The psychology of human misjudgment by Charlie Munger

The amazing Mr. Charlie Munger passed away today at the ripe age of 99. While many people will remember him for his legendary investing prowess and eminently quotable witticisms, I will always remember him for his legendary speech, The Psychology of Human Misjudgment. In the introduction of the speech, he says:

I have fallen in love with my way of laying out psychology because it has been so useful for me. And so, before I die, I want to imitate to some extent the bequest practices of three characters: the protagonist in John Bunyan’s Pilgrim’s Progress, Benjamin Franklin, and my first employer, Ernest Buffett.

Having read it multiple times, I can confidently say the bequest is worth its weight in gold. He originally delivered the speech to Harvard students in 1995 and revised it later. It is a profoundly insightful and brutal observation of the destructive tendencies that plague us, based on a lifetime of experience. I had read the speech many years ago but had forgotten about it. Rereading it, it had been on my to-do list for a long time. It’s sad that it had to be on a day like this. It’s a long speech, but it’s brilliant. Reading it will feel like looking at yourself in the mirror, and you may even squirm a little. I wanted to share some highlights from the speech because they were so damn good. This speech is as good as reading several books on human psychology.

Before that, there was another talk by Mr. Munger that I had watched several weeks ago and I remembered a few wonderful thoughts he shared:

It’s very simple, I think you should all just say, “So what? They are good tides and they’re bad tides.” I have a long way to go, and we know from the example of other people that if you constantly stand well by your own generation and cope with competency and grace with whatever life deals you, and just keep doing it, your share of the honors and emoluments of civilization, in due time, are very likely to come if you deserve the emoluments. And of course, that’s the other advice: the best way to get what you want in life is just to deserve what you want. How could it be otherwise? It’s not crazy enough so that the world is looking for a lot of undeserving people to reward. Yeah, and so you just keep plugging.

My Uncle Fred graduated from the Harvard School of Architecture with great distinction, and in the 1920s, he had a very successful architectural practice in Omaha. We designed churches, little buildings, and houses. During that time, he made eight or ten thousand dollars a year, which was an enormous amount of money for the architectural profession in the 1920s. However, when the 1930s came, the architectural permits and building permits in Omaha sometimes went down to $30,000 per month for the entire city. These were mostly furnace repairs, and there was absolutely no work for architects, including my distinguished architect uncle. In response, he moved to California.

In California, he took on drafting work at low rates for a few architects who still had some work. When things got even worse, he went to work for the County of Los Angeles, and in their agency, he was classified as a draftsman to save money. However, he saw it as an opportunity to exercise his skill and didn’t think it was beneath him. He coped as best he could, never complaining to anyone. His pay, after deductions, remained at $108 per month through 1931, 1932, 1933, and 1934. This situation wasn’t as bad as it may seem because he was able to rent a whole house in Glendale for $25 a month.

In 1936, when the FHA (Federal Housing Administration) was created, he took a civil service exam and passed it. From then on, he became the chief architect for the FHA in Los Angeles, engaging in a responsible, interesting, and civilization-benefiting line of work. He had a long and happy career in this role, never getting discouraged, and never thinking that what he had to do was something to complain about. I never heard him complain about anything. “Woe is me” was not in his vocabulary.

Generally speaking, in my long life, I’ve found two things to be true. One is to never feel sorry for yourself. Even in the most challenging situations, like when your child is dying of cancer, don’t feel sorry for yourself. The other thing you should never have is envy. Envy is one of the deadly sins, and you won’t have any fun at all if you allow it to consume you.

Coming back to the Psychology of Human Misjudgment speech, a few highlights:

On inversion

First, I had long looked for insight by inversion in the intense manner counseled by the great algebraist, Jacobi: “Invert, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to- find stupidity was just over the fence in the other fellow’s professional territory?

On the power of incentives. Here he’s talking about Robert Cialdini’s book Influence.

Part of Cialdini’s large book-buying audience came because, like me, it wanted to learn how to become less often tricked by salesmen and circumstances. However, as an outcome not sought by Cialdini, who is a profoundly ethical man, a huge number of his books were bought by salesmen who wanted to learn how to become more effective in misleading customers. Please remember this perverse outcome when my discussion comes to incentive-caused bias as a consequence of the superpower of incentives.

Almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power.

In my long life, I have never seen a management consultant’s report that didn’t end with the same advice: “This problem needs more management consulting services.” Widespread incentive-caused bias requires that one should often distrust, or take with a grain of salt, the advice of one’s professional advisor, even if he is an engineer. The general antidotes here are: (1) especially fear professional advice when it is especially good for the advisor; (2) learn and use the basic elements of your advisor’s trade as you deal with your advisor; and (3) double check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.

The inevitable ubiquity of incentive-caused bias has vast, generalized consequences. For instance, a sales force living only on commissions will be much harder to keep moral than one under less pressure from the compensation arrangement. On the other hand, a purely commissioned sales force may well be more efficient per dollar spent. Therefore, difficult decisions involving trade-offs are common in creating compensation arrangements in the sales function.

On behavioral limitations

Harvard’s great E.O. Wilson performed one of the best psychology experiments ever done when he painted dead-ant pheromone on a live ant. Quite naturally, the other ants dragged this useful live ant out of the hive even though it kicked and otherwise protested throughout the entire process. Such is the brain of the ant. It has a simple program of responses that generally work out all right, but which are imprudently used by rote in many cases.

On the tendency of liking and loving

Liking or loving, intertwined with admiration in a feedback mode, often has vast practical consequences in areas far removed from sexual attachments. For instance, a man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life. This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas. One common, beneficial example for us both was Warren’s uncle, Fred Buffett, who cheerfully did the endless grocery-store work that Warren and I ended up admiring from a safe distance. Even now, after I have known so many other people, I doubt if it is possible to be a nicer man than Fred Buffett was, and he changed me for the better.

On the tendency of human brain to avoid doubt

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. 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. And so man’s Doubt- Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.

On the tendency to avoid inconsistency

The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured. And the great rule that helps here is again from Franklin’s Poor Richard’s Almanack: “An ounce of prevention is worth a pound of cure.” What Franklin is here indicating, in part, is that Inconsistency-Avoidance Tendency makes it much easier to prevent a habit than to change it.

We have no less an authority for this than Max Planck, Nobel laureate, finder of “Planck’s constant.” Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, the progress is made by a new generation that comes along, less brain-blocked by its previous conclusions. Indeed, precisely this sort of brain-blocking happened to a degree in Einstein. At his peak, Einstein was a great destroyer of his own ideas, but an older Einstein never accepted the full implications of quantum mechanics.

On Curiosity

Man’s curiosity, in turn, is much stronger than that of his simian relatives. In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge. For instance, Athens (including its colony, Alexandria) developed much math and science out of pure curiosity while the Romans made almost no contribution to either math or science. They instead concentrated their attention on the “practical” engineering of mines, roads, aqueducts, etc. Curiosity, enhanced by the best of modern education (which is by definition a minority part in many places), much 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.

On influence from association

To avoid being misled by the mere association of some fact with past success, use this memory clue. Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere. And there are plenty of mundane examples of results like those of Napoleon and Hitler. For instance, 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. Or a man gets lucky in an odds-against venture headed by an untalented friend. So influenced, he tries again what worked before—with terrible results.

On excessive self regard

Man’s excess of self-regard typically makes him strongly prefer people like himself. Psychology professors have had much fun demonstrating this effect in “lost-wallet” experiments. Their experiments all show that the finder of a lost wallet containing identity clues will be most likely to return the wallet when the owner most closely resembles the finder. Given this quality in psycho- logical nature, cliquish groups of similar persons will always be a very influential part of human culture, even after we wisely try to dampen the worst effects.

On over-optimism

One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal, taught in my youth to high school sophomores. 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.

On social proof

And in the highest reaches of business, it is not all uncommon to find leaders who display followership akin to that of teenagers. If one oil company foolishly buys a mine, other oil companies often quickly join in buying mines. So also if the purchased company makes fertilizer. Both of these oil company buying fads actually bloomed, with bad results.

A few more things about Mr. Munger

I’ll miss his witty remarks like this :joy:

“I certainly didn’t invest in crypto. I’m proud of the fact I’ve avoided it. It’s like a venereal disease or something. I just regard it as beneath contempt.”


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