FrameworkDecision principleDecision-makingIncentivesInvesting
Invert the question, and look at the incentives first
Charlie Munger · Poor Charlie's Almanack
The idea
Two of Munger's models do most of the work. Inversion: instead of asking how to succeed, ask what would guarantee failure, and avoid it, because the failure list is shorter and more reliable. Incentives: before explaining any behaviour by belief or character, check what the person is paid to do, because the incentive usually explains it on its own. The sections to annotate, the Library says, are those two and the one on several forces compounding at once, where an outcome nobody intended comes from ordinary incentives pointing the same way.
Ask what would make this fail and who is paid for what before asking anything else.
When it works
Diligence, deal structuring, reading any management proposal, and preparing for any decision you cannot easily reverse.
When it may fail
Inversion can produce a list of fears that stops every decision, and the incentive lens can turn into cynicism about everyone. Munger used both to decide, not to abstain.
How to use it
For a deal, write the pre-mortem first: it is two years on and this failed, why? Then list every party and what they earn from each outcome. The two lists will overlap, and the overlap is your diligence plan.
Where it came from
Book Poor Charlie's Almanack · Charles T. Munger
What the source says. Mental models and inversion, collected from talks, with the sections on incentives and on several forces compounding at once as the ones to annotate.
Connected ideas
Puts it to work
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The Gotrocks family: how helpers take a fifth of what the owners earnInvestors as a group earn what businesses earn minus what they pay to helpers; every layer of advice is a claim on that pool.
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Accretion is arithmetic; whether a deal was worth doing is a different questionAnswer accretion with arithmetic and value with evidence, and never let the first stand in for the second.
Concepts
Put it to work on L3VLUP
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