Charlie Munger's 25 psychological tendencies of human misjudgement Flashcards
from http://www.rbcpa.com/mungerspeech_june_95.pdf
First: Under-recognition of the power of what psychologists call ‘reinforcement’
and economists call ‘incentives.’
http://www.rbcpa.com/mungerspeech_june_95.pdf
My second factor is simple psychological denial
This first really hit me between the eyes when a friend of our family had a super-athlete,
super-student son who flew off a carrier in the north Atlantic and never came back, and his
mother, who was a very sane woman, just never believed that he was dead. And, of
course, if you turn on the television, you’ll find the mothers of the most obvious criminals
that man could ever diagnose, and they all think their sons are innocent. That’s simple
psychological denial. The reality is too painful to bear, so you just distort it until it’s
bearable. We all do that to some extent, and it’s a common psychological misjudgment
that causes terrible problems
Third: incentive-cause bias, both in one’s own mind and that of ones trusted
advisor, where it creates what economists call ‘agency costs.
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Fourth, and this is a superpower in error-causing psychological tendency: bias
from consistency and commitment tendency, including the tendency to avoid or
promptly resolve cognitive dissonance. Includes the self-confirmation tendency of
all conclusions, particularly expressed conclusions, and with a special persistence
for conclusions that are hard-won.
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Fifth: bias from Pavlovian association, misconstruing past correlation as a reliable
basis for decision-making.
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Sixth: bias from reciprocation tendency, including the tendency of one on a roll to
act as other persons expect.
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Seventh, now this is a lollapalooza, and Henry Kaufman wisely talked about this:
bias from over-influence by social proof – that is, the conclusions of others,
particularly under conditions of natural uncertainty and stress.
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Nine [he means eight]: what made these economists love the efficient market
theory is the math was so elegant.
And after all, math was what they’d learned to do. To the man with a hammer, every
problem tends to look pretty much like a nail. The alternative truth was a little messy, and
they’d forgotten the great economists Keynes, whom I think said, “Better to be roughly
right than precisely wrong.”
Nine: bias from contrast-caused distortions of sensation, perception and cognition.
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- Bias from over-influence by authority.
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Eleven: bias from deprival super-reaction syndrome, including bias caused by
present or threatened scarcity, including threatened removal of something almost
possessed, but never possessed.
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Bias from envy/jealousy.
Well envy/jealousy made, what, two out of the ten commandments? Those of you who
have raised siblings you know about envy, or tried to run a law firm or investment bank or
even a faculty? I’ve heard Warren say a half a dozen times, “It’s not greed that drives the
world, but envy.”
Here again, you go through the psychology survey courses, and you go to the index:
envy/jealousy, 1,000-page book, it’s blank. There’s some blind spots in academia, but it’s
an enormously powerful thing, and it operates, to a considerable extent, on the
subconscious level. Anybody who doesn’t understand it is taking on defects he shouldn’t
have
. Bias from chemical dependency.
Well, we don’t have to talk about that. We’ve all seen so much of it, but it’s interesting
how it’ll always cause this moral breakdown if there’s any need, and it always involves
massive denial. See it just aggravates what we talked about earlier in the aviator case, the
tendency to distort reality so that it’s endurable.
- Bias from mis-gambling compulsion.
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Bias from liking distortion, including the tendency to especially like oneself, one’s
own kind and one’s own idea structures, and the tendency to be especially
susceptible to being misled by someone liked. Disliking distortion, bias from that,
the reciprocal of liking distortion and the tendency not to learn appropriately
from someone disliked.
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