The Psychology of Human Misjudgement – Charlie Munger

Standard causes of human misjudgement

Under recognition of power of reinforcement and incentives

  • Examples with Federal Express. System relies on a centralize shipping location that must be executed efficiently. If it doesn’t work, the whole system fails. Paid their employees more, system worked better.
  • Man with a hammer syndrome: Every problem tends to look pretty much as a nail and is solved with 1 solution. “Man with a Hammer” syndrome is the idea that if you only have one or two mental models in your head, you’ll approach all your problems with the same solution.
  • For example, if you’re a graphic designer (and that’s all you do), you’ll approach each problem with a graphics design solution. Even when a that’s not the best ‘tool’ for the job.

Psychological denial

  • Reality is too painful to bear so you distort reality until its bearable

Incentive caused bias both in one’s own mind and that of one’s trusted advisor

  • Economics called agency costs: An agency cost is a type of internal company expense, which comes from the actions of an agent acting on behalf of a principal. Agency costs typically arise in the wake of core inefficiencies, dissatisfactions, and disruptions, such as conflicts of interest between shareholders and management

Bias from consistency and commitment tendency

  • Self-confirmation tendency (hard to change your mind once emotionally committed to an idea)

Misconstruing past correlation as a reliable basis for decision making

Bias from reciprocation tendency

  • Ask for a lot and then back off to a lower offer

Over influence of social proof, that is conclusions of others, particularly under conditions of natural uncertainty and stress

Bias from contrast caused distortion of sensation, perception and cognition

  • Human cannot measure in absolute scale, but our sensory system can only compare by contrast
  • Example is a home salesman showing you an extremely expensive house, then shows you a more moderately priced home. Manipulates your senses to gravitate to the moderately priced home because by contrast, the price is not as bad

Bias from over-influence by authority

Bias from deprival super reaction syndrome

  • Caused by present or threatened scarcity, including threatened removal of something almost possessed, but never possessed.
  • People are really crazy about minor decrements down…People do not react symmetrically to loss and gain

Bias by envy jealousy

Bias from chemical dependency

  • Addictions such as substance use

Bias from mis-gambling compulsion

  • Example of lottery: If people commit to a set of number, it has to be good. And after they picked it themselves, it gets an extra validity
  • I made the choices so the odds must be better

Bias from liking distortion, including the tendency to like one’s self, one’s own kind, and one’s own ideas structure and the tendency to be especially suspectable to be misled by someone like

Bias from the non mathematical nature of the human brain in its natural state. Tendency to overweigh conveniently available information.

Don’t trust someone who says “I’ve never done it before and I’ll never do it again”

Bias from over influence by extra vivid evidence

  • Munger cites the example of Belridge Oil where he turned down a large block of shares because he “just mis-weighed it” based on his assessment of an extraordinarily peculiar CEO.

Mental confusion caused by information not arrayed in the mind in theory structure creating sound generalizations developed in response to the question why.

  • Uses generalization and information from memory to answer why without fully doing the research to answer the question why

Stress induced mental changes small and large temporary and permanent

  • Change in condition and behaviour induced by stress

Common mental illnesses and declines temporary and permanent and quitting the tendency to lose ability through disuse

Say-something syndrome

  • Munger cites the honeybee’s incoherent communication “dance” when it tries to convey nectar in a location for which it has no words – rather than stay silent it dishes out gibberish.
  • Many business meetings would feel incomplete to their participants if everyone didn’t pipe up at least once, regardless of any actual contribution

Other Notes

  • Effective way of learning: Watch one, do one, teach one. Similar structure of how doctors learn
  • To be efficient throughout the day, always plan the most difficult tasks in the morning and reward yourself with the things you like to do after the difficult task is done