Following up from episode #77 about mental models, I wanted to take things one step further and tie mental models to one of my favorite shows. If you came here hoping for the latest Excel trick or keyboard shortcut, apologies in advance. If there's one theme you should take away from these posts, it's being a good analyst means you're able to connect differing ideas, trends, and frameworks together.

One show that has informed my thinking over the years is Billions. For those uninitiated, Billions is a show about a hedge fund manager (Bobby Axelrod) who tries to gain wealth and power through unscrupulous means while evading the regulatory arms of Chuck Rhoades, the U.S. Attorney. The show is loosely based on real-life events where then U.S. Attorney for the Southern District of New York Preet Bhara prosecuted hedge fund manager Steve Cohen of S.A.C Capital Advisors in 2013. The show is filled with esoteric references, finance jargon, and yes, some mental models that are worth noting. Here are three mental models from three different episodes.

Source: Showtime

1) Survivorship bias and Axe's bad trade on BioLance

This is an example of not necessarily a mental model, but one of the many cognitive biases that can cloud our judgement. In addition to survivorship bias, there's a bit of confirmation bias and the hot hand effect at play here.

Setting up the scene: Axelrod is sitting in his office and waiting to hear the news about a company called BioLance he's invested in called BioLance. Before the CEO of the company goes on the conference call to discuss the status of their inhibitors for fighting type 2 diabetes, the trader (Mafee) who is executing the trade on behalf of Axelrod tries to talk Axelrod out of the trade. Mafee believes BioLance won't have approval from the FDA to move forward with manufacturing the inhibitor, and that Axelrod should short BioLance instead given the current competitive market. Axelrod claims he's done the research and believes BioLance's inhibitors will get approved, leading to a stock jump. The BioLance CEO gets on the conference call and announces the FDA has not approved their inhibitors. Axelrod is dumbstruck and is trying to figure out how his decision-making led to this $1B mistake.

The reason for Axelrod's flummoxed decision-making was he felt guilty about a previous misdeed he did and was punishing himself. Notwithstanding the real reason for the bad trade and the need for the plot to make sense, there is some interesting biases to take note of as Axelrod reflected on his trade.

A perfect example of survivorship bias is news about companies and startups who are raising millions in funding or doing an IPO. As an aspiring startup founder, you see this news and believe that it must be easy to create a company and have it be successful. The problem is you are overlooking the status of the majority of other companies who are failing our going bankrupt since there isn't as much news about these floundering companies.

Source: Google

Most of Axelrod's employees (including Axelrod himself) believe that Axelrod is never wrong. His hedge fund has billions under management and he wouldn't get to this position if he didn't make the right bets. There is survivorship bias here in terms of people focusing on the trades that made the fund millions of dollars, so this trade on BioLance shouldn't be any different.

Then there is the potential for confirmation bias, or interpreting and seeking information that confirms your current beliefs. Axelrod walks through his decision-making process with...