Decision Trees + Multi-Order Thinking [Necessary Models To Make Good Decisions]

Nugget from Charlie Munger

Hey Friend!

I’ve been super excited since finally the kindle version of Poor Charlie’s Almanack came out! (a few weeks ago). And I’ve been rereading this book in the kindle version mainly to make highlights that I can then resurface (which I couldn’t do with the physical book).

As I was reading it, I found something that really resonated with me (and super useful), and I want to share it with you in today’s edition :)

👤 Author

💡Nugget

✦ Charlie Munger:

At Harvard Business School, the great quantitative thing that bonds the first year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real life problems. And the students love it. They’re amazed to find that high school algebra works in life. By and large, as it works out, people can’t naturally and automatically do this. If you understand elementary psychology, the reason they can’t is really quite simple: The basic neural network of the brain is there through broad genetic and cultural evolution. And it’s not Fermat/ Pascal.

…

The Fermat/ Pascal system is dramatically consonant with the way the world works. And it’s a fundamental truth. So you simply have to have the technique.

…

[The brain] It uses a very crude, shortcut type of approximation. It’s got elements of Fermat/ Pascal in it. However, it’s not good. So you have to learn in a very usable way this very elementary math and use it routinely in life—just the way that if you want to become a golfer, you can’t use the natural swing that broad evolution gave you. You have to learn to have a certain grip and swing in a different way to realize your full potential as a golfer.

If you don’t get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one legged man in an ass kicking contest. You’re giving a huge advantage to everybody else. One of the advantages of a fellow like [Warren] Buffett, whom I’ve worked with all these years, is that he automatically thinks in terms of decision trees and the elementary math of permutations and combinations.

💭 Reflections [Decision Trees and Multi-order Thinking]

What I love about Decision Trees is that it helps me see clearly (in one snapshot) all the options / paths available with all their implications, and I can expand it to a Multi-order thinking to get to the ultimate consequences for each option / path taken. And the best way to do this is, for each path, to ask yourself “And then what?”. This question will reveal the next order set of actions and/or consequences, and you can go on like that until it naturally stops.

“Failing to consider second- and third-order consequences is the cause of a lot of painfully bad decisions, and it is especially deadly when the first inferior option confirms your own biases. Never seize on the first available option, no matter how good it seems, before you’ve asked questions and explored.”

- Ray Dalio

My favorite example on Multi-order thinking is the story of the Mexican Fisherman, narrated by Mohnish Pabrai (if you click on the video below, it will automatically take you to the Fisherman story):

📁 All the ideas in this article are saved and classified in a searchable Database, which (as of July 2024) contains nearly 2,000 timeless ideas (sourced directly from the most influential doers and entrepreneurs — captured on books, interviews/podcasts and articles).

I call this Database the Doers Notebook, and I’ve recently opened it for anyone who wants it.

🤔 Why did I build this?

Well, as the Latin motto goes, “A chief part of learning is simply knowing where you can find a thing.” And since it’s all 🔎 searchable, we only need to type a keyword to immediately get a list of insights related to it!

For instance, if I’m unsure about how to get more sales in my business, I can simply type the word “sales” and immediately get 88 search results! In this case from Jim Edwards, Peter Thiel, Naval Ravikant, Paul Graham, Sam Altman, Balaji Srinivasan, Nassim Taleb, and many other remarkable individuals.

It’s like having a 🧠 second brain from which we can pull wisdom on demand.

And this is super valuable because it can significantly decrease the error rate in our judgment.

“In an age of infinite leverage [code and media], judgment is the most important skill.”

- Naval Ravikant

I actually made a video where I went through the list of insights I got for the keywords “sales” and “creative”.

So, if you wanna get better at sales and learn to be more creative (and also see all the features of the database and how you can get access) then definitely check out the video 👇

💥 Stuff I Loved

Really good blogpost if you wanna go deeper into the Multi-order thinking mental model → https://fs.blog/second-order-thinking/

(Highlight resurfaced on Readwise)

Super insightful life and career advice from Ben Horowitz.

♡ An App I’m Loving (not sponsored)

All the way back to 24th December of 2023, I learned about an app that completely changed how I pick nuggets from YouTube.

It’s called Reader, and (among other features) it lets me seemingly connect any YouTube video to it and watch it on the Reader website (and mobile app).

But… Why would I watch YouTube videos on Reader instead of YouTube?? The answer is simple:

(1) It has a more easy-to-follow transcript of the video.

(2) You can make highlights right inside the transcript! (whether in the website or the mobile app).

Then, the Reader app will create a notebook with all your highlights (from that video), and even connect automatically to Readwise (an app that aggregates highlights from Reader, Kindle, etc.).

This is how I’m building my own personal library of ideas that have resonated with me, which I can revisit at any time.

"A chief part of learning is simply knowing where you can find a thing."

- Latin Motto

(3) Another benefit is that there are no distractions! You can focus exclusively on the information of the video. This has expanded my attention span!

“I did not succeed in life by intelligence. I succeeded because I have a long attention span.”

- Charlie Munger

There is a free trial of 30 days (after that it’s 8.99$ per month), but I reached out to the team at Reader and they made a special offer for us! If you use my special link you will get a 60-day free trial (after that it’s 8.99$ per month) 👉 https://readwise.io/pickingnuggets-reader

If you enjoyed this newsletter edition, consider fueling 🔥 my work with an absurdly massive (or small) donation ✨

Wishing you a great weekend 🌈

Julio xx

P.S. If you liked this article, you'll definitely enjoy my free 80-page ebook. It’s packed with 23 big ideas (from top influential doers and entrepreneurs) to become better, richer and wiser. Download your copy here!