Mental Models for Investors
How great investors think — margin of safety, incentives, second-order effects, and bias control — in one curated list.
Curated models (20)
- Finance & Investing
Margin of Safety
Benjamin Graham
Buy below intrinsic value to protect against errors and the unforeseen.
- Finance & Investing
Circle of Competence
Buffett & Munger
You have an edge in some domains and not others — and the boundary between the two is where most catastrophic decisions happen. Knowing where your knowledge actually ends, not where your confidence ends, is the single most protective mental model.
- Finance & Investing
Mr. Market
Benjamin Graham
Mr. Market is Benjamin Graham's allegory: a manic-depressive partner who shows up every day and offers to buy your share of the business or sell you his at a price. Some days he's...
- General Thinking & Meta-Models
Second-Order Thinking
Howard Marks
Think past the immediate effect to the second and third-order consequences.
- Mathematics & Probability
Inversion
Carl Jacobi / Charlie Munger
Think backwards: instead of asking how to succeed, ask what guarantees failure — then avoid it.
- Economics & Markets
Opportunity Cost
Frédéric Bastiat
The true cost of any decision is what you gave up to get it.
- Mathematics & Probability
Compounding
Einstein
Exponential growth from consistent small gains over long time horizons.
- Psychology & Behavior
Survivorship Bias
Abraham Wald
Studying only survivors produces systematically wrong conclusions.
- Psychology & Behavior
Confirmation Bias
We seek evidence that confirms what we already believe and filter out what contradicts it.
- Psychology & Behavior
Availability Cascade
Timur Kuran / Cass Sunstein
In 1999, Timur Kuran and Cass Sunstein published a paper that explains half of what goes wrong in public discourse: "Availability Cascades and Risk Regulation." The concept is a...
- Mathematics & Probability
Regression to the Mean
Francis Galton
Extreme outcomes are followed by more moderate ones as luck fades.
- Psychology & Behavior
Narrative Fallacy
Nassim Nicholas Taleb
We compress complex reality into clean stories, mistaking explanation for prediction.
- General Thinking & Meta-Models
Map vs Territory
Alfred Korzybski
Models are not reality; confusing the two leads to systematic errors.
- Economics & Markets
Skin in the Game
Nassim Nicholas Taleb
Decision-makers must bear consequences to align incentives.
- Natural Sciences
Incentives
Charlie Munger / Adam Smith
People respond to rewards and punishments, not instructions.
- Mathematics & Probability
Probabilistic Thinking
Thomas Bayes / Nate Silver
Replace binary judgments with probability estimates under uncertainty.
- Mathematics & Probability
Bayes Theorem
Bayes / Price / Laplace / Fisher
Update your beliefs proportionally to how surprising the new evidence is — the foundation of rational inference.
- Military & Conflict
OODA Loop
John Boyd
Cycle through observe-orient-decide-act faster than competitors.
- Mathematics & Probability
Black Swan Theory
Nassim Nicholas Taleb
Rare, unpredictable events with extreme impact shape history.
- General Thinking & Meta-Models
Goodhart's Law
Charles Goodhart
When a measure becomes a target, it ceases to be a good measure.
FAQ
- What mental models do value investors use?
- Margin of safety, circle of competence, and Mr. Market are core. Pair with inversion (avoid dumb mistakes) and second-order thinking for macro and sentiment.
- Which biases hurt investors most?
- Confirmation bias, narrative fallacy, and survivorship bias distort backtests and stories. Regression to the mean explains why hot streaks cool.