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Mental models give financial advisors a way to examine decisions from more than one angle. Circle of competence helps clarify when to bring in a specialist. Inversion helps expose practice risks before they grow. “The map is not the territory” prompts advisors to check whether a client’s financial plan still reflects their life. This article shows each model in an advisor setting.
Key Takeaways
A mental model gives you a way to think through a decision without starting from scratch each time.
Circle of competence helps you see where your expertise ends. Inversion helps you spot risks before they grow. Map is not the territory reminds you to check what a financial plan may have missed.
You can use one model for a decision or draw on several when the situation calls for it.
Why Did Charlie Munger Rely on Mental Models?
Charlie Munger, the late vice chairman of Berkshire Hathaway, loved mental models.
He drew ideas from psychology, physics, economics, biology, and other fields, then used them to think through decisions. Basically, it’s a way to understand how something works and use that understanding when you face a new problem.
Warren Buffett valued his thinking too. In Berkshire’s 2023 annual report1, Buffett called Munger the “architect” of the company they built together.
So clearly Munger was on to something – and we should learn from him.
For example, psychology could help him spot a flaw in his own judgment. Economics could help him understand why a business made money. Biology offered a way to think about contagion, including how fear can spread through a market as investors react to one another. Each field gave him another way to examine the situation.
He called the connections between those ideas a latticework of mental models.
And in his 1994 USC speech – A Lesson on Elementary, World Wisdom2 (a must read) - Munger argued that isolated facts are hard to use until you connect them to ideas that explain how things work. He also warned that relying on too few models can lead you to force a problem into a familiar pattern. Thus, the value came from having several mental models to pull from for various situations.
I’m sure as a financial advisor you can see the appeal of this.
Let’s say a client needs a trust, so you use systems thinking to map who makes each decision and where an estate attorney needs to step in. Or you want your marketing to work harder, so you build a feedback loop that turns content into 24/7 prospecting engines. Or an older client asks they’re tempted to sell after a market drop, and your knowledge of emotional biases gives you a way to explain how to fight that urge.
Different problems call for different ways of thinking.
So, in the spirit of Munger’s approach, here are three models you can put to work in your practice today.
How Can Advisors Stay Within Their Circle of Competence?
Your circle of competence3 is the work you know well enough to judge with confidence. But what matters most is knowing where it ends. As Warren Buffett has pointed out, you can do good work within a small circle if you understand its limits so you don’t bite off more than you can chew.
Advisor Example: say a client tells you they want to set up a trust. Before discussing the structure, you ask what they hope it will do. Do they want to provide for a child, plan for a family member’s care, or decide how assets will pass after they die? You can help them see how those goals fit their broader financial plan.
As the conversation gets more specific, you may need to bring in an estate planning attorney for legal advice or a trust company to discuss how the trust would be carried out. Dunham Trust4, for example, works with financial advisors on trust implementation and administration.
But that’s the circle of competence in practice.
You contribute what you know, recognize where your expertise ends, and keep working with the client as the right specialist steps in.
So, list the needs you handle with confidence and the ones that call for another professional. Revisit that list as your experience grows.
How Can Inversion Help Advisors Spot Practice Risks?
Inversion5starts with the outcome you want to avoid most. Meaning - when you’re working toward a goal, ask what could prevent you from reaching it. That gives you a list of risks to check before you move ahead (instead of focusing on having a great day – ask yourself what a bad day would look like and how to avoid it).
Advisor Example: say you want to grow your book. Before you plan the next move, ask what could cause the clients you already serve to lose confidence in you. Maybe replies take longer as your team gets busier. Maybe a few households account for a large share of revenue. Or maybe clients would have no clear point of contact if you got sick.
Write down the risks specific to your practice. Make each one clear enough to check. “Slow service” is hard to measure. “Client questions wait three business days for a reply” gives you something to investigate.
Then pick the risk that needs attention first. Fixing response times or documenting a succession plan may feel less exciting than bringing in new clients. But it could matter more to the people who already count on you.
Why Should Advisors Treat Financial Plans as Maps?
A map helps you find your way, but it can’t show every detail on the ground. That’s the idea behind “map is not the territory”6model. And your client’s financial plan works the same way - it organizes their goals, accounts, and assumptions into something abstract you can use to make decisions. It also reflects what you knew when you built it.
Advisor Example: say you’re reviewing a client’s plan from five years ago. Since then, he’s newly divorced, and his mother has had a sudden medical emergency. Thus, his expenses and family responsibilities have changed, but the plan still uses the old numbers. It describes a life he no longer lives.
And even a new projection has limits. An illustrative Monte Carlo result might show an 85% probability of plan success based on assumptions about markets, spending, and time. But again, if the client’s spending plans change - that result needs another look.
This “map” model gives you a useful habit for every review. Ask what has changed in the client’s life before you rely on what the plan says. Then update the plan to reflect what you learn.
At the next review, ask before you open the report.
“Before we look at the numbers, has anything changed in your life that this plan doesn’t know about yet?”
Their answer tells you where the plan needs another look.
How Can Advisors Use These Three Models Together?
You can use one model to start a decision, then bring in another to see what you missed. That gets closer to Munger’s idea of drawing on several ways of thinking for the same problem.
Tying it all together now, let’s say a recently divorced client asks about setting up a trust. Your circle of competence tells you to bring in an estate planning attorney for the legal work. Inversion prompts you to ask what could go wrong if the client’s account details and beneficiary designations haven’t been reviewed since the divorce. “Map is not the territory” reminds you to revisit the financial plan you built before their life changed and make sure the small details are added.
Each model catches a different part of the same situation. And together, they help you decide who needs to be involved, what needs attention first, and which information you need from the client.
The Bottom Line
Know where your expertise starts and ends.
Look for potential risks before they have time to become reality.
Remember that the plan is a map. Check it against the client’s life, including details the plan may have missed.
Use more than one model when the decision calls for it.
Remember, Munger kept coming back to mental models because they helped him ask better questions.
You can do the same, starting with the next decision that needs a closer look.
Frequently Asked Questions About Mental Models for Financial Advisors
What are mental models in financial advising? Mental models are ways to look at a decision from different angles. An advisor can use them to see where their expertise ends, think through what could go wrong, or check whether a client’s plan still fits their life. They help frame useful questions, but they don’t replace the facts of the client’s situation.
Which mental models are useful for financial advisors? Three useful models are circle of competence, inversion, and “the map is not the territory.” Circle of competence helps an advisor recognize when to bring in a specialist. Inversion starts with an outcome to avoid and works back to its possible causes. The map model prompts an advisor to compare a financial plan’s assumptions with the client’s life today.
How can advisors use mental models in a client meeting? Start with the decision the client faces, then choose a model that helps clarify it. If a client asks about a trust after a divorce, circle of competence points the advisor toward an estate planning attorney. Inversion can prompt a check for overlooked account or beneficiary details, while the map model calls for a fresh look at the client’s older plan.
How can inversion help an advisor spot practice risks? Inversion starts by naming an outcome the advisor wants to avoid, such as clients losing confidence as the practice grows. The advisor then works backward to find possible causes. Delayed replies, too much reliance on a small group of clients, and unclear coverage during an absence are all worth checking before deciding which risk needs attention first.
Farnam Street — The Map Is Not the Territory [fs.blog]
Disclosure
This communication is general in nature and provided for educational and informational purposes only. It should not be considered or relied upon as legal, tax or investment advice or an investment recommendation, or as a substitute for legal or tax counsel. Any investment products or services named herein are for illustrative purposes only and should not be considered an offer to buy or sell, or an investment recommendation for, any specific security, strategy or investment product or service. Always consult a qualified professional or your own independent financial professional for personalized advice or investment recommendations tailored to your specific goals, individual situation, and risk tolerance.
Dunham & Associates Investment Counsel, Inc. is a Registered Investment Adviser and Broker/Dealer. Member FINRA / SIPC. Advisory services and securities offered through Dunham & Associates Investment Counsel, Inc., Trust services offered through Dunham Trust, an affiliated entity. Dunham Private Trust is the Wyoming division of Dunham Trust.
