Understanding Charlie Munger's 'Practical Thought About Practical Thought?'

 What Can Be Learned from 'Practical Thought About Practical Thought?'?

Charlie Munger's talk 'Practical Thought About Practical Thought?' from 'Poor Charlie's Almanack'

Nasdaq.com published an interesting piece on one of Charlie Munger’s most interesting (and most infamously inscrutable) talks recently: "Practical Thought About Practical Thought?".  The piece is interesting. What Munger is up to, I think, is providing a user’s guide to his concept of Mental Models.  Munger’s speech is an elaborate demonstration in how he applies his latticework of mental models. We can better understand (and better use) Munger's insights if we can recognize and think through a misunderstanding of how Munger is teaching us, and what can learn from his writing.

Munger laments that most don’t grasp the ideas in ‘Practical Thought’, which is published in “Poor Charlie’s Alamnack”, even upon reading it multiple times. The writing, like most of Munger’s, is clear enough and peppered with interesting, evocative allusions. What Munger is providing, though, is quite difficult because of his argument’s high level of abstraction.

Nasdaq.com’s contributor GuruFocus loves the piece because in it Munger deploys a “rarity of real life examples” that in turn make ‘Practical Thought’ “especially valuable”.  I don’t think that’s quite right. Munger begins with a counterfactual scenario—he uses an actual brand name, Coca-Cola—but the ‘real life’ aspect of Munger’s method ends there. He proceeds from that hypothetical starting point to examine how he’d go about solving the series of problems it presents. Obviously, he couldn’t possibly have anticipated issues like those covered in this recent Wall Street Journal piece, but doing so wasn’t the speech’s aim, anyway.

Munger gives himself the following task to solve: “You were in the year 1884 and to be chosen as the other partner in Coca-Cola's business, you must demonstrate, in 15 minutes, that your business plan will make Coca-Cola worth $2 trillion 150 years later, in the money of that time, despite paying out a large part of its earnings each year as a dividend.”

The Nasdaq.com piece then proceeds to offer a sparkling summary of Munger’s approach to solving this self-imposed conundrum. I won’t rehearse the summary or Munger’s argument; what I’m interested in is what understanding ‘Practical Thought’ means to those of us who are interested in developing and using a latticework of mental models in a way his thought suggests is possible.

What Should We Understand About How Munger Uses Mental Models in 'Practical Thought'?

It’s not too complicated trying to understand the way Munger deploys the process of simplification, or numerical fluency, or even the psychological principles that he thinks of as comprising his toolkit of mental models in 'Practical Thought'. The reason, to my mind, that people misunderstand the piece is that Munger is more interested in showing us something else. In another post on this blog, I cite an ancient Chinese proverb to explain why “Poor Charlie’s” (and any book or written material) is unlikely to provide us what we’re all looking for in using Munger’s mental models. What Munger is trying to do, though, in the piece ‘Practical Thought’ is to give us as much insight as possible into how he, to use the metaphor of the proverb, uses his chisel to cut a wheel properly. Munger is interested in the piece in showing us what the process of using mental models looks like in practice. 

Poor Charlie's Almanack. The Wit and Wisdom of Charles T. Munger. Expanded Third Edition.

Scientific though many of these models are, the system of using these models once they’re arrayed across a functional latticework (meaning that one can competently use each model individually and in concert with the others as they intersect in practice[1]), doesn’t operate by simply applying inductive reasoning. Munger’s system is bound to disappoint anyone, like Francis Bacon (no, not the one whose triptych recently sold at auction for more money than any other piece of artwork ever had), who in his "Novum Organum"  sought and tried to explicate an inductive method to understand the world. Deduction, rather, and a good deal of it, is required to operate Munger’s system.

Understanding Mental Models Means Knowing How To Use Them

What we’re looking for in trying to come to grips with Munger’s mental models is the ability to use them. As Wittgenstein reminds us, to understand is to know how to do. British thinker Michael Oakeshott, in his essay “Rational Conduct” explains why those looking for an operators manual or instruction list to the mental models will be sorely disappointed. “Doing anything both depends upon and exhibits knowing how to do it,” he writes in a vein quite similar to Wittgenstein. “And though part (but never the whole) of knowing how to do it can subsequently be reduced to knowledge in the form of propositions (and possibly to ends, rules and principles), these propositions are neither the spring of the activity nor are they in any direct sense regulative of the activity.”

Oakeshott thinks that anyone, whether a carpenter, scientist, painter, judge, cook (he doesn’t mention investor like Munger, but his thinking certainly applies to them ) “in the ordinary conduct of his life, and in his relations with other people and with the world around him is a knowledge, not of certain propositions about themselves, their tools (including mental models), and the materials in which they work, but a knowledge of how to decide certain questions.” This knowledge, he goes on to argue, is “the condition of the exercise of the power to construct such propositions.” Looking for Munger’s ‘Practical Thought’ to provide actual answers to concrete situations, in other words, is folly, because, as Oakeshott avers in another context, “a received philosophy is already a dead one.”

To make this case specific, Oakeshott argues, “‘Good’ English is not something that exists in advance of how English is written (that is to say English literature); and the knowledge that such and such is a sloppy, ambiguous construction, or is ‘bad grammar’, is not something that can be known independently and in advance of knowing how to write the language.” His point is just as true for investment as it is for language.

Thinking Clearly About What We Have To Learn

Just as Munger suggests is too often the case with his piece 'Practical Thought', Oakeshott thinks people misunderstand experience because they misapprehend how we come to learn how to do things, such as investing or applying a Munger-like latticework approach to problem solving. The reason?: "we are apt to believe that in order to teach an activity it is necessary to have converted our knowledge of it into a set of propositions—the grammar of a language, the rules of research, the principles of experiment and verification, the canons of good workmanship—and that in order to learn an activity we must begin with such propositions.” Of course, Munger operates under no such illusion. As a result, his speech ‘Practical Thought’ doesn’t offer any conclusions masquerading as ironclad propositions. And that’s much of what makes it difficult for people to understand. Munger, though, in giving us insight into his thought process provides something far better, and vastly more useful. If we can learn what to make of it.

Oakeshott can be of help here, too. Considering the rules and propositions that one might make regarding the practice of any activity, including Munger’s attempt at teaching via his Coca-Cola example in 'Practical Thought,' Oakeshott writes, “it must be observed that, not only are these rules, etc., these propositions about the activity, an abridgment of the teacher’s concrete knowledge of the activity (and therefore posterior to the activity itself), but learning them is never more than the meanest part of education in an activity.” 

Oakeshott’s understanding of what can be learned and taught is instructive—it suggests that there’s much more to learn from Charlie Munger than a set of propositions or rules. He also suggests that the stuff we have to learn beyond rules and propositions is a lot harder to learn than those rules are.

Such rules “can be taught, but they are not the only things that can be learned from a teacher. To work alongside a practiced scientist or craftsman is an opportunity not only to learn the rules, but to acquire also a direct knowledge of how he sets about his business (and, among other things, a knowledge of how and when to apply the rules); and until this is acquired nothing of great value has been learned." This is what we should hope to get out of studying 'Practical Thought'; we should appreciate this speech not because, as GuruFocus would have it, it's peppered with real life examples, but because we're afforded a peek into how Munger actually sets about his business. 

If You Made It This Far...

You're well on your way to understanding both 'Practical Thought About Practical Thought?' and effectively acquiring and using Munger's latticework system of mental models.

Congratulations. 

---

[1] A fun example from Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs: once you get into the joys of synthesis, you immediately think. “Do these things interact?” Of course they interact. Beautifully. And that’s one of the causes of the power of a modern economic system. I saw an example of that kind of interaction years ago. Berkshire had this former savings and loan company, and it had made this loan on a hotel right opposite the Hollywood Park Racetrack. In due time the neighborhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes, and there were people hanging around the hotel with guns, and nobody would come. We foreclosed on it two or three times, and the loan value went down to nothing. We seemed to have an insolvable economic problem -- a microeconomic problem.

Now we could have gone to McKinsey, or maybe a bunch of professors from Harvard, and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said: “For sale or rent.” And in came, in response to that sign, a man who said, “I’ll spend $200,000 fixing up your hotel, and buy it at a high price on credit, if you can get zoning so I can turn the parking lot into a putting green.” “You’ve got to have a parking lot in a hotel,” we said. “What do you have in mind?” He said. “No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. And I don’t care how bad the neighborhood is going to be because my people are selfcontained behind walls. All they have to do is get on the bus in the morning and come home in the evening, and they don’t need a parking lot; they need a putting green.” So we made the deal with the guy. The whole thing worked beautifully, and the loan got paid off, and it all worked out.