One of the few people I closely follow is Charlie Munger. He often cites the mathematician Carl Gustav Jacobi Jacobi while talking about his favorite mental models. The mental model he borrowed from Jacobi was that of Inversion.
Jacobi said: “Invert, Always Invert”
Inversion is really a powerful too and I often use it in thinking over important issues, and particularly while fighting with my (politically) misguided friends 🙂
The reason I remembered it today is the following tweet I saw on Twitter.
I got a call from bank. They said: “You pay us ₹ 6000 every month. You will get ₹ 1 crore when you retire”.
I replied: “You reverse the plan. You give me ₹ 1 crore now. And I will pay you ₹ 6000 every month till I die.”
The banker disconnected the call. Did I say anything wrong?
Is this a good example of applying the principle of Inversion? If the same deal is reversed, is it good for the one who is offering that deal? No? Does that make it a bad deal?
The answer is no. This is a wrong example of applying Inversion. Just notice the subtle difference. It’s inverse not “reverse”. In the above story, it’s only reversing the deal. That will almost always never work. Because the deal happens when both parties have some unmet need which gets fulfilled by that deal. Then only it is win-win. t’s not a zero sum game. There is net value (the perceived utility) for both the parties.
For example, if I have 100 apples and you have 100 mangoes. I want a mango and you want an apple. Suppose you offer me a deal: For 2 apples from my side, you will give me 1 mango. In evaluating the deal, I should not simply “reverse” it and say will you be happy if I give you a mango in return of 2 apples? That would be wrong. Because the other side already has plenty of mangoes. The incremental utility of mango is less for that man. For him apples are more useful.
The right way of applying principle on Inversion in this case could be as follows:
Suppose the same deal is offered to you. You should “invert” the scenario and think, if I had been in his position would I have done a similar deal? 2 apples:1 mango? Or if this deal doesn’t happen, will I be worse off? Will he be worse off? Is the value I derive from this exchange (1 mango) better than the cost I pay (2 apples)?
As Warren Buffett said: “Cost is what you pay. Value is what you get.” When the value you derive is greater than the cost you incur, it’s a good deal…for you! The reason I added “…for you” at the end is because value is subjective. Someone else may not derive the same value (utility, pleasure, satisfaction etc) from the mango. Why someone? I don’t like mangoes much. I may not find it valuable. Someone else who absolutely loves mangoes would be happy to give away 2 apples, maybe even 3 apples.
So by applying inversion, you assess the scenario from the other side or perspective and think if it makes sense.
To summarize, remember: inverse is not same as reverse. Merely reversing the situation will not give you the complete perspective. More often we simple reverse (“What did you do when you were in power?” or “You said behaved the same way to me, remember?”) and not inverse.
P.S.: I am categorizing this post under the label “Principles”. I intend to write more such posts under the same label where all such principles or mental models will be clubbed together.