In my previous article I mentioned a book called "The Art of Thinking" by a Chinese entrepreneur and practitioner of Charlie Munger (Trades, Portfolio)’s mental models approach named Cheng Jia. The book is about how to apply Munger’s thinking models in real life. One reader has asked me where this book is available for purchase. Unfortunately at this point, the book is only available in China and in Chinese only, but I’ll keep sharing some of the most interesting insights from the book for non-Chinese readers.
I wrote about one of the most interesting insights from the book called “hidden messages” in my previous article. In this article, I’ll share another important takeaway, which is what Cheng calls “the four layers of thinking models.”
The idea is very straightforward. Cheng suggests that to solve any problem, we can ask questions and seek answers from 4 layers – experiential, methodical, academic disciplinary and philosophical. Each layer requires exponentially deeper thinking and understanding.
The classic example Cheng uses is haggling. He tells the story of how he bought the same jacket twice but for vastly different prices at a wholesale market. The first time, the vendor asked for $60. Without thinking, he haggled for $30 and the vendor immediately sold it to him. Then he spoke to his friend about the experience and got laughed at. His friend suggested he start from a tenth of the ask price, so he went with his friend to the same market and looked for the same jacket from the same vendor, this time starting with $6. After rounds of haggling, he eventually bought it for less than $14, or under half of what he paid the first time.
How is this story related to the four layers of thinking models? Well, the first layer is the experience – learning to start from a tenth of the ask price whenever he shops at that specific wholesale market. The second layer is methodical – at any place where you know the price is artificially set too high, you should aggressively haggle and start from as low as possible. Then the third layer is from academics – “the anchoring effect” in psychology. The seller deliberately sets a high anchor price to fool buyers. Last and more importantly, philosophically, we need to think about the problem from the human psychological misjudgment point of view and why it happens. What advantages and disadvantages do these psychological biases create from an evolutionary perspective, and under what circumstances should humans pay particular attention to these biases?
You see, as we go from one layer to the next, we also get closer to the most fundamental “why things happen” part.
For an investing example, take how Facebook FB tries to keep its users hooked to its products. Let’s think about the four layers of thinking models here:
Experiential layer – Social app users can often become addicted to the apps.
Methodical layer – Facebook utilizes tricks such as “like” buttons and constantly changing status updates to get us spend more time on the platform.
Academic layer – Like buttons hit the “pleasure center” in our brain and we need more “doses” of stimuli as the marginal utility declines.
Philosophical layer – Should the society as a whole do something about digital addiction and what are the long term implications for companies like Facebook FB?
Conclusion:
In my view, the four layers of thinking models provide a practical guide of how to reason from first principles. It’s a way of finding out how the world works and how the business operates, which requires much inquiry and exploration. Again, what matters is asking the right questions and exploring the answers. Doing so will absolutely help us think better and deepen our understanding of the business we analyze.
Read more here:
- Warren Buffett's Hidden Messages on Kraft Heinz
- Buttet's 10% Hurdle
- Profound Lessons From Arnold Van Den Berg - Part 1
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