Charlie Munger - Source

Charlie Munger gave a speech to Harvard University in 1995. It was about how he built his own curriculum for Psychology. He’s an ace investor - dealing with psychology everyday to make money in the market. However, this curriculum is not just about investing psychology. It’s about everything.

Key takeaway

There are 25 tendencies that humans display. These are useful for running ourselves in automatic mode. However, sometimes, they trip us up. It pays to know when one of your tendencies is acting against you - and when it’s acting for you.

Keep your mind in order, and it will serve you well.

Munger began with the theory of evolution.

I was aware that man was a “social animal,” greatly and automatically influenced by behavior he observed in men around him. I also knew that man lived, like barnyard animals and monkeys, in limited size dominance hierarchies, wherein he tended to respect authority and to like and cooperate with his own hierarchy members while displaying considerable distrust and dislike for competing men not in his own hierarchy.

However, this template wasn’t enough to explain the extreme irrationality surrounding him. Thus began his quest to cope with irrationality better. The search for his models to explain human behaviour gave birth to this essay - The Psychology of Human Misjudgment.

“I saw this patterned irrationality, which was so extreme, and I had no theory to deal with it. So I created my own system of psychology.”

Here are the tendencies.

Reward and Punishment super-response tendency

Incentives drive people. People work towards rewards, and away from punishments.

FedEx faced a peculiar problem. They wanted to deliver packages on time. For this, they needed to load their airplanes before sunrise. The catch - they were never on time. The night shift workers were paid by the hour, and expected to work the entire 8 hour night shift. The idea was, if they spend enough time on the shift, they’ll get the job done. (As some managers still think - in places with fixed work hours)

Finally, somebody got the idea that it was foolish to pay the night shift by the hour. The employer wanted rapid loading of a plane, not maximized billable hours of employee service. Maybe if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.

“If you would persuade, appeal to interest and not to reason.” - Ben Franklin

Incentives are one of the better understood parts of Psychology. However, that doesn’t mean incentives explains everything. Focusing just on this because you understand it better can lead to ruin. This is the man with a hammer tendency - To a man with just a hammer, everything looks like a nail.

Skinner [a famed psychologist] lost most of his personal reputation (a) by overclaiming for incentive superpower to the point of thinking he could create a human utopia with it and (b) by displaying hardly any recognition of the power of the rest of psychology.

Incentive caused bias

Since incentives are so powerful, they end up biasing you and everyone around you.

This means, you should distrust the advice of your professional advisor - specially when it’s good for the advisor. The general antidotes here are:

(1) fear professional advice when it is good for the advisor;
(2) learn and use the basic elements of your advisor’s trade as you deal with your advisor;
(3) double check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.

The ubiquity of incentive-caused bias has vast consequences. For instance, a sales force living only on commissions will be much harder to keep moral than one under less pressure to earn their living.

Things work the same way with punishments, although not as well as rewards.

Around the time of Caesar, there was a European tribe that, when the assembly horn blew, always killed the last warrior to reach his assigned place, and no one enjoyed fighting this tribe.

Liking / Loving tendency

We tend to see people we like in a better light than they are.

One consequence of Liking/ Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend to -

(1) ignore faults of and comply with wishes of, the object of his affection
(2) favor people, products, and actions merely associated with the object of his affection (Influence from mere association tendency)
(3) distort other facts to facilitate love.

The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this “feedback mode” in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved.

Disliking / Hating tendency

We tend to see people we dislike in a worse light than they are.

Distortion of that kind is often so extreme that miscognition is shockingly large. When the World Trade Center was destroyed, many Pakistanis immediately concluded that the Hindus did it, while many Muslims concluded that the Jews did it. Such factual distortions often make mediation between opponents locked in hatred either difficult or impossible.

Doubt Avoidance tendency

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

After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do

Inconsistency Avoidance Tendency

Humans like to be consistent in everything they do, everything they say, and everything they are.

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

“An ounce of prevention is worth a pound of cure.” -Ben Franklin

Ben Franklin is indicating that Inconsistency-Avoidance Tendency makes it much easier to prevent a habit than to change it.

A quickly reached conclusion, triggered by Doubt-Avoidance Tendency, when combined with a tendency to resist any change in that conclusion, will cause a lot of errors in cognition for modern man.

This tendency, along with doubt avoidance work together against First Principles thinking.

“It was not the intrinsic difficulty of new ideas that prevented their acceptance. Instead, the new ideas were not accepted because they were inconsistent with old ideas in place” - Lord Keynes

The antidote comes from Charles Darwin. He trained himself to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one.

“At his peak, Einstein was a great destroyer of his own ideas.”

As a result, it is important not to put one’s brain in chains before one has come anywhere near his full potential as a rational person.

“It’s very important to not put your brain in chains too young by what you shout out.”

Curiosity Tendency

Humans are curious. Those who can get into a culture which enhances curiosity will have several benefits.

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

Kantian Fairness Tendency

Kant was famous for his categorical imperative, a “golden rule” that required humans to follow behavior patterns that, if followed by all others, would make the surrounding human system work best for everybody.

It’s like the “treat others like you wish to be treated” idiom.

Most humans expect fairness and are fair in situations they expect fairness. This shows up in queueing up for something, first come first serve and letting lane switchers on a merging highway cut in front of you.

Envy and Jealousy Tendency

“A member of a species designed through evolutionary process to want often-scarce food is going to be driven strongly toward getting food when it first sees food. And this is going to occur often and tend to create some conflict when the food is seen in the possession of another member of the same species”

Reciprocation Tendency

The automatic tendency of humans to reciprocate both favors and disfavors is extreme, as it is in apes, monkeys, dogs, and many less cognitively gifted animals. The tendency facilitates group cooperation for the benefit of members.

The standard antidote to one’s overactive hostility is to train oneself to defer reaction.

“You can always tell the man off tomorrow if it is such a good idea.” - Tom Murphy

Reciprocate-favor tendency operates at a subconscious level.

When an automobile salesman graciously steers you into a comfortable place to sit and gives you a cup of coffee, you are very likely being tricked, by this small courtesy alone, into parting with an extra five hundred dollars.

But here this might be balanced by your loss - the 500$ out of your pocket.

But, if you’re a representative for a rich employer - you have no such downside. Now the minor favor you receive from the salesman is less opposed by the threat of extra cost to you because someone else is paying the extra cost. Under such circumstances, the salesman is often able to maximize his advantage, particularly when the government is the purchaser.

The simplest antidote works best: Don’t let employees accept any favors from vendors.

Influence from Mere Association Tendency

A man buys a can of branded shoe polish, has a good experience with it when shining his shoes, and because of this “reward,” buys the same shoe polish when he needs another can.

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.

Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.

Think of the following situations as antidotes -

(1) Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere.

(2) A man foolishly gambles in a casino and yet wins. This unlikely correlation causes him to try the casino again, or again and again, to his horrid detriment.

The proper antidotes to being made such a patsy by past success are

  • to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will mislead
  • to look for dangerous aspects of the new undertaking that were not present when past success occurred.

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. This is a dangerous practice, usually disguised because it occurs on a subconscious basis.

Influence-from-Mere-Association Tendency often has a shocking effect that helps swamp the normal tendency to return favor for favor.

Sometimes, when one receives a favor, his condition is unpleasant, due to poverty, sickness, subjugation, or something else. In this case, the favor may trigger an envy-driven dislike for the person who was in so favorable a state that he could easily be a favor giver.

Influence from mere association shows up in judging people via stereotypes as well.

Just as one must learn that trend does not always correctly predict destiny, one must learn that the average dimension in some group will not reliably guide him to the dimension of some specific item. Otherwise one will make many errors, like that of the fellow who drowned in a river that averaged out only eighteen inches deep.

More on this quote and stereotypes: Averages are meaningless.

Pain Avoiding Psychological Denial

The reality is too painful to bear, so one distorts the facts until they become bearable. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency.

“It is not necessary to hope in order to persevere.” ­- William the Silent

Excessive Self Regard Tendency

Humans think of themselves as better than they are, think of their possessions as more valuable than they are, and think of their decisions as better than they are.

There is a name in psychology for this overappraise-your-own-possessions phenomenon: the “endowment effect”. And all man’s decisions are suddenly regarded by him as better than would have been the case just before he made them.

Mans excessive self regard tendency also makes him prefer people like him.

This has perverse consequences.

  • Degrading cults / orgs - A dysfunctional group in charge of hiring degrades the entire organization - as they hire more people like themselves.
  • Irrational bets - I think I’m taller, faster, and stronger than you (even if I might not be)

On a personal level, excessive self regard makes you blind to your shortcomings. Try to face the 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.

  • In demanding places, like athletic teams and General Electric, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.

I once heard of a child-teaching method so effective that the child remembered the learning experience over fifty years later. The child later became Dean of the USC School of Music and then related to me what his father said when he saw his child taking candy from the stock of his employer with the excuse that he intended to replace it later. The father said, “Son, it would be better for you to simply take all you want and call yourself a thief every time you do it.”

Overoptimism Tendency

We are over-optimistic.

One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal. The mental rules of thumb that evolution gives you to deal with risk are not adequate. They resemble the dysfunctional golf grip you would have if you relied on a grip driven by evolution instead of golf lessons.

Deprival Superreaction Tendency

The quantity of man’s pleasure from a ten dollar gain does not match the quantity of his displeasure from a ten-dollar loss. This is also known as loss aversion.

In displaying Deprival-Superreaction Tendency, man incurs disadvantage by misframing his problems. He will often compare what is near instead of what really matters. For instance, a man with $10 million in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet.

Social-Proof Tendency

Mans evolution left him with Social-Proof Tendency, an automatic tendency to think and act as he sees others around him thinking and acting. What simpler way could there be to find out how to walk to a big football game in a strange city than by following the flow of the crowd?

Triggering of social proof occurs in the presence of puzzlement or stress, and particularly when both exist.

Because both bad and good behavior are made contagious by Social-Proof Tendency, it is important that human societies

(1) stop any bad behavior before it spreads
(2) foster and display all good behavior.

In social proof, it is not only action by others that misleads but also their inaction. In the presence of doubt, inaction by others becomes social proof that inaction is the right course.

If only one lesson is to be chosen from a package of lessons involving Social-Proof tendency, and used in self improvement, my favorite would be: Learn how to ignore the examples from others when they are wrong.

Contrast-Misreaction Tendency

The nervous system of man does not naturally measure in absolute scientific units. So, it must rely on something simpler. The answer is contrast, the difference between things.

The eyes register the contrast in what is seen. They’ll see what is faster, not the actual speed.

As perception goes, so goes cognition.

Large scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents. Or as when a man takes wife number two who would be appraised as alright only in comparison to wife number one.

When a man’s steps are consecutively taken toward disaster, with each step being very small, the brain’s Contrast-Misreaction Tendency will often let the man go too far toward disaster to be able to avoid it. This happens because each step presents so small a contrast from his present position.

Availability-Misweighing Tendency

“When I’m not near the girl I love, I love the girl I’m near.”

Mans imperfect, limited-capacity brain drifts into working with what’s easily available to it. And the brain can’t use what it can’t remember or what it is blocked from recognizing because it is heavily influenced by one or more psychological tendencies. And so the mind overweighs what is easily available.

This tendency also shows up when thinking about difficult problems. Instead of measuring the factors that actually represent the problem, man tends to focus on measuring the factors that are easily available. These factors are usually numeric in nature. For example, solving for growth of a country via measuring only GDP.

A simple, incomplete explanation to a complex phenomena gains widespread attention because it’s simple, easily available. This is called an Availability Cascade, a potent result of availability bias

The main antidote to mis-cues from Availability- Misweighing Tendency involve procedures, like use of checklists.

Another antidote is to behave like Darwin did when he emphasized disconfirming evidence.

Another option is red teaming.

The great algorithm to remember in dealing with this tendency is simple: An idea or a fact is not worth more merely because it is easily available to you.

Use it or lose it Tendency

If you stop using your skills, you’re going to lose them.

People tend to forget that they learnt these skills and stop using them, which makes them worse off.

It is thus, essential to assemble your skills into a checklist that you routinely use.

If a skill is raised to fluency, instead of merely being crammed in briefly to enable one to pass some test, then the skill (1) will be lost more slowly and (2) will come back faster when refreshed with new learning. These are not minor advantages, and a wise man engaged in learning some important skill will not stop until he is really fluent in it.

Authority-Misinfluence Tendency

People’s brain turns to mush when hearing orders from authority.

Thus, be careful whom you appoint to power because a dominant authority figure will often be hard to remove.

Twaddle Tendency

Some people like to work, others like to twaddle. Twaddling means talking about something you don’t know, or just making up stuff as you go, or talking about meaningless stuff.

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.

As a direct result, choose people you want to talk to carefully.

Reason Respecting Tendency

People respect reasons for things. There is a natural joy that comes from being able to explain why.

Few practices, therefore, are wiser than not only thinking through reasons before giving orders but also communicating these reasons to the recipient of the order.

Carl Braun [a CEO] well knew that ideas got through best when reasons for the ideas were meticulously laid out. - You had to tell Who was to do What, Where, When, and Why.

An unfortunate byproduct of Reason-Respecting Tendency is respecting bullshit reasoning. For example, at the photocopy machine, people would let others cut in line when they said “Excuse me, can I cut in because I have to make some copies?”

Lollapalooza Tendency

The Tendency to Get Extreme Consequences from Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome.

When some of the above tendencies work together, you get extreme consequences.

You can listen to an abridged version of the essay here

For the full essay, it’s available in Poor Charlie’s Almanac [Affiliate link]

All quotes by Charlie Munger.