4 mental models for thinking about your money.

By Jessica Sier 26 July 2018 6 min read


  • Regret minimisation framework;
  • The idea maze;
  • Confirmation bias;
  • Disruptive innovation.

This post smooshes together four excellent mental models with personal finance goals.

And they yield some interesting outcomes.

Mental models are like applications for your brain. They are ways of approaching a problem that might yield a different answer than your original school of thought.

For example, you might have an ingrained model; “I have something to teach everyone”, but after a while, you might switch it to something like; “I have something to learn from everyone”.

Nothing changes about life or the world around you, but it’s possible your behaviour might.

Reading widely, talking to as many people as you can and staying humble gives a person a whole “lattice” of models. (That’s Charlie Munger speaking).

And when it comes to managing your money, there are probably a whole set of ingrained models that dictate your behaviour.

Here are some famous models that might prompt some different - maybe positive! - changes in the way you think.

Regret minimisation framework.

Created by Jeff Bezos.

Model: Think about how your future self would feel about the decision you’re currently facing.

This model is largely built around understanding (and appreciating) time and what you’re going to do with it.

"If you can project yourself out to age 80 and sort of think, “What will I think at that time?” it gets you away from some of the daily pieces of confusion."

"I left this Wall Street firm in the middle of the year. When you do that, you walk away from your annual bonus. That’s the kind of thing that in the short-term can confuse you, but if you think about the long-term then you can really make good life decisions that you won’t regret later." - Jeff Bezos, 2001.

When it comes to investing, it’s not about timing the market, it’s about time in the market.

Would your 80-year-old self care much if you never became a full time investor? Probably not.

Would your 80-year-old self care much if you never got around to understanding simple investing so you had a bit more money? Perhaps.

Money gives us options. It’s a careful tightrope to walk, because furiously earning money without stopping to smell (buy?) the flowers will make us miserable, but only hanging out with the flowers won’t move us forward.

What your future self will understand, that your current self might not, is the value of having time.

There might be 50 years between then and now. Your 80-year-old self might seriously regret that you didn’t put away $20 a month for 50 years, and let that investment happily grow by itself.

Bezos points out that the “short term” parts can sometimes confuse and cloud our judgement. In his case, it was walking away from his annual bonus. When it comes to our own money, we could be telling ourselves, “I need my entire pay cheque to pay rent and cover my living expenses!” or “I’ve got a credit card debt that I seem to be endlessly paying off.”

But your 80-year-old self might wonder why it took your entire pay just to stay afloat.

This model is designed to minimise future regret by interrogating your decision through the lens of time.

The idea maze.

A term coined by Balaji S. Srinivasan.

Model: Build a plan and contemplate as many possible paths according to how the world changes.

This model was designed with startup founders in mind, but it can also apply to developing investment habits. It’s about acknowledging the different paths that lead to treasure. (There are lots!).

“A good founder is capable of anticipating which turns lead to treasure and which lead to certain death. A bad founder is just running to the entrance of (say) the “movies/music/filesharing/P2P” maze or the “photosharing” maze without any sense for the history of the industry, the players in the maze, the casualties of the past, and the technologies that are likely to move walls and change assumptions.”  - Balaji S. Srinivasan, Market Research, Wireframing, and Design.

Learning to live with a little less money every month, learning to look around you, see investment potential and shake off a consumer-only mentality.

See the path before you as a maze.

! Identify your goals without judgement > Find role models > Take care of yourself > Work out how much you might need to achieve your goal > Decide on ways to make that money > Give yourself a reasonable amount of time to make it > Make it and learn more about your goal > Always scrutinise your new ideas.

Srinivasan also points out that hopping on the next hottest trends, whether that be a stock punt or some other gamble, without understanding the context of that idea just leads you in circles. In this mental model, you’re the founder.

Here’s a maze for starting a surf school:

I’d like to start a surf school! > I spoke with a few ladies down at Bondi who run schools and got a sense of what the steps were (licensing/insurance) > Worked out I need probably $15,000 to cover boards, licensing, storage and some marketing materials up front > Worked out I would probably need to charge $75 per person for a two hour session > My goal is to have two ten person classes at least 3 times a week (or at least get 60 people a week in the water) to comfortably cover living costs, ongoing insurance, pay myself superannuation and put 15% away for savings or other investments > So for the next twelve months, I’m going to answer phones in a call centre and wait tables for that first $15,000 and scrutinise the maze.

Scrutinising the maze means lots of questions are going to pop up. As those questions pop up, you find out answers for them. How do I get a license to operate on a beach? Is Bondi too expensive? Is it too crowded with other surf schools? Should I check out some beaches outside of Sydney and figure out what the potential market is there?

The Idea Maze is a powerful mental model that can really break down what are large decisions into achievable steps.

Confirmation bias.

Recognised by Thucydides.

Model: Confirmation bias is where you notice or look for what confirms your beliefs rather than what contradicts them.

"It is a capital mistake to theorise before one has data. Insensibly one begins to twist facts to suit theories, instead of theories to suit facts." – Sherlock Holmes, A Scandal in Bohemia.

What is your data?

How much money is coming in? How much must go out? Honestly, what are my problem spending areas?

There are thousands of biases against you managing your own financial future effectively.

It’s too difficult. I don’t have any money to start with. I never pick the right shares. I don’t know what a share is! I only understand mining stocks so they are the only ones I will look at. The market is always going to crash. A financial advisor will do a better job than I will.

We can look around us and see these biases reiterated in all forms of life. If you’d like to begin building your wealth slowly, start somewhere simple.

Shake off the existing biases and instead think about your money in a new way. Develop a new habit. Don’t conform to the stereotype of “I’m hopeless with money”.

What if you were actually rather good with it but you just never knew it.

Disruptive innovation.

Defined by Clayton Christensen.

Disruptive innovation is when a product or service starts out as a simple solution at the bottom of a market and then relentlessly moves up, eventually displacing the established competitors and redefining the industry.

Introducing "simplicity, convenience, accessibility, and affordability where complication and high cost are the status quo.” - The Christensen Institute.

This can be a powerful one when you think about your personal finance!

Imagine you begin your investing life at the bottom. You try out a simple-to-use investing product (like Spaceship’s Voyager app) and give yourself some time to work out how you feel about shares or markets or whatever. You can leverage the power of compounding returns and you build in some great regular investment habits.

As time passes, banks and other institutions begin offering you more and more tidbits. A higher credit balance. Access to products and wealth growing strategies. Personal loans for holidays.

But you have a sweet little investment balance that is slowly growing over time. As you get older, and you explore different strategies and you become familiar with the tools at your disposal to build your own strategy, without the weight of a bank pressing on your decisions.

You can disrupt the existing consumer patterns by keeping things simple and constant. Your portfolio will do the heavy lifting for you and you don’t have to become indebted to any other institution.

Disrupt the existing industry by keeping things simple.

Words by
Jessica Sier Right Chevron

Jessica Sier is a financial journalist. Prior to that she led content at Spaceship and was a reporter at the AFR where she discovered that breaking down financial jargon was a public good.

4 mental models for thinking about your money.