Charlie Munger: The Psychology of Human Misjudgement

Selection from three of Charlie’s talks, combined in to one talk never made.

Notes from book Poor Charlie’s Almanack

  • Charlie created his own psychology system how to get throught life (and avoid irrational pattern) by cassual reading and from his expierences

1.) Reward and Punishment Superresponse Tendency

FedEx couldn’t fullfill all packages per shift on time. Instead of paying workers per hour they switched to paying per shift and it all worked.

Incentive-caused bias: explains why people with a vested interest in something will tend to guide you in the direction of their interest.

Incentives automatically influence the way people act, based on how they’re rewarded. As a result, the structure of the incentives people are exposed to has a significant impact on behavior.

Assuming that the things people are controlling for stay the same, changing the incentives is also likely to change behavior. In Street Smarts, Norm Brodsky and Bo Burlingham describe how they compensate their salespeople.

Most companies compensate salespeople on a commission basis: closing more sales nets the salesperson more money. Under this incentive structure, their salespeople would be hyper-focused on closing sales-even if those sales weren’t profitable or in the long-term interest of the company. By compensating their salespeople on a salary basis and giving generous bonuses based on long-term performance, their salespeople began to focus on making profitable sales vs. sales at any cost.

As the saying goes: don’t ask the barber if you need a haircut.

If you’re working with an agent who’s paid on commission, it’s not necessarily in their best interest to tell you that purchasing something is not a good idea.

First, the behavior you see is usually the result of incentives you don’t see. Consider the sharp elbows you see in a typical workplace. Looking at this behavior in isolation it makes little sense. However, odds are, this is rewarded in some way.

Altough money is the main driver among rewards, it is not the only reward that works. People also change their behaviour and cognition for sex, friendship, companionship, advancement in status and other nonmonetary items.

Ask yourself if people you work with are rewarded up to your decision. What are their interest ? Do not automatically trust people who have something at stake from your decisions ? Do you have any incentives that may bias your decisions or actions?

2.) Liking/Loving Tendency

One very practical consequence of Liking/Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection and (3) to distort other facts to facilitate love.

We ignore the faults of other people, products or companies that we admire.

Most of us already know that we prefer to take advice from people that we like. We also tend to more easily agree with opinions formed by people we like.

We favor people, products, and actions associated with our favorite celebrities. Sometimes we even distort facts to facilitate love. The influence that our friends, parents, lovers, and idols exert on us can be enormous.

We like people who resemble us. Whether it’s appearance, opinions, lifestyle or background, we tend to favor people who on some dimension are most similar to ourselves.

If dealing with salesmen and others who clearly benefit from your liking, it might be a good idea to check whether you have been influenced. In these unclear cases, Cialdini advises us to focus on our feelings rather than the other person’s actions that may produce liking. Ask yourself how much of what you feel is due to liking versus the actual facts of the situation.

The time to call out the defense is when we feel ourselves liking the practitioner more than we should under the circumstances, when we feel manipulated.

Do I agree with someone just because I like them ? Do I agree with them more than I would expect under the given circumstances ? If so, step back and question ourself. Do I make a deal because I like someone or because it’s best option out there ?

3.) Disliking/Hating Tendency

Opposite from Liking/Loving

These Tendencies acts as conditioning device that makes the dislike/hater tend to 1.) Ignore virtues in the object of dislike, 2.) Dislike people, products, and actions merely associated with the object of his dislike, and 3.) distort other facts to facilitate hate.

Do I disagree with someone just because I don’t like them ?

4.) Doubt-Avoidance Tendency

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.

When we’re performing research or amidst a decision we’ve already got a X amount of information that has our brain perceiving the situation a certain way in order to form its judgement and ultimately a decision (be it a purchase or investing scenario).
If and when you uncover new information set yourself a cooling off period to analyze this information and take it into account before making any snap decision based upon doubt or stress.

Once we’ve got some information on a subject we don’t like to hear new (even correct!) information.
As new information comes in we ignore it and make a snap decision based upon our (consistent) previous knowledge.

What usually trigger Doubt-Avoidance Tendency is some combination of puzzlement and stress.

5.) Inconsistency-Avoidance Tendency

Brain of man conserve programming space by being relucant to change, which is a form of inconsistency avoidance.

Practically everyone has a great many bad habits he has long maintained despite their being known as bad.

Great rule that help is: it’s easier to prevent a habit than to change it.

People has anti-change mode.

Doubt-Avoidance tendency combined with Inconsistency-Avoidance tendency will naturally cause a lot of errors in cognition for modenr man.

People tend to accumulate large mental holding of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.

6.) Curiosity Tendency

Curiosity, enhanced by the best of modern education, much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curiosity are also provided with much fun and wisdom long after formal education has ended.

7.) Kantian Fairness Tendency

Life isn’t fair, but many can’t accept this. Tolerating a little unfairness should be okay if it means a greater fairness for all. The example Munger uses is letting in other drivers on the freeway knowing they will reciprocate in the future.

8.) Envy/Jealousy Tendency

Siblings jealousy is clearly very strong and usually greater in children than adults. It is often stronger than jealousy directed at strangers.

Envy/Jealousy is extreme in myth, religion, and literature wherein, in account after account, it triggers hatred and injury.

9.) Reciprocation Tendency

The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as extreme, as it is in apes, monkeys, dogs, and many less cognitively gifted animals.

Cialdini experiments at Influence

10.) Influence-from-Mere-Association-Tendency

Advertisers know about the power of mere association. You won’t see Coke advertised alongside some account of the death of a child. Instead, Coke ads picture life as happier than reality.

Man gets lucky in an odds-againts venture headed by an untalented friend. So influenced, he tries again what worked before – with terrible results.

Avoid being Influenced 1.) Carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking and 2.) Look for dangerous aspects of the new undertaking that were not present when past sucess occured.

Hating and Disliking also cause miscalculation triggered by mere association. In business, I commonly see people underappraise both the competency and morals of competitors they dislike.

“Always tell us the bad news promptly. It is only the good news that can wait.”

11.) Simple, Pain-Avoiding Psychological Denial

The reality is too painful to bear, so one distorts the facts until they became bearable. We all do that to some extent, often causing terrible problems. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency.

12.) Excessive Self-Regard Tendency

We all commonly observe the excessive self-regard of man. He mostly misappraises himself on the high side, like the ninety percent od Swedish drivers that judge themselves to be above average.

And man’s children are likewise appraised higher by him than they are likely to be in a more objective view.

Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them.

Overppraised your own possesions : “Endowment effect”

In lotteries, the play is much lower when numbers are distributed eandomly than it is when the player picks his own number. This is quite irrational. The odds are almost exactly the same and much against the player.

The best cure to silliness from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity.

13.) Overoptimism Tendency

“What a man wishes, that also will he believe.”

14.) Deprival-Superreaction Tendency

The quantity of man’s pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss. That is, the loss seems to hurt much more than the gain seems to help.

Munger’s dog would only bite when you try to take his food from his mouth. He would automatically bite. Nothing could be more stupid than for the dog to bite his master.

Humans are much the same as this Munger’s dog. A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing.

15.) Social-Proof Tendency

Cialdini’s chapter on Social Proof

people do what they see other people do.

“Monkey-see, Monkey-do”

“Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.”

16.) Contrast-Misreaction Tendency

People comparing price, buying $1000 leather seats compare to $65000 car is low.

routinely used to cause disadvantage for customers buying merchandise and services. To make ar ordinary price seem low, the vendor will very frequently create a highly artificial price that is much higher than the price always sought, the advertise his standard price as a big reduction from his phony price.

Frog tossed into very hot water would jump out, but that the same frog would end up dying if placed in room-temperature water that was later heated at a very slow rate.

“A small leak will sink a great ship.”

17.) Stress-Influence Tendency

Everyone recognize that sudden stress, for instance from a threat, will cause a rush of adrenaline in the human body, prompting faster and more extreme reaction.

Light stress can slightly improve performance-say, in examinations-whereas heavy stress causes dysfunction.

Pavlovian Conditioning

18.) Availability-Misweighing Tendency

Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it.

The main cure to miscues often involve procedures, including checklists.

An idea or a fact is not worth more merely because it is easily available to you.

19.) Use-It-or-Lose-It Tendency

Cure to loss of knowing/undestanding is to practice all of the rarely used skills

Throught life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self. If he reduces the number of skills he practises and, therefore, the number od skills he retains, he will naturally drift into error from man with a hammer tendency.

20.) Drug-Misinfluence Tendency

destructive power is so widely known to be intense. with frequent tragic consequences for cognition and the outcome of life

21.) Senescence-Misinfluence Tendency

As we age there is a natural loss of certain skills and abilities. Continuous thinking and learning helps to slow the decay.

Continuous thinking and learning, done with joy, can somewhat help delay what is inevitable.

22.) Authority-Misinfluence Tendency

Human society is formally organized into dominance hierarchies, with their culture augmenting the natural follow-the-leader tendency of man.

Milgram’s experiment ( giving electric shock to another person with fake doctor supervising)

23.) Twaddle Tendency

It’s very important part of wise administration to keep prattling people, pouring out twaddle, far away from the serious work.

“The principal job of an academic administration is to keep the people who don’t matter from interfering with the work of the people that do.”

24.) Reason-Respecting Tendency

Humans enjoy mental exercises, puzzles and games. Munger attributes this to the fact that humans have a natural love for accurate cognition. As such, one of the best ways to convince a man to do something is to explain the reasons for why it must be done.

As an example of this tendency put to great use, Munger describes the philosophy of Carl Braun, the skilled designer of oil refineries. Whenever an order was given within his company, the order must always be accompanied by the reason why. Braun would fire those who didn’t give the ‘why’, because he understood the positive influence it would carry down the line.
Because of this human preference for reason, even meaningless or incorrect reasons will increase compliance. Munger references a psychology experiment where people budge to the front of the line with meaningless excuses that are better received than they should be!

Carl Braun rule: you have to tell Who was to do What, Where, When and Why.

25.) The Tendency to Get Extreme Consequences from Confluences of Psychological Tendencies Acting in Favor of Particular Outcome ( Lollapalooza Tendency )

We humans have many inherent biases and tendencies that can sway our behavior one way or another. When several of them act in concert to drive us toward a particular action, you have a Lollapalooza effect. The Lollapalooza effect can create large-scale drivers of human behavior — and often error.

On the other hand, Munger also points to the open auction system as a negative example of the Lollapalooza effect. He believes that in this environment, several psychological biases converge, causing people to act foolishly. Namely, the psychological phenomenon known as “social proof” leads people to imitate the actions of others in an effort to reflect seemingly appropriate behavior. As a result, during an auction, participants will often engage in bidding wars because that’s what the people around them are doing — not because they’re passionate about acquiring the item up for auction, or because they’ve drawn the logical conclusion that they’re offering a good price for the item. 

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