery. While helping him pack his stuff I casually flipped through his discharge summary papers. Most of the medical jargon in the file didn’t make much sense to me but one particular thing caught my attention.

Under details of surgery, the last line read – “Mops/instrument counts were correct”. The first thought that came to mind was – are these guys so concerned about their instruments (and even cotton mops) that they count it after the operation? Many of those instruments are anyway disposable and can’t be used again. So what’s the big deal about counting them?

Later I came to know that counting all the instruments and mops is part of their protocol. It’s to make sure that they haven’t left any items inside the body of the person being operated. It was an important step in their written ‘list of things to check’. Made sense.

Hundred of people die every day because of unavoidable blunders (like leaving an instrument inside the patient’s body) by surgeons.

In US alone the number of deaths following surgery is 75,000 per year which is more than the number of road accident fatalities. And these are the cases which are avoidable because they emanate from human errors. The failure rate is disproportionately high and can’t be ignored.

But medicine has become a field of extreme complexity. And not just medicine but many other fields have grown so far beyond the usual kind that avoiding daily mistakes is proving impossible even for our most super-specialized.

So how do you approach this problem? This is the question that intrigued Dr. Atul Gawande, professor of medical surgery in Harvard Medical School, and his quest to find the solution ended at a totally unrelated place. The aviation industry.

In 1930’s the airline industry was manufacturing more powerful and better planes but flying these sophisticated machines became too complicated. Relying on any one person (however expert) to deal with all the complexities invited disaster. So to address this a ridiculously simple tool was proposed which even seemed crazy to those who had spent years carefully developing ever more advanced skills and technologies.

And the strategy was – A Pilot’s Checklist. It was simple, brief and to the point – short enough to fit on an index card. And it worked wonders.

How could something as simple as a checklist be of substantial help? Dr. Gawande, in his book The Checklist Manifesto, explains –

In a complex environment, experts are up against two main difficulties. The first is the fallibility of human memory and attention, especially when it comes to mundane, routine matters that are easily overlooked under the strain of more pressing events….A further difficulty is that people can lull themselves into skipping steps even when they remember them…Checklists remind us of the minimum necessary steps and make them explicit. They not only offer the possibility of verification but also instill a kind of discipline of higher performance.

The researchers have found that simply having the doctors and nurses in the ICU create their own checklists for what they thought should be done each day improved the consistency of care to the point that the average length of patient stay in intensive care dropped by half.

This was a remarkable discovery and a brilliant example of cross pollination of ideas across unrelated disciplines.

The apparent simplicity of checklist belies its power. It’s difficult to accept that such a humble tool can be so effective at improving the results. But when people ignore this simple idea, disaster ensues. Such as this –

In 1987, Northwest Airlines flight 255 crashed shortly after takeoff. All 155 persons aboard except one were killed. A federal report concluded that the probable cause of the accident was the flight crew’s failure to use the taxi checklist to ensure that the flaps and slats were extended for takeoff. Contributing to the accident was the absence of electrical power to the airplane’s takeoff warning system, which consequently could not warn the flight crew that the airplane was not configured properly for takeoff.

Today, no wise pilot, no matter how great his talent and experience, takes off without going through his checklist.

Checklists have proved to be extremely effective decision-making tools in fields as diverse as aviation, medicine, and construction.

Herbert Simon, a nobel laureate and author of Models of My Life, wrote –

If one could open the lid, so to speak, and see what was in the head of the experienced decision maker, one would find that he had at his disposal repertoires of possible actions; that he had checklists of things to think about before he acted.

That’s how Charlie Munger, vice-chairman at Berkshire Hathaway and Warren Buffett’s partner, thinks. Munger is a strong proponent of a checklist approach. In Wesco annual meeting (2007) he said –

I’m a great believer in solving hard problems by using a checklist. You need to get all the likely and unlikely answers before you; otherwise it’s easy to miss something important.

In Investing

When you find a promising new investment idea with a prospect of making a lot of money, it triggers the emotion of human greed which is the enemy of a rational mind.

Guy Spier, a noted value investor and author of The Education of a Value Investor, calls it The Cocaine Brain. According to him –

You go into the greed mode …Neuroscientists have found that the prospect of making money stimulates the same primitive reward circuits in the brain that cocaine does.

Checklists are a systematic way to engage the rational brain, and for investors, they can be highly effective vaccines, inoculating against conventional wisdom and cocaine brain.

In fact Spier, in his book, has devoted a whole chapter discussing the importance of checklist. He writes –

…the mind has a way of skipping over certain pieces of information—including rudimentary stuff like where I’ve left my keys. This also happens during the investment process. The checklist is invaluable because it redirects and challenges the investor’s wandering attention in a systematic manner. I sometimes use my checklist in the middle of the investing process to deepen my understanding of a company, but it’s most useful right at the end as a way of backstopping myself.

When it comes to investing Munger suggests using models in a checklist fashion. He says –

Generally speaking, I think you need mental models – and what I call checklist procedures – where you take a worthwhile list of models and run right down them: “Is this here? Is that here?” and so on and so on…Now if there are two or three items that are very important that aren’t on your checklist – well, if you’re an airplane pilot, you can crash. Likewise, if you’re trying to analyze a company without using an adequate checklist, you may make a very bad investment.

The idea of checklist is very subjective. A borrowed or outsourced checklist isn’t going to be of much help. Every investor has to build his own checklist based on his unique experience, knowledge, and previous mistakes. A checklist created in this manner would be most useful.

“You need a different checklist and different mental models for different companies.”, says Munger, “I can never make it easy by saying, “Here are three things.” You have to derive it yourself to ingrain it in your head for the rest of your life.”

In Poor Charlie’s Almanack, Peter Kaufman has condensed Munger’s teachings into a checklist. He calls this “Investing Principles Checklist”, as it contains the core principles that has made Munger the brilliant investor he is today. Needless to say, you must read it.

Building Checklists

So how do you go about creating checklists?

Here’s what Prof. Sanjay Bakshi suggested in his interview with Safal Niveshak –

The checklist for a small investor who focuses on buying good companies with durable moats would revolve around three factors – business, people, price.

For evaluating business, I highly recommend reading Pat Dorsey’s book – “The Little Book that Builds Wealth”.

It’s such a simple, common-sensical book that investors can learn from. It will help them in spotting moats. It will also help them in keeping away from thousands of companies that have no moats. So, for “business” factor checklist, read that book.

For “people factor”, you need a checklist for evaluating management. Perhaps, we can work on this together for the benefit of your readers.

It would be a simple checklist covering skills (operating as well as capital allocation) and ethical conduct.

There are lot of red flags one should look for:

1. You don’t want to see management paying itself exorbitant salaries and perks.
2. You don’t want to see promoters merging their private companies into the company whose stock you are evaluating.
3. You don’t want them to appoint their relatives who don’t have adequate qualifications.
4. You don’t want them to have a lot of related-party transactions with their own privately held companies.
5. You don’t want to be involved with companies where the promoters trade in and out of the stock.
6. You don’t want to be get involved with promotional managements.

Essentially, you want to keep away from shady promoters.

For “price factor,” a simple rule can be used. You don’t have to make it complicated. A rule like never paying a more than a P/E multiple of 13 (where “E” is expected minimum future earnings) can be used. Since the stock has already passed the tests on “business factors” and “people factors,” having a simple rule on the “price factor” makes a lot of sense.

Peter Bevelin, author of the wonderful book Seeking Wisdom, warns that excessive reliance on checklists isn’t good either. He writes –

They [checklists] may sometimes give us a false sense of security. Checklists work well as long as what may happen can be foreseen. But the unexpected sometimes happens. An unmentioned item may be the core cause of a problem.

To be able to use checklist effectively, we need to understand which situations they work and in which they don’t.

“Doing something according to pre-established rules, filters and checklists often makes more sense than doing something out of pure emotion.”, writes Bevelin, “But we can’t have too many rules, filters or items without thinking. We must always understand what we’re trying to accomplish.”

Building construction is one such profession where people seem to understand the importance as well as the limitations of checklists. To deal with uncertainties associated with the construction, the builders trust on the power of communication. So they maintain two types of checklists. First they have a set of checklists to ensure that stupid but critical stuff is not missed and second they have another set of checklists to ensure people talk and coordinate and accept responsibility.

You would be surprised to discover the rampant use of communication checklist in some unusual places – like award winning restaurants.

At Safal Niveshak, in all our investor interviews, especially the Investor Insight column in Value Investing Almanack, we have a standard question for the investors. Do you use checklists and what does it look like? And every time we have found remarkable insights about checklists.

Conclusion

So we learnt that the purpose of creating a checklist is to avoid obvious and predictable errors. Checklists promote analysis and rationality and eliminate the distractions that often cloud complex decisions.

Put simply, checklist acts as the final circuit breaker in a decision-making process.

A checklist is a way of managing your own mind and guarding against your own specific follies. In the end, checklist is not a mere formula but a means of self awareness.

I would posit that today we learnt a meta-model because the purpose of learning the mental models is to create a checklist of mental models which you can run through mentally while thinking about a problem. And one of those models is checklist itself.

In fact all the mental models we are learning in this Latticework series are supposed to be used in a checklist-style. Munger says –

You’ve got all the tools. And you’ve got to have one more trick. You’ve got to use those tools checklist-style because you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need it. But if you’ve got a full list of tools and go through them in your mind, checklist-style, you will find a lot of answers that you won’t find any other way.

According to Charlie Munger the best thing a human being can do is help another human being know more. And as they say charity begins at home, so I am constantly trying to help myself know more.

Learning about mental models is just the beginning. To be able to use those mental models effectively, one has to work on building his or her own latticework based on knowledge and experience.

It might look like I am trying to spread the knowledge here, but as I have always said – my selfish intention is to solidify my own learning through teaching. The best way to learn is to teach. And as a spillover effect, if just one more person benefits from my effort I would consider it a huge accomplishment for myself.

Take care and keep learning.