A Summary Of Charlie Munger's ‘The Psychology of Human Misjudgment’
The following are EMA's key takeaways from a talk by Charlie Munger delivered at Harvard University in June 1995.
Enrique Aboitiz Mendieta
Fairly late in life, I stumbled into this book ‘Influence’ by Bob Cialdini...and that filled in a lot of holes in my crude system.
– C. Munger
What is being laid out is a copied summary. I hesitate to comment on them as we are after learning and prefer not to risk offending anyone who may feel particularly averse to what they hear.
- Understand the power of incentives
- Psychological Denial – You will find mothers of the most obvious criminals who think their sons are innocent. Every father thinks their daughter is the prettiest and there are monsters out there.
- Incentive-Caused Bias – Caused plus mindset leads to abuse
- Bias from consistency and commitment tendency – Educational institutions are in some senses irresponsible
- Bias from Pavlovian association – 3/4 of advertising works on pure Pavlov; Persians did kill the messenger who brought them bad news
- Bias from reciprocation tendency – What you think may change what you do and you, and what you do will change what you think
- Lollapalooza – One oil company bought a fertilizer plant and every other major oil company practically ran out and bought a fertilizer plant—a total disaster
- Better to be roughly right than precisely wrong
- Bias from contrast-caused distortions of sensation, perception, and cognition – It takes a percentage changed before one notices so the frog stays in the warm water as the heat is elevated and dies in it
- Bias from over-influence by authority – Hitler succeeded before he failed
- Bias from deprival super-reaction syndrome – People are crazy about minor decrements down and can reciprocate animosity and things can escalate; overweighing the importance of what is lost and things do not get done or less gets done; New Coke, some smart people make these terrible boners
- Bias from envy/jealousy – They made two of the ten commandments, "It’s not greed that drives the world, but envy"
- Bias from chemical dependency
- Bias from mis-gambling compulsion – People think that if they have committed to it, it has to be good; they thought it, they acted on it and so it gets extra validity
- Bias from liking distortion – Especially like oneself, one's kind and one's ideas and the tendency to be especially susceptible to being misled by someone liked and the opposite, disliking distortion bias
- You're getting advice in this world from your paid advisor with his huge load of ghastly bias, a woe to you.
- You can learn the basic elements of your advisor's trade.
- What this needs is more management consulting!!!
- Bias from non-mathematical nature of the human brain in its natural state
- A tendency to overweigh conveniently available information
- Availability changes behavior, which both Coca-Cola and the Catholic Church use as a strategy to alter behavior in their direction
- Coca-Cola has raised availability to a secular religion — you will drink a lot more Coke if it's always available
- What else distorts judgment?
- Caution with human sympathy – “I never did it before, I'll never do it again”
- Vengeance is a waste of time
- Bias from over-influence by extra-vivid evidence
- Creating sound generalizations developed in response to the question ‘why?’
- Failure to obtain deserved influence by not properly explaining why or getting the ‘why’ wrong; a ‘why’ in which people do not believe is not a ‘why’
- Array the facts on the theory structures answering the question ‘why?’, if you do not do that, you just cannot handle the world
- Other normal limitations of sensation, memory, cognition, and knowledge
- Stress-induced mental change, small and large, temporary and permanent
- Can reverse condition personality
- Psychological ignorance in very high places
- Common mental illness and decline
- Temporary and permanent
- The tendency to lose ability through disuse
- Development and organizational confusion from the say-something syndrome
- Noise of the say-something syndrome
Institution of the Board of Directors
- Caution reciprocation tendency
- A CEO doing asinine things and no one objecting
- Until things start getting bad and the board is being made to look foolish or a threatening legal liability appears
Institution of Voting
US Constitutional Convention – It is secret, not vote until the whole vote, then just one vote on the whole constitution. If different, everybody would have been pushed into a corner by his pronouncements and his oratory.
Institution of Training
Watch one, do one, teach one.
You do not get ice cream until you eat your carrots.
All forced to do what’s unpleasant and important and then rewarded by doing something you do not like doing.
Post Morten: Johnson & Johnson
- Everybody must revisit their old acquisitions and wade through the presentations.
- Do it routinely.
- For most companies, disasters are quickly forgotten—denial.
Open-Cry Auctions – Do not go!
ABOVE ALL, BE RATIONAL!
Listen to the speech via the YouTube video below:
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