Mental Models To Supercharge Your Wealth Building

Mastering The Mind

Author

Millionaire Syrup
April 23, 2024

Mental Models To Supercharge Your Wealth Building

Mastering The Mind

Inversion

Inversion is all about thinking in reverse or approaching things from the opposite direction. When you encounter a problem, instead of taking the common approach, try flipping your perspective.

For example, say you have a problem with spending too much money. The typical approach would be to cut back on expenses, which can be exhausting and stressful. But with inversion, you approach it differently.

Instead of focusing on what to cut, think about what you want to keep. Identify the expenses that bring you the greatest joy and fulfillment. By prioritizing what you want to spend money on, you can easily see what expenses are not as important.

The Pareto Principle

The Pareto Principle, also known as the 80/20 rule, suggests that a small number of causes, about 20%, are responsible for a large portion, about 80%, of the effects.

To apply this to your finances, focus on the big expenses that consume the majority of your budget, like housing, vehicles, or costly habits. While it's good to be mindful of smaller expenses, like a daily coffee or monthly subscriptions, it's the larger costs that will have the most significant impact on your financial health. By managing these effectively, you're taking control of the 20% that leads to 80% of your expenses. Concentrate on these areas, and you'll find your efforts in wealth building improve.

Occam’s Razor
Occam's Razor is a principle that suggests choosing the simplest explanation or solution when faced with competing ideas. The idea behind Occam's Razor is that simpler options are not only easier to understand and explain but also tend to produce better results. In the world of investing, people often get drawn to complex financial products and strategies, thinking that they will make more money. However, Occam's Razor is a reminder that the simplest option, the one you can actually understand, is usually the preferable one. Instead of spending your time trying to decipher complex financial tools, focus on choosing simpler options that align with your goals and are easier to execute.

Regression To The Mean

Regression to the mean is a concept in statistics that tells you if something extreme happens, it's likely to be followed by a more normal event. For instance, if you flip a coin and get heads 10 times in a row (which is super rare), you might think you're just lucky, but regression to the mean suggests that your next flips are more likely to balance out, giving you a mix of heads and tails. By the time you reach 100 flips, you'd probably end up with close to 50 heads and 50 tails.

If you connect this with investing, imagine a group of stocks or an entire sector is doing way better than the market average. It's tempting to think this streak will keep going, so people rush to buy more. But just like with the coin flips, regression to the mean says that over time, these investments are likely to return closer to the average market performance. That's why it's important not to chase after the latest 'winning' investment but to think about the long game instead.

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