Mental Models

Mental models shape how individuals understand the world, are the framework for explaining how something works, and represent how the mind interprets different situations.

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.

Join 200k+ options traders
Be the first to get notified when we publish new updates.
Was this helpful?
Share this

Trade smarter with automation