Charlie Munger on Human Misjudgement

“We can’t change the world. The only thing we can change is ourselves, by trying to get a better understanding of our own messed-up wiring.” – Guy Spier

In last week’s Intelligent Investor column for the Wall Street Journal, Jason Zweig discussed value investor Guy Spier’s journey to reinvent himself as both a thinker and portfolio manager.

It’s a great article about the benefits that can come from continuous learning and self-reflection. There were a number of steps Spier took for self-improvement, but this one caught my eye:

For 18 months, Mr. Spier listened to nothing in his car but a lecture on human misjudgement by Charles Munger, Mr. Buffett’s vice chairman at Berkshire Hathaway. Of the two dozen mental mistakes cited by Mr. Munger, “I realized I was guilty of all of them,” Mr. Spier says.

18 months?!  That’s dedication.

This reminded me that it’s been a number of years since I have pulled out one of my all-time favorite books on the psychology of investing and decision-making, Munger’s Poor Charlie’s Almanack.

The entire speech is included in the book and it’s a tour de force on human nature and the psychological tendencies that can lead to poor decisions and even worse outcomes.

So you don’t have to spend 18 months mastering this speech, I went back through the book and took a few short notes on each of the 24 tendencies.

1. Reward & Punishment Superresponse Tendency: The power that incentives and disincentives have on the actions of others cannot be overstated. Munger says this should be obvious but so many people don’t understand the how important incentives are for shaping people’s motivation to complete a task.

2. Liking/Loving Tendency: We ignore the faults of other people, products or companies that we admire.

3. Disliking/Hating Tendency: We also ignore the virtues of those things we dislike and distort the facts to facilitate that hatred while putting on blinders to other options and opinions.

4. Doubt/Avoidance Tendency: If we are unsure about a decision we try to quickly remove any doubt by making an ill-informed, quick decision.

5. Inconsistency-Avoidance Tendency: We have a reluctance to change. Eliminating bad habits is a rare trait.

6. Curiosity Tendency: There is not enough curiosity to learn, even though you receive so many benefits from a continuous learning process. Munger says, “the curious are also provided with much fun and wisdom once formal education has ended.”

7. Kantian Fairness Tendency: Life isn’t fair, but many can’t except 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/Jealously Tendency: Self-explanatory, but Munger makes an interesting point that envy and jealously are surprisingly absent from most psych textbooks.

9. Reciprocation Tendency: We tend to want to return the favor when someone helps us, which can be a good thing at times, but it can also lead to poor decisions if you reciprocate business deals based on these minor favors.

10. Influence-From-Mere-Association Tendency: We can be easily manipulated by mere association. It can be a group of people, the quality of a product, advertising, etc.

11. Simple, Pain-Avoiding Psychological Denial: We have a habit of distorting the facts until they become bearable for our own views.

12. Excessive Self-Regard Tendency: We all think we’re above average. This is where overconfidence comes from. Munger says the greatest type of pride should be taking pride in being trustworthy to avoid developing an ego.

13. OverOptimism Tendency: Greed.

14. DeprivalSuperreaction Tendency: Loss aversion.

15. Social-Proof Tendency: This is when we tend to think and act like those around us. It’s the herd mentality.

16. Contrast-Misreaction Tendency: Our problem here is a misunderstanding of comparisons and missing out on the magnitude of decisions. This gets to Phillip Fisher’s point when he once said, “the stock market is filled with individuals who know the price of everything but the value of nothing.”

17. Stress-Influence Tendency: Adrenaline tends to produce faster and more extreme reactions. Some stress can improve performance but heavy stress often leads to dysfunction.

18. Availability-Misweighing Tendency: We overweight what’s easily available. A checklist or set of rules can help with this tendency.

19. Use-It-or-Lose-It Tendency: Too many learn a skill to simply cram for a test or presentation instead of trying to actually understand it fluently.

20. Drug-Misinfluence Tendency: Self-explanatory.

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

22. Authority-MisinfluenceTendency: Following orders just because someone says so.

23. Twaddle Tendency: Basically, spending too much time on nonsense.

24. Reason-Respecting Tendency: Some people just want the answers, not the reasons or a better understanding.

And finally Munger says there’s one more psychological issue which is the lollapalooza effect — the tendency to get extreme consequences when you combine a number of these misjudgements when trying for a particular outcome.

All is not lost though because we’re all still functioning human beings even with these tendencies that can trip us up.  The worst offenders aren’t impossible to correct either, according to Munger:

Tendency is not always destiny, and knowing the tendencies and their antidotes can often help prevent trouble that would otherwise occur.

Listen to Munger’s entire speech here:
The Psychology of Human Misjudgement

Giving yourself an investing makeover (WSJ)
Poor Charlie’s Almanack



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