Guide to Smart Decision Making Using Mental Models

Guide to Smart Decision Making Using Mental Models

Do you ever look back at your past and seriously question some of your decisions?

If so you’re not alone. As it turns out, research shows humans are not terribly rational beings, and we are all prone to mental errors when it comes to decision making.

Habits researcher and writer James Clear talks about several common mental mistakes we tend to make. Here are some of them.

  • Survivorship bias – where we focus on the winners while forgetting about the vast swathes of humanity that used the same methods but failed. For example, we might think because Bill Gates dropped out of college, that we can also do so and be successful (although even Gates says he “got lucky” and advises students not to drop out!)
  • Mindset anchoring – this is about limited availability. For example, when a shopkeeper puts a limit on a product (e.g. limit of six per customer), people will tend to buy more of that product than they originally intended.
  • Confirmation bias – this is where we seek out information that confirms our pre-existing beliefs.
  • Illusory correlation – such as perceiving things for which there is no evidence (such as the full moon sends people crazy)

How to make better business decisions

A good way to start is by recognising some of the mental errors you make and becoming aware of your prejudices and bad thinking habits.

There are also mental models that can help you make better decisions. Mental models are basically ways of thinking or worldviews, and they are something we all use. The problem however is that we tend to use the same ones over and over, and to try to fit problems into our existing worldview.

Learning new types of mental models can help you overcome biases and think in more rational ways. There are hundreds of mental models around we can use. Here are some examples:

  • Margin of safety – this involves creating buffers or not cutting it too close (such as by allowing an extra 15 minutes to drive to a meeting, or by saving a percentage of our income to leave room for unexpected costs).
  • Diversification – e.g. reducing the risk of volatility by investing in a variety of assets.
  • Inversion – this is about thinking backwards as well as forwards. One way to do this is to seriously consider what mistakes you want to avoid. Examples include asking things like “what would a bad manager do?”, or “what would alienate a customer?”, and so on. 

Most of us act out of habit when it comes to making decisions. Learning new ways of thinking can help us to expand our ability to make better decisions in business and in life.

Leave a reply

Your email address will not be published. Required fields are marked *