Mental Models for Your Digital Transformation

January 20, 2020 Joe Chung

Mental models are deeply held internal images of how the world works, images that limit us to familiar ways of thinking and acting. Very often, we are not consciously aware of our mental models or the effects they have on our behavior.
– Peter Senge

As leaders, we are responsible for making decisions in the interest of the organizations we serve. Should I invest in this project? Should I take a risk on this technology? What direction do I take the organization? I have an interest in how people make these decisions, particularly when they boldly change the trajectory of an organization, recognize trends before anyone else, or create lasting change, be it monetary or for the advancement of humanity. Someone who comes to mind for their ability to spot trends is Warren Buffett, CEO of Berkshire Hathaway, the Oracle of Omaha, the fourth wealthiest person on earth (depending on the day) and arguably the world’s most successful investor. However, one person that is often overlooked who has contributed to the success of Berkshire Hathaway is Charlie Munger. Charlie is often described as Mr. Buffett’s sidekick.

The reason why I focus on Mr. Munger is his discussion on mental models. In a speech in the 1990s, he said,

What is elementary, worldly wisdom? Well, the first rule is that you can’t really know anything if you just remember isolated facts and try and bang ’em back. If the facts don’t hang together on a latticework of theory, you don’t have them in a usable form. You’ve got to have models in your head. And you’ve got to array your experience both vicarious and direct on this latticework of models. You may have noticed students who just try to remember and pound back what is remembered. Well, they fail in school and in life. You’ve got to hang experience on a latticework of models in your head.

In an effort to make better investment decisions, saying he believes it is his moral duty to grow wiser and be rational, Mr. Munger reads voraciously across a variety of domains often unrelated to business, finance, and investing to pick up on new mental models to stitch together what he calls a latticework of models. Armed with his set of mental models, Mr. Munger helped guide Berkshire Hathaway to a compounded annual return of ~20% since its inception in 1965, an astounding result. I am no investing expert but one can imagine the track record of the right investment decisions that needed to have been made to achieve those results.

At Amazon we use mental models to help guide and execute against our leadership principles. One that we mention often is the “one-way and two-way doors” mental model. This mental model supports a principle we call Bias for Action, which states, “Speed matters in business. Many decisions and actions are reversible and do not need extensive study. We value calculated risk taking.” The idea is that most decisions in business are two-way doors, meaning they can be easily unwound or backed out of. But most of these decisions in organizations are treated as one-way doors, an image that suggests a decision is difficult to unwind, like building a new factory. While you may believe you’re mitigating risk by consulting lots of people or asking for permission, this process can lead to more bureaucracy and unnecessarily slow decision-making. Two-way door decisions should be executed with immediacy, as the negative consequences of such decisions are likely minimal. Amazon believes this leads to higher customer satisfaction and faster innovation.

There are many other mental models that can help you in your cloud or digital transformation journey. That said, one flawed mental model that people tend to use related to the AWS cloud is the belief that the cloud is just an outsourced version of an on-premise data center, but with some added benefits (e.g. usage-based pricing). This mental model assumes that the primary motivation for moving to the cloud is all about lower cost. Thinking about the cloud simply as a lower-cost option could trap you into a decision-making framework limited in its optics, and you could miss the broader picture of opportunity. I propose upgrading the mental model of the cloud to that of a digital superstore where people and organizations have access to more capability at a lower cost than they could ever consume. I wrote about this mental model in a previous blog post called “Complexity or Choice?” With this mental model, you can promote ways of using the cloud to give responsible access to new capabilities, like artificial intelligence and machine-learning services.

There are a number of other mental models I’ll present in future posts. My hope is that some of these mental models help you and your organization create your own “lattice of mental models” to make better decisions in your digital transformation journeys.

Never stop innovating,

Joe

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