11 docs tagged with "investing"

Asymmetric Risk is a decision framework that evaluates opportunities based on the ratio of potential upside to potential downside, actively seeking situations where the maximum loss is small and bounded while the potential gain is large and unbounded — or vice versa when avoiding risks. The concept, central to Nassim Taleb's work on options and convexity, holds that rational decision-making under uncertainty should prioritize the shape of the payoff distribution over its expected probability of success.

The definitive guide to Charlie Munger's mental model system — 30+ models across psychology, physics, biology, economics, and mathematics. Learn how Berkshire Hathaway's vice-chairman built the latticework framework that produced one of history's greatest investment records.

The Circle of Competence is a mental model developed by Warren Buffett and Charlie Munger that encourages individuals and organizations to limit consequential decisions to domains where they have genuine, developed understanding — and to know precisely where the boundary of that circle lies. The model's central insight is that the boundary matters more than the size; a small circle, clearly known, is far more valuable than a large circle whose edges are uncertain.

Expected Value (EV) is a mathematical framework for decision-making under uncertainty that calculates the probability-weighted average of all possible outcomes. By making the implicit trade-offs in any risky decision explicit and quantitative, EV provides a principled basis for comparing investments, bets, and choices across different probability and payoff profiles — even when no single outcome is guaranteed. It is the foundation of rational decision-making in investing, game theory, and any domain where outcomes are uncertain.

A rigorous framework for making investment decisions — whether in public equities, private companies, real estate, or your own business — using Expected Value, Circle of Competence, and Margin of Safety. Covers how to evaluate an opportunity, size a position, and know when you should not be making the investment at all.

The Kelly Criterion is a mathematical formula developed by Bell Labs scientist John L. Kelly Jr. in 1956 that calculates the optimal fraction of a bankroll to bet on a favorable wager in order to maximize the long-run growth rate of wealth. It is widely used by professional gamblers and quantitative investors as a position-sizing rule. The full Kelly allocation maximizes expected logarithmic utility; fractional Kelly (typically 25–50% of full Kelly) is preferred in practice to reduce volatility while preserving most of the growth advantage.

Margin of Safety is a risk management principle originating in civil engineering and popularized in investing by Benjamin Graham that involves building a buffer between your assumptions and the point at which those assumptions failing would cause harm. In investing, it means buying assets at a significant discount to their estimated intrinsic value. In engineering, it means designing structures to withstand loads far greater than expected. The core insight: because our estimates are always uncertain, the buffer between our estimate and the failure point determines how wrong we can be and still survive.

Mental Accounting is a cognitive bias where individuals treat money differently based on its source, its intended use, or the mental "category" it has been assigned. Developed by Nobel laureate Richard Thaler in 1985, this mental model explains why we spend tax refunds more loosely than salary, why we keep low-interest savings while carrying high-interest debt, and why "free shipping" feels like a bigger win than a direct discount. Understanding Mental Accounting allows for more rational financial planning by enforcing the principle of Fungibility—the fact that every dollar is identical regardless of its label.

Recency Bias is a cognitive distortion where individuals give disproportionate weight to the most recent information or events while discounting older, potentially more relevant data. Rooted in the "Serial Position Effect" identified by Hermann Ebbinghaus in 1885, this mental model explains why investors chase short-term market trends, why managers fail at annual performance reviews, and why we overreact to recent arguments in long-term relationships. Understanding Recency Bias allows decision-makers to implement "Full-Spectrum Analysis" and maintain a longitudinal perspective in a world of constant real-time updates.

Second Order Thinking is a decision-making framework that requires you to consider not just the immediate consequences of an action (first order), but the subsequent consequences of those consequences (second order), and potentially further iterations. Developed and popularized by investor and author Howard Marks, it is the discipline of asking "and then what?" until the full consequence chain becomes visible — and is most valuable when immediate effects seem clearly positive but downstream effects are ambiguous or harmful.

The complete mental model system for investment decision-making — Expected Value, Circle of Competence, Margin of Safety, and the 9 cognitive traps that systematically destroy investor returns. Based on the documented frameworks of the world's most successful long-term investors.