Charlie Munger devised what he calls ‘mental models‘. These are a prescriptive set of guidelines/heuristics for being more rational. I, on the other hand, devised the ‘simple systems’ model, which is more descriptive than prescriptive, and posits that the world is composed of competing ‘systems’ that seek to optimize capital, given all possible alternatives.
From the post: A systems-based approach to rationalism
So understanding the world as an arrangement of systems that seek to optimize capital, instead of a system of individuals, is a major advantage. So I think Marx is right in this regard about the centrality of capital, and Adam Smith is right about the ‘invisible hand’, but Marx is wrong about exploitation and capitalism being self-limiting, and I am not sure that the invisible hand implies ‘optimally good outcomes’, but rather describes autonomous nature of the economy as a system of competing agents.
Priori A: capital flows along a gradient to a local maximum, constrained by size effects (if there is too much capital, excess capital will flow to the second-best choice, third-best, etc., but it may also split to seek diversification).
Posteriori A: winner-take-all economy and stock market (large social networks (such as Facebook) get bigger and more successful; same for companies like Amazon, Apple, Microsoft, and Google); ‘Bubbles’ such as Tesla and Bitcoin refuse to pop, due to constant inflows of capital into those asset classes.
So once you know this, you can not only invest optimally, but also obtain a better understand the world. That’s why you have an economy where so few sectors and or individuals seem to be fully participating, or why the strength of only a few sectors and stocks is enough to lift the entire economy and S&P 500, due to capital chasing after a handful of ‘winner’s and flowing out of the ‘losers’.
But then how does one know which investments will be optimal, before the fact (avoiding hindsight bias)? That’s where the HBD-investing thesis comes into play:
Priori B: High-IQ individuals, industries, companies, and countries will rise above less intelligent ones. Low-IQ companies, industries, and countries are less competent in terms of leadership and management, have more corruption, and are more vulnerable to macro factors and competition. Given B, this leads to A (meaning that capital, intentionally or not, will generally flow to high-IQ stuff).
Posteriori B: Out-performance of tech stocks (high-IQ sector) versus energy, industrial, and commodity sectors; the resiliency of Bitcoin and Web 2.0; resiliency of stock market and economy; widening of wealth gap; permanent ascendance of Silicon Valley and other high-IQ enclaves