Mental models are ingrained ways of thinking and understanding. These models shape the way decisions are made and learning occurs. Mental models are akin to sketches, blueprints, or diagrams for understanding and remembering the details of a situation in an organized way.
Awareness of mental models aids investors in understanding how decisions are made and how certain biases may affect the investment decision-making processes. Cognitive biases such as mental accounting, frame dependence, and overconfidence influence investor decisions as the very framework for decision making is shaped by mental models.
If investors are able to identify the mental models they’ve internalized, it may assist them in avoiding potentially negative decisions in the future.