Mental Model: Economics

A mental model is an explanation of a thought process about how something works in the real world. Mental models help shape our behaviour and define our approach to solving problems (akin to a personal algorithm) and carrying out tasks. Mental models have been studied by cognitive scientists as part of efforts to understand how humans know, perceive, make decisions, and construct behavior in a variety of environments. Charles Munger provides a concept of “Elementary, Worldly Wisdom” which consists of a set of mental models framed as a solving problems of business, finance and investing. According to Munger, only 80 or 90 important models will carry about 90% of the freight in making you a worldly-wise person.

Articles on Economics as a Mental Model for Investing

The Market for ‘Lemons’: Quality Uncertainty and the Market Mechanism” by George Akerlof, The Quarterly Journal of Economics, 1970, vol. 84, issue 3, pages 488-500

What Determines Productivity?” by Chad Syverson, Journal of Economic Literature 2011 49(2): 326–65.

The world in balance sheet recession: causes, cure, and politics” by Richard C. Koo at Nomura Research Institute, Tokyo

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