Fermat's Library | Practical Thought About Practical Thought annotated/explained version.

Other Paper by Charles T. Munger on Fermat's Library: - [The Psych...

#### TL;DR In this lecture Charlie Munger offers five simple heu...

You can find a beautiful HTML version on Stripe Press' website: [P...

Munger frames the talk as an extension of his 1994 USC speech, sign...

Helpful Notion 4: - Which basic models from other fields help with...

The five helpful notions are important because they provide a power...

Helpful Notion 1: - “simplify by deciding big no-brainer questions...

Helpful Notion 2: - links numeracy to Galileo’s “language of God”...

Helpful Notion 3: - “Invert, always invert.” Munger urges delibera...

The "hammer and nail" problem where specialists see everything thro...

Helpful Notion 5: - “Really big effects…often come only from large...

This quick back-of-envelope math - 8 billion people × 8 oz water ×...

$2 trillion of value in 150 years this fixes the order-of-magnitude...

Choosing sugar + caffeine + cold temperature shows inversion: he st...

By defining the business as “creating conditioned reflexes” Munger ...

Heavy ad spend leverages social proof! The more people seen drinkin...

The four inversion-style “must avoids”: - aftertaste - trademark...

Munger wants to integrate psychology with other fields and leans on...

Practical Thought about Practical Thought?

Charles T. Munger

July 20, 1996

Originally published in Poor Charlie’s Almanack

What I’m going to try to do today is to extend the

remarks I made two years ago at the USC Business

School. You were assigned a transcript of my USC

talk. There’s nothing I said then that I wouldn’t

repeat today. But I want to amplify what I said then.

The title of my talk is “Practical Thought about

Practical Thought?,” with a question mark at the

end. In a long career, I have assimilated various

ultrasimple general notions that I ﬁnd helpful in

solving problems. Five of these helpful notions I

will now describe. After that, I will present to you

a problem of extreme scale. Indeed, the problem

will involve turning startup capital of $2 million

into $2 trillion, a sum large enough to represent

a practical achievement. Then, I will try to solve

the problem, assisted by my helpful general notions.

Following that, I will suggest that there are important

educational implications in my demonstration. I will

so ﬁnish because my objective is educational, my

game today being a search for better methods of

thought.

The ﬁrst helpful notion is that it is usually best to

simplify problems by deciding big no-brainer ques-

tions ﬁrst.

The second helpful notion mimics Galileo’s con-

clusion that scientiﬁc reality is often revealed only by

math as if math was the language of God. Galileo’s

attitude also works well in messy, practical life.

Without numerical ﬂuency, in the part of life most

of us inhabit, you are like a one-legged man in an

ass-kicking contest.

The third helpful notion is that it is not enough

to think problems through forward. You must also

think in reverse, much like the rustic who wanted to

know where he was going to die so that he’d never

go there. Indeed, many problems can’t be solved

forward. And that is why the great algebraist Carl

Jacobi so often said, “Invert, always invert,” and why

the Pythagoreans thought in reverse to prove that the

square root of two was an irrational number.

The fourth helpful notion is that the best and most

practical wisdom is elementary academic wisdom.

But there is one extremely important qualiﬁcation:

You must think in a multidisciplinary manner. You

must routinely use all the easy-to-learn concepts

from the freshman course in every basic subject.

Where elementary ideas will serve, your problem-

solving must not be limited, as academia and many

business bureaucracies are limited, by extreme balka-

nization into disciplines and subdisciplines, with

strong taboos against any venture outside assigned

territory. Instead, you must do your multidisciplinary

thinking in accord with Ben Franklin’s prescription

in Poor Richard: “If you want it done, go. If not,

send.”

If, in your thinking, you rely entirely on oth-

ers, often through purchase of professional ad-

vice—whenever outside a small territory of your

own—you will suffer much calamity. And it is not

just difﬁculties in complex coordination that will do

you in. You will also suffer from the reality evoked

by the Shavian character who said, “In the last anal-

ysis, every profession is a conspiracy against the

laity.”

Indeed, a Shavian character, for once, understated

the horrors of something [George Bernard] Shaw

didn’t like. It is not usually the conscious malfea-

sance of your narrow professional adviser that does

you in. Instead, your troubles come from his sub-

conscious bias. His cognition will often be impaired,

for your purposes, by ﬁnancial incentives different

from yours. And he will also suffer from the psycho-

logical defect caught by the proverb “To a man with

a hammer, every problem looks like a nail.”

The ﬁfth helpful notion is that really big effects,

lollapalooza effects, will often come only from large

combinations of factors. For instance, tuberculosis

was tamed, at least for a long time, only by routine,

combined use in each case of three different drugs.

And other lollapalooza effects, like the ﬂight of an

airplane, follow a similar pattern.

It is now time to present my practical problem.

And here is the problem:

It is 1884 in Atlanta. You are brought, along

with 20 others like you, before a rich and eccentric

Atlanta citizen named Glotz. Both you and Glotz

share two characteristics: First, you routinely use

in problem-solving the ﬁve helpful notions, and sec-

ond, you know all the elementary ideas in all the

basic college courses, as taught in 1996. However,

all discoverers and all examples demonstrating these

elementary ideas come from dates before 1884. Nei-

ther you nor Glotz knows anything about anything

that has happened after 1884.

Glotz offers to invest $2 million in 1884 dollars,

yet take only half the equity, for a Glotz Charitable

Foundation, in a new corporation organized to go

into the non-alcoholic beverage business and remain

in that business only, forever. Glotz wants to use a

name that has somehow charmed him: Coca-Cola.

The other half of the new corporation’s equity will

go to the man who most plausibly demonstrates that

his business plan will cause Glotz’s foundation to be

worth a trillion dollars 150 years later, in the money

of that later time, 2034, despite paying out a large

part of its earnings each year as a dividend. This will

make the whole new corporation worth $2 trillion,

even after paying out many billions of dollars in

dividends.

You have 15 minutes to make your pitch. What

do you say to Glotz?

Here is my solution, my pitch to Glotz, using only

the helpful notions and what every bright college

sophomore should know:

Well, Glotz, the big no-brainer decisions that, to

simplify our problem, should be made ﬁrst are as fol-

lows: First, we are never going to create something

worth $2 trillion by selling some generic beverage.

Therefore, we must make your name, Coca-Cola,

into a strong, legally protected trademark. Second,

we can get to $2 trillion only by starting in Atlanta,

then succeeding in the rest of the United States, then

rapidly succeeding with our new beverage all over

the world. This will require developing a product

that has universal appeal because it harnesses power-

ful elemental forces. And the right place to ﬁnd such

powerful elemental forces is in the subject matter of

elementary academic courses.

We will next use numerical ﬂuency to ascertain

what our target implies. We can guess reasonably

that by 2034 there will be about 8 billion beverage

consumers in the world. On average, each of these

consumers will be much more prosperous in real

terms than the average consumer of 1884. Each

consumer is composed mostly of water and must

ingest about 64 ounces of water per day. This is

eight 8-ounce servings. Thus, if our new beverage,

and other imitative beverages in our new market,

can ﬂavor and otherwise improve only 25 percent of

ingested water worldwide, and we can occupy half

of the new world market, we can sell 2.92 trillion

8-ounce servings in 2034. And if we can then net

4¢ per serving, we will earn $117 billion. This will

be enough, if our business is still growing at a good

rate, to make it easily worth $2 trillion.

A big question, of course, is whether 4¢ per serv-

ing is a reasonable proﬁt target for 2034. And the

answer is yes if we can create a beverage with strong

universal appeal. One hundred and ﬁfty years is a

long time. The dollar, like the Roman drachma, will

almost surely suffer monetary depreciation. Concur-

rently, real purchasing power of the average beverage

consumer in the world will go way up. His procliv-

ity to inexpensively improve his experience while

ingesting water will go up considerably faster. Mean-

while, as technology improves, the cost of our simple

product, in units of constant purchasing power, will

go down. All four factors will work together in favor

of our 4¢ per-serving proﬁt target. Worldwide bever-

age purchasing power in dollars will probably multi-

ply by a factor of at least 40 over 150 years. Thinking

in reverse, this makes our proﬁt-per-serving target,

under 1884 conditions, a mere one-fortieth of 4¢ or

one-tenth of a cent per serving. This is an easy-to-

exceed target as we start out if our new product has

universal appeal.

That decided, we must next solve the problem

of invention to create universal appeal. There are

two intertwined challenges of large scale. First, over

150 years, we must cause a new-beverage market

to assimilate about one-fourth of the world’s water

ingestion. Second, we must so operate that half the

new market is ours while all our competitors com-

bined are left to share the remaining half. These

results are lollapalooza results. Accordingly, we

must attack our problem by causing every favorable

factor we can think of to work for us. Plainly, only

a powerful combination of many factors is likely to

cause the lollapalooza consequences we desire. For-

tunately, the solution to these intertwined problems

turns out to be fairly easy if one has stayed awake in

all the freshman courses.

Let us start by exploring the consequences of our

simplifying no-brainer decision that we must rely

on a strong trademark. This conclusion automati-

cally leads to an understanding of the essence of our

business in proper elementary academic terms. We

can see from the introductory course in psychology

that, in essence, we are going into the business of

creating and maintaining conditioned reﬂexes. The

Coca-Cola trade name and trade dress will act as

the stimuli, and the purchase and ingestion of our

beverage will be the desired responses.

And how does one create and maintain condi-

tioned reﬂexes? Well, the psychology text gives

two answers: 1) by operant conditioning and 2) by

classical conditioning, often called Pavlovian con-

ditioning to honor the great Russian scientist. And

since we want a lollapalooza result, we must use

both conditioning techniques, and all we can invent

to enhance effects from each technique.

The operant conditioning part of our problem is

easy to solve. We need only 1) maximize rewards

of our beverage’s ingestion and 2) minimize pos-

sibilities that desired reﬂexes, once created by us,

will be extinguished through operant conditioning

by proprietors of competing products.

For operant conditioning rewards, there are only

a few categories we will ﬁnd practical:

1) Food value in calories or other inputs

Flavor, texture, and aroma acting as stimuli to

consumption under neural preprogramming of

man through Darwinian natural selection

3) Stimulus, as by sugar or caffeine

Cooling effect when man is too hot or warming

effect when man is too cool

Wanting a lollapalooza result, we will naturally

include rewards in all the categories.

To start out, it is easy to decide to design our

beverage for consumption cold. There is much less

opportunity, without ingesting a beverage, to coun-

teract excessive heat compared with excessive cold.

Moreover, with excessive heat, much liquid must be

consumed, and the reverse is not true.

It is also easy to decide to include both sugar

and caffeine. After all, tea, coffee, and lemonade

are already widely consumed. And it is also clear

that we must be fanatic about determining, through

trial and error, ﬂavor and other characteristics that

will maximize human pleasure while taking in the

sugared water and caffeine we will provide.

And, to counteract possibilities that desired

operant-conditioned reﬂexes, once created by

us, will be extinguished by operant-conditioning-

employing competing products, there is also an obvi-

ous answer: We will make it a permanent obsession

in our company that our beverage, as fast as prac-

ticable, will at all times be available everywhere

throughout the world. After all, a competing prod-

uct, if it is never tried, can’t act as a reward creating

a conﬂicting habit. Every spouse knows that.

We must next consider the Pavlovian condition-

ing we must also use. In Pavlovian conditioning,

powerful effects come from mere association. The

neural system of Pavlov’s dog causes it to salivate

at the bell it can’t eat. And the brain of man yearns

for the type of beverage held by the pretty woman

he can’t have. And so, Glotz, we must use every

sort of decent, honorable Pavlovian conditioning we

can think of. For as long as we are in business, our

beverage and its promotion must be associated in

consumer minds with all other things consumers like

or admire.

Such extensive Pavlovian conditioning will cost

a lot of money, particularly for advertising. We will

spend big money as far ahead as we can imagine. But

the money will be effectively spent. As we expand

fast in our new-beverage market, our competitors

will face gross disadvantages of scale in buying ad-

vertising to create the Pavlovian conditioning they

need. And this outcome, along with other volume-

creates-power effects, should help us gain and hold

at least 50 percent of the new market everywhere.

Indeed, provided buyers are scattered, our higher

volumes will give us very extreme cost advantages

in distribution.

Moreover, Pavlovian effects from mere associa-

tion will help us choose the ﬂavor, texture, and color

of our new beverage. Considering Pavlovian effects,

we will have wisely chosen the exotic and expensive-

sounding name “Coca-Cola” instead of a pedestrian

name like “Glotz’s Sugared, Caffeinated Water.” For

similar Pavlovian reasons, it will be wise to have

our beverage look pretty much like wine instead of

sugared water. So we will artiﬁcially color our bever-

age if it comes out clear. And we will carbonate our

water, making our product seem like champagne, or

some other expensive beverage, while also making

its ﬂavor better and imitation harder to arrange for

competing products. And, because we are going to

attach so many expensive psychological effects to

our ﬂavor, that ﬂavor should be different from any

other standard ﬂavor so that we maximize difﬁculties

for competitors and give no accidental same-ﬂavor

beneﬁt to any existing product.

What else from the psychology textbook can help

our new business? Well, there is that powerful

“monkey see, monkey do” aspect of human nature

that psychologists often call social proof. Social

proof—imitative consumption triggered by mere

sight of consumption—will not only help induce

trial of our beverage, it will also bolster perceived

rewards from consumption. We will always take

this powerful social proof factor into account as

we design advertising and sales promotion and as

we forego present proﬁt to enhance present and fu-

ture consumption. More than with most other prod-

ucts, increased selling power will come from each

increase in sales.

We can now see, Glotz, that by combining 1)

much Pavlovian conditioning, 2) powerful social

proof effects, and 3) a wonderful-tasting, energy-

giving, stimulating, and desirably cold beverage that

causes much operant conditioning, we are going

to get sales that speed up for a long time by rea-

son of the huge mixture of factors we have chosen.

Therefore, we are going to start something like an

autocatalytic reaction in chemistry—precisely the

sort of multifactor-triggered lollapalooza effect we

need.

The logistics and the distribution strategy of our

business will be simple. There are only two practi-

cal ways to sell our beverage: 1) as syrup to foun-

tains and restaurants and 2) as a complete carbonated

water product in containers. Wanting lollapalooza

results, we will naturally do it both ways. And, want-

ing huge Pavlovian and social proof effects, we will

always spend on advertising and sales promotion,

per serving, over 40 percent of the fountain price for

syrup needed to make the serving.

A few syrup-making plants can serve the world.

However, to avoid needless shipping of mere space

and water, we will need many bottling plants scat-

tered over the world. We will maximize proﬁts if,

like early General Electric with light bulbs, we al-

ways set the ﬁrst-sale price, either 1) for fountain

syrup or 2) for any container of our complete prod-

uct. The best way to arrange this desirable proﬁt-

maximizing control is to make any independent bot-

tler we need a subcontractor, not a vendee of syrup,

and certainly not a vendee of syrup under a perpetual

franchise specifying a syrup price frozen forever at

its starting level.

Being unable to get a patent or copyright on our

super-important ﬂavor, we will work obsessively to

keep our formula secret. We will make a big hoopla

over our secrecy, which will enhance Pavlovian ef-

fects. Eventually, food chemical engineering will

advance so that our ﬂavor can be copied with near

exactitude. But by that time, we will be so far ahead,

with such strong trademarks and complete, “always

available” worldwide distribution, that good ﬂavor

copying won’t bar us from our objective. Moreover,

the advances in food chemistry that help competitors

will almost surely be accompanied by technological

advances that will help us, including refrigeration,

better transportation, and, for dieters, the ability to

insert a sugar taste without inserting sugar’s calories.

Also, there will be related beverage opportunities we

will seize.

This brings us to a ﬁnal reality check for our busi-

ness plan. We will, once more, think in reverse like

Jacobi. What must we avoid because we don’t want

it? Four answers seem clear:

First, we must avoid the protective, cloying, stop-

consumption effects of aftertaste that are a standard

part of physiology, developed through Darwinian

evolution to enhance the replication of man’s genes

by forcing a generally helpful moderation on the

gene carrier. To serve our ends, on hot days, a con-

sumer must be able to drink container after container

of our product with almost no impediment from af-

tertaste. We will ﬁnd a wonderful no-aftertaste ﬂavor

by trial and error and will thereby solve this problem.

Second, we must avoid ever losing even half of our

powerful trademarked name. It will cost us mightily,

for instance, if our sloppiness should ever allow the

sale of any other kind of “cola,” for instance a “Peppy

Cola.” If there is ever a Peppy Cola, we will be the

proprietor of the brand.

Third, with so much success coming, we must

avoid bad effects from envy, which is given a promi-

nent place in the Ten Commandments because envy

is so much a part of human nature. The best way to

avoid envy, as recognized by Aristotle, is to plainly

deserve the success we get. We will be fanatic about

product quality, quality of product presentation, and

reasonableness of prices, considering the harmless

pleasure we will provide.

Fourth, after our trademarked ﬂavor dominates

our new market, we must avoid making any huge

and sudden change in our ﬂavor. Even if a new ﬂa-

vor performs better in blind taste tests, changing to

that new ﬂavor would be a foolish thing to do. This

follows because, under such conditions, our old ﬂa-

vor will be so entrenched in consumer preference by

psychological effects that a big ﬂavor change would

do us little good, and it would do immense harm

by triggering in consumers the standard deprival-

superreaction syndrome that makes “take-aways” so

hard to get in any type of negotiation and helps make

most gamblers so irrational. Moreover, such a large

ﬂavor change would allow a competitor, by copy-

ing our old ﬂavor, to take advantage of both 1) the

hostile consumer superreaction to deprival and 2)

the huge love of our original ﬂavor created by our

previous work.

Well, that is my solution to my own problem of

turning $2 million into $2 trillion even after paying

out billions of dollars in dividends. I think it would

have won with Glotz in 1884 and should convince

you more than you expected at the outset. After all,

the correct strategies are clear after being related to

elementary academic ideas brought into play by the

helpful notions.

How consistent is my solution with the history of

the real Coca-Cola Company? Well, as late as 1896,

12 years after the ﬁctional Glotz was to start vigor-

ously with $2 million in 1884 dollars, the real Coca-

Cola Company had a net worth under $150,000 and

earnings of about zero. And thereafter, the real Coca-

Cola Company did lose half its trademark and did

grant perpetual bottling franchises at ﬁxed syrup

prices. And some of the bottlers were not very ef-

fective and couldn’t easily be changed. And the

real Coca-Cola Company, with this system, did lose

much pricing control that would have improved re-

sults, had it been retained.

Yet, even so, the real Coca-Cola Company fol-

lowed so much of the plan given to Glotz that it is

now worth about $125 billion and will have to in-

crease its value at only 8 percent per year until 2034

to reach a value of $2 trillion. And it can hit an an-

nual physical volume target of 2.92 trillion servings

if servings grow until 2034 at only 6 percent per

year, a result consistent with much past experience

and leaving plenty of plain-water ingestion for Coca-

Cola to replace after 2034. So I would guess that

the ﬁctional Glotz, starting earlier and stronger and

avoiding the worst errors, would have easily hit his

$2 trillion target. And he would have done it well

before 2034.

This brings me, at last, to the main purpose of

my talk. Large educational implications exist, if my

answer to Glotz’s problem is roughly right and if

you make one more assumption I believe true—that

most PhD educators, even psychology professors

and business school deans, would not have given the

same simple answer I did. And if I am right in these

two ways, this would indicate that our civilization

now keeps in place a great many educators who can’t

satisfactorily explain Coca-Cola, even in retrospect,

and even after watching it closely all their lives. This

is not a satisfactory state of affairs.

Moreover—and this result is even more ex-

treme—the brilliant and effective executives who,

surrounded by business school and law school grad-

uates, have run the Coca-Cola Company with glo-

rious success in recent years also did not under-

stand elementary psychology well enough to predict

and avoid the New Coke ﬁasco, which dangerously

threatened their company. That people so talented,

surrounded by professional advisers from the best

universities, should thus demonstrate a huge gap

in their education is also not a satisfactory state of

affairs.

Such extreme ignorance, in both the high reaches

of academia and the high reaches of business, is a

lollapalooza effect of a negative sort, demonstrating

grave defects in academia. Because the bad effect is

a lollapalooza, we should expect to ﬁnd intertwined,

multiple academic causes. I suspect at least two such

causes:

First, academic psychology, while it is admirable

and useful as a list of ingenious and important ex-

periments, lacks intradisciplinary synthesis. In par-

ticular, not enough attention is given to lollapalooza

effects coming from combinations of psychological

tendencies. This creates a situation reminding one

of a rustic teacher who tries to simplify schoolwork

by rounding pi to an even 3. And it violates Ein-

stein’s injunction that “everything should be made

as simple as possible, but no more simple.” In gen-

eral, psychology is laid out and misunderstood, as

electromagnetism would now be misunderstood if

physics had produced many brilliant experimenters

like Michael Faraday and no grand synthesizer like

James Clerk Maxwell.

Second, there is a truly horrible lack of synthesis

blending psychology and other academic subjects.

But only an interdisciplinary approach will correctly

deal with reality—in academia as with the Coca-

Cola Company.

In short, academic psychology departments are

immensely more important and useful than other

academic departments think. And at the same time,

the psychology departments are immensely worse

than most of their inhabitants think. It is, of course,

normal for self-appraisal to be more positive than

external appraisal. Indeed, a problem of this sort

may have given you your speaker today. But the size

of this psychology department gap is preposterously

large. In fact, the gap is so enormous that one very

eminent university, Chicago, simply abolished its

psychology department, perhaps with an undisclosed

hope of later creating a better version.

In such a state of affairs, many years ago and

with much that was plainly wrong already present,

the New Coke ﬁasco occurred. Therein, Coke’s

executives came to the brink of destroying the most

valuable trademark in the world. The academically

correct reaction to this immense and well-publicized

ﬁasco would have been the sort of reaction Boeing

would display if three of its new airplanes crashed in

a single week. After all, product integrity is involved

in each case, and the plain educational failure was

immense.

But almost no such responsible Boeing-like reac-

tion has come from academia. Instead, academia, by

and large, continues in its balkanized way to toler-

ate psychology professors who misteach psychology,

non-psychology professors who fail to consider psy-

chological effects obviously crucial in their subject

matter, and professional schools that carefully pre-

serve psychological ignorance coming in with each

entering class and are proud of their inadequacies.

Even though this regrettable blindness and lassi-

tude is now the normal academic result, are there

exceptions providing hope that disgraceful shortcom-

ings of the education establishment will eventually

be corrected? Here, my answer is a very optimistic

yes.

For instance, consider the recent behavior of the

economics department of the University of Chicago.

Over the last decade, this department has enjoyed

a near monopoly of the Nobel Prizes in economics,

largely by getting good predictions out of free-

market models postulating man’s rationality. And

what is the reaction of this department after winning

so steadily with its rational-man approach? Well, it

has just invited into a precious slot amid its com-

pany of greats a wise and witty Cornell economist,

Richard Thaler. And it has done this because Thaler

pokes fun at much that is holy at the University of

Chicago. Indeed, Thaler believes, with me, that peo-

ple are often massively irrational in ways predicted

by psychology that must be taken into account in

microeconomics.

In so behaving, the University of Chicago is im-

itating Darwin, who spent much of his long life

thinking in reverse as he tried to disprove his own

hardest-won and best-loved ideas. And so long as

there are parts of academia that keep alive its best

values by thinking in reverse like Darwin, we can

conﬁdently expect that silly educational practices

will eventually be replaced by better ones, exactly

as Carl Jacobi might have predicted.

This will happen because the Darwinian approach,

with its habitual objectivity taken on as a sort of hair

shirt, is a mighty approach indeed. No less a ﬁg-

ure than Einstein said that one of the four causes of

his achievement was self-criticism, ranking right up

there alongside curiosity, concentration, and perse-

verance.

And, to further appreciate the power of self-

criticism, consider where lies the grave of that very

“ungifted” undergraduate, Charles Darwin. It is in

Westminster Abbey, right next to the headstone of

Isaac Newton, perhaps the most gifted student who

ever lived, honored on that headstone in eight Latin

words constituting the most eloquent praise in all

graveyard print: “Hic depositum est, quod mortale

fuit Isaaci Newtoni”—“Here lies that which was

mortal of Isaac Newton.”

A civilization that so places a dead Darwin will

eventually develop and integrate psychology in a

proper and practical fashion that greatly increases

skills of all sorts. But all of us who have dollops

of power and see the light should help the process

along. There is a lot at stake. If, in many high places,

a universal product as successful as Coca-Cola is

not properly understood and explained, it can’t bode

well for our competency in dealing with much else

that is important.

Of course, those of you with 50 percent of net

worth in Coca-Cola stock, occurring because you

tried to invest 10 percent after thinking like I did

in making my pitch to Glotz, can ignore my mes-

sage about psychology as too elementary for useful

transmission to you. But I am not so sure that this

reaction is wise for the rest of you. The situation

reminds me of the old-time Warner & Swasey ad that

was a favorite of mine: “The company that needs

a new machine tool and hasn’t bought it is already

paying for it.”

Discussion

You can find a beautiful HTML version on Stripe Press' website: [Practical Thought about Practical Thought?](https://www.stripe.press/poor-charlies-almanack/talk-four?progress=0.00%) Helpful Notion 1: - “simplify by deciding big no-brainer questions first” which is very similar to his investing habit of killing obvious losers before deeper analysis. Other Paper by Charles T. Munger on Fermat's Library: - [The Psychology of Human Misdgugement](https://fermatslibrary.com/s/the-psychology-of-human-misdgugement) Helpful Notion 4: - Which basic models from other fields help with this problem? If you can't easily find one searcher harder! Heavy ad spend leverages social proof! The more people seen drinking Coke the more new drinkers imitate, self-reinforcing demand that compounds distribution advantages. The four inversion-style “must avoids”: - aftertaste - trademark dilution - envy - sudden flavor change show risk management as the flip side of lollapalooza creation. The five helpful notions are important because they provide a powerful framework for effective problem-solving in practical life. Charlie Munger presents them as "ultrasimple general notions" that he finds consistently helpful! This quick back-of-envelope math - 8 billion people × 8 oz water × ¼ share × ½ market × 4 ¢ profit = $117B revenue perfectly showcases Munger's helpful notion 2: rough numbers beat vague adjectives. By defining the business as “creating conditioned reflexes” Munger is using multi-disciplinary concepts and showcases a perfect example of helpful notion 4 where he brings psychology into strategy. He reframes beverage sales as behavioral conditioning, not just product marketing. Munger wants to integrate psychology with other fields and leans on Darwin, Einstein, and Jacobi as role models for relentless self-critique. Versatility drives lasting progress. $2 trillion of value in 150 years this fixes the order-of-magnitude lens before we talk about tactics. This is a great use of helpful notion 1. Choosing sugar + caffeine + cold temperature shows inversion: he starts with human physiology (heat, energy, taste) and works backward. Helpful Notion 3: - “Invert, always invert.” Munger urges deliberately asking the opposite question: What would guarantee failure? Eliminating those conditions often helps find the winning path. Helpful Notion 2: - links numeracy to Galileo’s “language of God” turning quantitative fluency from nice-to-have into must have survival skill. The "hammer and nail" problem where specialists see everything through their narrow expertise. Munger frames the talk as an extension of his 1994 USC speech, signaling continuity in his “worldly wisdom” playbook. Helpful Notion 5: - “Really big effects…often come only from large combinations of factors”. Aligned forces multiply and produce outsized results. #### TL;DR In this lecture Charlie Munger offers five simple heuristics for solving real-world problems. The five helpful notions form Munger's complete thinking framework: 1. simplify with no-brainer decisions first 2. use numerical fluency “without it you’re a one-legged man in an ass-kicking contest” 3. always invert to see problems backward 4. apply multidisciplinary elementary wisdom instead of narrow expertise 5. recognize that big effects need multiple combined factors. He then sets a thought experiment: turn $\$2$ in 1884 into $\$$2 trillion by 2034 with a non-alcoholic drink called Coca-Cola. Using the five notions, he shows how trademark strength, operant & Pavlovian conditioning, social proof, cost advantages, and global distribution could compound into dominance.

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