Notes on The Psychology of Human Misjudgment by Charlie Munger
When I listened to it: May 2020
Why I listened to it: Everybody knows about Warren Buffett, but few people know about his business partner, Charlie Munger. Charlie gave this speech in 1995. It’s about how behavioral psychology can be applied to decision-making. Charlie wrote this because he wanted to help others avoid “standard thinking errors”. In it, he walks through 25 psychological tendencies that can lead to bad decision-making.
Listen below or scroll further down for my notes. I also converted these notes to a simple checklist for my own use. Feel free to steal it or repurpose it for your own use!
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My notes
Each human is made up of a physical structure + behavioral algorithms in our nerve cells ⇒ Charlie refers to these behavioral algorithms as “psychological tendencies”.
We operate counterproductively from the over-simplicity in our mental processes (these tendencies don’t always work in our best interest).
He developed this psychological tendency checklist through two methods:
Inversion: studying bad judgment and figuring out how to avoid it (in order to get good judgement)
A book called Influence by Robert Cialidin
Researching psychology textbooks
Munger’s idea of a well-lived life is one where you:
don’t have a lot of envy
don’t have a lot of hatred /resentment
don’t overspend your income
stay cheerful in spite of your troubles (let go of negative feelings)
deal with reliable people
do what you’re supposed to do
This checklist is a way to make better decisions and live a better life as a result.
The 25 tendencies are:
1. Reward and Punishment Superresponse Tendency
2. Liking/Loving Tendency
3. Disliking/Hating Tendency
4. Doubt-Avoidance Tendency
5. Inconsistency-Avoidance Tendency
6. Curiosity Tendency
7. Kantian Fairness Tendency
8. Envy/Jealousy Tendency
9. Reciprocation Tendency
10. Influence-from-Mere-Association Tendency
11. Simple, Pain-Avoiding Psychological Denial
12. Excessive Self-Regard Tendency
13. Overoptimism Tendency
14. Deprival-Superreaction Tendency
15. Social-Proof Tendency
16. Contrast-Misreaction Tendency
17. Stress-Influence Tendency
18. Availability-Misweighing Tendency
19. Use-It-or-Lose-It Tendency
20. Drug-Misinfluence Tendency
21. Senescence-Misinfluence Tendency
22. Authority-Misinfluence Tendency
23. Twaddle Tendency
24. Reason-Respecting Tendency
25. Lollapalooza Tendency
1. Reward and Punishment Superresponse Tendency
We tend to work towards rewards and avoid punishments.
“Whose bread I eat, his song I sing” (German idiom)
“If you would persuade, appeal to interest and not to reason” - Ben Franklin
Recognize the power of incentives ⇒ Incentives and disincentives change thinking and behavior ⇒ Maybe the most important rule in management is “Get incentives right”
Psychologist B.F. Skinner ⇒ prompt rewards work much better than delayed rewards in changing or maintaining behavior
Incentive-caused bias can lead to rationalized bad (immoral) behavior ⇒ “cognitive drift” ⇒ “I’ve never seen a management consultant’s report that didn’t end with the same advice: ‘This problem needs more management consulting services’”
With the prevalence of incentive-caused bias, you should generally distrust a professional advisor. Solution:
Fear professional advise when it is really good for the advisor
Learn and use the basic elements of your advisor’s trade as you deal with the advisor
Double check, disbelieve, or replace what you’re told, to the degree that seems appropriate after objective thought
Bad behavior is habit-forming when it is rewarded
From the employer’s perspective, employers generally lose to employees who improperly think of themselves first ⇒ The solution is to make bad behavior hard with:
Tough internal audit systems
Severe public punishment for identified wrongdoers
Misbehavior-preventing routines and machines (e.g. cash registers)
From the employee’s perspective, employees generally lose to employers who improperly think of themselves first (e.g. the sweatshop, the unsafe workplace). The solution is in:
Pressure from unions
Government action, such as wage and hour laws, workplace safety rules, measures fostering unionization, and workers’ compensation systems.
Man tends to “game” all human systems ⇒ you need anti-gaming systems and to avoid rewarding people for what can be easily faked
Money is now the main reward that drives habits ⇒ some people use money to buy status and others use status to get money.
But money is not the only reward that works ⇒ people also change their behavior and thinking for sex, friendship, companionship, advancement in status, and other nonmonetary items.
“Granny’s Rule” ⇒ eat your carrots before dessert ⇒ use this rule to force yourself daily to first do your unpleasant and necessary tasks before rewarding yourself.
2. Liking/Loving Tendency
We tend to ignore faults in people and things we like/love (and whom like/love us).
We are born to like and love based on triggering events (e.g. maternal love, sexual attraction, social groups)
We like and love being liked and loved ⇒ we will generally strive lifelong for the affect and approval of many people not related to us.
This tendency acts as conditioning device that makes the liker or lover tend:
To ignore the faults of, and comply with the wishes of, the object of his affection
To favor people, products, and actions merely associated with the objective of his affection
To distort other facts to facilitate love
Admiration also causes or intensifies liking or love ⇒ this can create negative (self-destruction) or positive (self-improvement) feedback loops
3. Disliking/Hating Tendency
We tend to ignore the virtues in people and things we dislike/hate (and whom dislike/hate us).
“Politics is the art of marshaling hatreds”
We are born to dislike and hate based on triggering events
This tendency acts as a conditioning device that makes the disliker or hater tend to:
Ignore virtues in the object of dislike
Dislike, people, products, and actions merely associated with the object of his dislike
Distort other facts to facilitate hatred
This can cause really irrational distortions ⇒ which lead to impossible mediations between opponents ⇒ because the “facts” do not overlap.
4. Doubt-Avoidance Tendency
We tend to avoid doubt by manufacturing certainty.
Our brains are programmed with a tendency to quickly remove doubt by reaching some decision ⇒ this makes sense as it would be counterproductive to deliberate when a predator is near
It is typically triggered by some combination of puzzlement and stress (i.e. threat).
One solution is to force “delay before decision-making“
It’s logical that some leaps of religious faith are greatly boosted by this tendency ⇒ you have to reconcile many different religious beliefs.
5. Inconsistency-Avoidance Tendency
We tend to avoid inconsistency by automatically resisting change.
Our brains conserve energy by being reluctant to change ⇒ we see this in all human habits, constructive and destructive
This tendency makes it much easier to prevent a habit than to change it
Most of us have many bad habits that we maintain despite their being known as bad ⇒ The chains of habits are too light to be felt before they become too strong to be broken
Wise living = many good habits maintained and many bad habits avoided or cured ⇒ “An ounce of prevention is worth a pound of cure” - Ben Franklin
We also tend to maintain our:
Previous conclusions
Human loyalties
Reputational identity
Commitments
Accepted role in civilization
This tendency causes “first conclusion bias” and “confirmation bias”.
Combined with “doubt-avoidance” tendency, this tendency can create a lot of thinking errors ⇒ we get imprisoned in poor conclusions that are maintained by mental habits that are hard to break ⇒ we tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of evidence that they are wrong.
Examples:
A person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity ⇒ this explains why ceremonies are so effective in brain washing ⇒ and why we have so many ;)
“Franklin Favor” ⇒ Getting an enemy to do a favor for you (e.g. loaning you a book) makes them trust you more because doing you a favor would be inconsistent with distrusting you.
Chinese prisoner brainwashing system ⇒ when you are forced into intentionally hurting someone, you will tend to dislike or even hate that person because liking them would be inconsistent with hurting them.
This tendency is so strong that it will often prevail after one has only pretended to have some identity, habit, or conclusion ⇒ the power of imagination.
One solution is to force yourself to hear all sides of argument before making a decision (e.g. how courts work)
Another solution is to train yourself to intensely consider any evidence tending to disconfirm any of your hypothesis ⇒ i.e. “disconfirmation bias”
6. Curiosity Tendency
We tend to be curious about new things.
Like other mammals, we have an innate curiosity.
Curiosity is effective in advancing knowledge (in advanced civilizations) ⇒ it helps us prevent or reduce bad consequences arising from other psychological tendencies (i.e. it helps us gain wisdom)
Curiosity can also lead to lack of focus and reduced progress
7. Kantian Fairness Tendency
We tend to prioritize / expect fairness.
Immanuel Kant ⇒ modern man displays / expects a lot of fairness ⇒ because this is necessary for an advanced civilization to work.
One example is the “first-come-first-serve” bias that leads to people forming lines.
Another example is how we let others merge in on highways.
When someone breaks these “fair-sharing” rules, hostility occurs.
This tendency has probably contributed to the abolition of slavery, women’s rights, and gay rights.
8. Envy/Jealousy Tendency
We tend to desire what someone else has that we don’t.
“It is not greed that drives the world, but envy.” — Warren Buffet
We’ve evolved to want often-scarce food ⇒ when others have food and we don’t, we envy it. ⇒ this applies to all things we value ⇒ envy/jealousy leads to hatred.
It’s no surprise that envy/jealousy is shamed in myth, religion, and literature.
E.g. People go crazy when a peer gets paid a multiple of the average pay for a position ⇒ To address this, many firms treat people the same with compensation.
For whatever reason, this phenomenon is not covered much in psychology textbooks ⇒ probably so as not to offend.
9. Reciprocation Tendency
We tend to reciprocate favors and disfavors.
A benefit of this tendency is that it facilitates group cooperation for the benefits of its members (e.g. marriage, modern trade).
When people smile at you, you smile back; when people get mad at you, you get mad back.
This tendency can be used to manipulate (e.g. a salesman doing minor favors; or in negotiation by giving choices versus a yes/no).
One way to avoid this tendency is to delay reaction ⇒ exercise the “24 hour rule”
Another solution is to avoid accepting favors (e.g. Sam Walton)
10. Influence-from-Mere-Association Tendency
We tend to assign value to things based on association.
Examples:
Higher price = higher quality
If you smoke, you will be cool
If we succeeded before, we will succeed again
If <influencer> endorses it, it must be good.
If <influencer> denounces it, it must be bad.
The bearer of bad news
Stereotypes
“Always tell us the bad news promptly. It is only the good news that can wait.” (Berkshire injunction)
11. Simple, Pain-Avoiding Psychological Denial
We tend to avoid painful situations by automatically denying reality.
The reality is too painful to bear, so we distort it (e.g. an addict who sees themselves as respectable while they are spiraling out of control).
12. Excessive Self-Regard Tendency
We tend to overvalue ourselves, our decisions, our people, and our possessions.
The endowment effect = we value what we already own greater than how we would value it if we did not own it.
This can also lead to overconfidence / pride (which has its own merits ⇒ “Never underestimate the man who overestimates himself”).
This can lead to us preferring to associate with people like ourselves. (i.e. people like us are more valuable) ⇒ which can lead to bad hiring practices ⇒ which can lead to massively dysfunctional groups requiring a new leader needs to come in and “clean house”
To avoid bad hiring: underweight face-to-face interactions and overweight past records of achievement.
Try to face two simple facts:
Fixable but unfixed bad performance is bad character and tends to create more of itself, causing more damage to the excuse giver with each tolerated instance, and
In demanding places, like athletic teams and Amazon, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.
The best antidote 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.
Pride is not bad if it is truly justifiable ⇒ the most useful form of pride is a justified pride in being trustworthy.
13. Overoptimism Tendency
We tend to believe the future will be better than today, and make decisions based on this.
“What a man wishes, that also will he believe” — Demosthenes
One solution is to train yourself to apply math / probability to decision-making.
14. Deprival-Superreaction Tendency
We tend to react with irrational intensity to a small loss (or threatened loss) of value (e.g. property, love, friendship, territory, opportunity, status, etc.).
This includes the loss of an almost-possession.
It explains how incumbents respond to new disruptive innovations (e.g. Taxis versus Uber) ⇒ It also explains “groupthink”, which has two solutions:
Maintain a culture of courtesy, despite differences in ideology.
Deliberately bring in innovators / disruptors / diverse thinkers to challenge the groupthink.
This tendency makes labor relations very difficult ⇒ businesses die because labor won’t agree to reduced wages (i.e. we often value the loss of a fraction of wages greater than the loss of a job).
Video games pray on this tendency (when we lose a game, we want to play another to get even).... So do open-outcry auctions.
15. Social-Proof Tendency
We tend to think and act as we see others around us thinking and acting.
“Monkey see; Monkey do”
This gets triggered most often in the presence of confusion or stress, and particularly when both exist.
This works for good behavior (e.g. opening doors for others) and bad behavior (e.g. rioting)
It also applies to action and in-action.
Solution: “Learn how to ignore the examples from others when they are wrong” ⇒ decision-making checklists are one way to do this.
16. Contrast-Misreaction Tendency
We tend to overreact to high contrast and underreact to low contrast.
Examples:
A bad second wife might good compared to a really really bad first wife
A bad husband by might be great compared to a really really bad father
A good overpriced house might be great compared to a really bad overpriced house
Price anchoring
A frog being placed in boiling water will jump out, but if you place the frog in cold water and slowly heat it up it will cook nicely
Small expenses adding up over time
“Beware of little expenses; a small leak will sink a great ship” — Benjamin Franklin
17. Stress-Influence Tendency
We tend to overreact in situations when we are under heavy stress.
Light stress can improve performance, but heavy stress can cause dysfunction.
When you're under heavy stress, it’s better to avoid making decisions and instead focus on reducing the stress.
18. Availability-Misweighing Tendency
We tend to over-value what’s easily available to us and under-value what's not.
This is where recency bias comes from.
“When I’m not near the girl I love, I love the girl I’m near.”
Ironically, this tendency can be used to influence people toward the right decision… through presentation.
One solution is to develop and use procedures (e.g. checklists) to guard against this.
Another solution is to remember that an idea or fact is not worth more merely because it is easily available to you.
19. Use-It-or-Lose-It Tendency
We tend to lose skills when we don’t use them.
Caveat: The skills in which we become fluent fade slower and come back faster with practice.
Solution: Achieve fluency in the skills you wish to retain and practice them regularly ⇒ A good way to do this is to make a list of the skills you wish to retain.
20. Drug-Misinfluence Tendency
We tend to make irrational decisions when we are under the influence of drugs.
Solution: Avoid drugs at all costs.
21. Senescence-Misinfluence Tendency
We tend to lose cognitive ability as we age.
Solution: You can delay this with continual thinking / learning new skills while practicing old ones.
22. Authority-Misinfluence Tendency
We tend to go along with those who have authority regardless of why they are right or wrong.
Solution: Be careful who you give authority / follow.
23. Twaddle Tendency
We tend to talk just to talk or or because we think we know something when we actually don’t.Solution: Be honest with yourself about what you know / don’t know …. don’t be afraid to say, “I don’t know.” ⇒ and when you don’t know, shut up.
24. Reason-Respecting Tendency
We tend to embrace things that have reasons and avoid things that don’t.
This is so strong that even giving meaningless reasons “why” can manipulate someone into doing something they shouldn’t.
Solution: Validate the reasons before making a decision.
25. Lollapalooza Tendency
We tend to fall victim to a combination of tendencies at one time.
When tendencies combine, they are even more powerful ⇒ i.e. they’re more likely to lead to bad decision-making.
Solution: when things don’t feel right, trust your gut, step back, and reevaluate based on a decision-making checklist.
Conclusion
These tendencies do good much of the time. It’s when they mislead us that we must be careful.
Also, be careful not to use these tendencies to mislead / manipulate others ⇒ it could harm your reputation.