The Four Pillars of Rationality (According to Charlie Munger)

“This all sounds simple,” said Li Lu, “but there are many cases in life where people violate common sense — and, indeed, every time it happens people pay a heavy price.”

Charlie Munger’s mission in life — if such a lofty concept can ever truly be boiled down to just one thing — was to make the world a more rational place. Every time he stepped in front of a microphone, he preached both the practical and moral imperative of rationality. Charlie was never out to just get rich — though he did just fine on that front — but to help humanity think a little bit more clearly.

Last year, in a rare interview on the Chinese social network Zhenghe Island, his close friend Li Lu tried to explain how Charlie managed to build such a prodigious mental advantage over the rest of us mere mortals. And, in doing so, shed more light on the four pillars — or levels, as Li Lu called them — to the Munger mindset on rationality.

“Charlie’s rationality is profound,” he said, “and is a great legacy.”

One that’s certainly worth studying further…

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(1) Universal Wisdom: First Principles to Real Results

“Whether your conclusion is correct actually depends on the basic facts, the basic assumptions, and reasoning process,” said Li Lu. “This is the basic thinking of physics, mathematics, and all modern sciences. However, most people do not apply this way of thinking to other aspects outside of science.”

Charlie Munger, on the other hand, embraced this “first principles” thinking — a back-to-basics approach borrowed from physics — with open arms. Most people swallow conventional wisdom whole. Not Charlie. He preferred to strip a thorny problem down to its roots, examine the facts and fundamentals, and then build a logical conclusion from there.

It’s probably why he managed to spot patterns and tendencies that others missed. He was never one to just mindlessly follow the herd.

And, when it comes to determining “what actually works”, there’s no better proving ground than the real world.

As such, the man had an immense respect for wisdom and lessons mined straight from the trenches of human experience. (Charlie was never an ivory tower theory kind of guy.) His teachers were those men and women who strode into the arena and tested their ideas in real-life. How did they succeed? And how did they fall short?

And what, when you zoom out and look at all of these triumphs and failures collectively, emerges as common through-lines — woven by life and not lectures — from these stories?

And if he could speed-run the learning process vicariously — mostly through the avid reading of biographies — so much the better.

Charlie himself summed up his approach best at Berkshire Hathaway’s AGM in 1997. “The idea of picking some extreme example [in this case, the unprecedented success of State Farm Insurance] and asking my favorite question — ‘What in the hell is going on here?’ — is the way to wisdom in this world.”

That simple, irreverent question remained his compass all his life.

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(2) Mental Models: A Problem-Solving Swiss Army Knife

If you’ve ever cracked open Poor Charlie’s Almanack, you probably already know the drill: Charlie Munger strongly recommended that all inquiring minds should raid the various academic disciplines for their big ideas — and then weave them together into a latticework of mental models.

Too many stuffed shirts cannot see past the boundaries of their own disciplines — making them one-dimensional and limited when confronted with the complexities of life.

“The real world is actually very complex,” said Li Lu. “When we do research, we must learn the knowledge of each discipline separately — but, when it comes to application, you must string this knowledge together.” Doing anything less will create unnecessary obstacles for yourself.

If you fail to cast your net wide enough when accumulating knowledge, you risk falling into the specialist’s trap: defaulting to your favored area of expertise no matter the problem. Even if a different tactical approach might prove far more effective.

In his final CNBC interview, filmed just two weeks before his death, Charlie raved about his former Harvard Law professor Lon Fuller for breaking through the silos of academe and integrating economics into his legal coursework. “He really saw the whole damn [thing],” said Charlie. “I was just awestruck by Lon Fuller.”

In school, you learn subjects separately — but, in real life, problems don’t come labeled as “math” problems or “history” problems. They are usually messy and require ideas from multiple disciplines at once.

Too many people carry a hammer and see every issue as a nail. Charlie? He had the whole toolbox — and knew how to use it.

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(3) Avoid Systematic Irrationality

Here’s the bad news: Our brains are out to get us. Those cognitive shortcuts and reflexes that kept us alive when dodging prehistoric predators are now something of a liability as we attempt to navigate modern life.

To solve this problem, Charlie Munger flipped the script with one of his favorite mental models — inversion. Don’t ask, “How can I be more rational?” Instead, “What makes people do dumb things? And how can I avoid that happening to me?”

In other words, spot the stupid and then steer clear.

“Charlie spent a long time summarizing the systematic irrational tendencies of human beings — one by one,” said Li Lu. “How should we think rationally and make the right decisions? First of all, we need to think about when people are irrational and make wrong decisions. What are the reasons for this wrong decision? Which reasons are systematic? Can we make a list of them? [And], thinking clearly, we can deliberately avoid them.”

This lifelong study culminated in what some consider to be Charlie’s magnum opus — The Psychology of Human Misjudgment. Li Lu, for one, calls this speech his “original contribution to the world”. In it, Charlie describes the many ways that man can go wrong — from misaligned incentives (using real-world examples like FedEx and Xerox), envy and jealousy, excessive self-regard, stress, and many more.

It’s a masterclass on misjudgment.

“If you want to think rationally,” said Li Lu, “you need to systematically detect these thinking patterns that have been imprinted in your genes and then [go through] them in a checklist way so that you can be truly rational when making decisions.”

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(4) Common Sense

Charlie Munger often joked that common sense was actually rather uncommon. Li Lu takes it one step further: “Common sense is actually the most scarce cognition.”

I think Charlie would agree with that.

“His most important view on rationality,” said Li Lu, “is ‘copy what works [and] avoid what doesn’t’.” If you learn only one thing from Charlie, it should probably be that.

Speaking to a Chinese audience, Li Lu used the late Deng Xiaoping as an example. With China’s economy on a long slog to nowhere, Deng ditched the planned-economy playbook and embraced the healing power of the market.

“Deng Xiaoping pursued a planned economy all his life,” said Li Lu, “but when this was proven to be wrong, he decisively chose to try those things in the market economy that could be applied under the Chinese system. He took a set of methods of ‘crossing the river by feeling the stones’ [meaning that any modernization came slowly and carefully] — allowing China to take a completely new path.”

It’s not easy to thumb your nose at popular opinion — let alone an out-and-out ideology in Deng’s case. But it’s important to remain focused on what actually works. “It doesn’t matter if a cat is black or white,” Deng famously said, “as long as it catches mice.”

“This all sounds simple,” said Li Lu, “but there are many cases in life where people violate common sense — and, indeed, every time it happens people pay a heavy price.”