Munger: The Psychology of Human Misjudgment (1995, revised 2005)
Charlie Munger · 1995 · 848 words
The Psychology of Human Misjudgment — Charlie Munger, Harvard Law School, 1995 (revised 2005)
I had little interest in academic psychology textbooks — a fact later reflected in my consequences as I painfully discovered I needed psychology and that it was largely missing from the soft sciences. The lesson I drew from this is that you must wear the worldly wisdom of your discipline lightly, expecting always to revise it from the cross-checks of other disciplines.
Twenty-Five Tendencies of Human Misjudgment
1. Reward and Punishment Superresponse Tendency. Never, ever, think about something else when you should be thinking about the power of incentives. The acid test of an incentive system is whether it produces what you want, and the absence of which produces what you don't want. The federal welfare system is a master class in unintended incentive failure.
2. Liking/Loving Tendency. People will distort other facts to facilitate love.
3. Disliking/Hating Tendency. The converse of liking, with similar distorting power. We tend to ignore virtues in the objects of our dislike, exaggerate vices, and find it easy to misappropriate them in our minds.
4. Doubt-Avoidance Tendency. The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. Religion and tradition exist in part to satisfy this tendency.
5. Inconsistency-Avoidance Tendency. The brain of man conserves programming space by being reluctant to change. The result is rampant first-conclusion bias. The brain has an antifoolishness device — but it isn't very strong, and the man who has avoided foolish error all his life has saved less than expected because subsequent improvement is hard.
6. Curiosity Tendency. There is a lot of innate curiosity in mammals, but its nonhuman version is highest among apes and monkeys. Man's curiosity, in turn, is much greater than that of his fellow mammals.
7. Kantian Fairness Tendency. Modern man often acts unfairly through the medium of laws — most especially through unfair, government-induced inflation.
8. Envy/Jealousy Tendency. A member of a species, designed to grab quickly food sufficient for survival, naturally became envious or jealous when another member of the species had more food or chow earned by a fellow.
9. Reciprocation Tendency. The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as extreme.
10. Influence-from-Mere-Association Tendency. The standard conditioned reflex generates skewed reasoning in adults that is hard to overcome.
11. Simple, Pain-Avoiding Psychological Denial. This is first cousin to "Persian Messenger Syndrome" — the practice of beheading the messenger with bad news.
12. Excessive Self-Regard Tendency. We all commonly observe the excessive self-regard of man. He mostly misappraises himself on the high side.
13. Overoptimism Tendency. Anyone in possession of a good supply of innate optimism will frequently take poorly evaluated risks.
14. Deprival-Superreaction Tendency. The quantity of man's pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss. The displeasure is much greater.
15. Social-Proof Tendency. The human tendency to think and act as one sees others around one thinking and acting is a powerful force.
16. Contrast-Misreaction Tendency. Because the contrast between the perceived option and the alternative is high, real estate brokers show clients overpriced houses first, etc.
17. Stress-Influence Tendency. Light stress can slightly improve performance — say, in examinations — but heavy stress causes dysfunction.
18. Availability-Misweighing Tendency. Our perception of risk is biased by easily available memory.
19. Use-It-or-Lose-It Tendency. Skills attenuate from disuse.
20. Drug-Misinfluence Tendency. This needs no further description.
21. Senescence-Misinfluence Tendency. The ravages of old age impair cognition.
22. Authority-Misinfluence Tendency. Living in dominance hierarchies as he does, like all his ancestors before him, man was born mostly to follow leaders, with only a few people doing the leading. And so, human society is formally organized into dominance hierarchies, with their culture augmenting the natural follow-the-leader tendency of man.
23. Twaddle Tendency. Man, as a social animal who is also a "language animal," is born to prattle "twaddle."
24. Reason-Respecting Tendency. There is in man an automatic tendency to respect a request that comes accompanied by an explanation, even when the explanation is meaningless.
25. Lollapalooza Tendency — The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. When several of these factors are acting together in the same direction, they can produce far greater consequences than the sum of the individual tendencies.
A check list of the tendencies prevents one from missing important factors. The lollapalooza effect — when several of these tendencies operate together — is what produces extreme outcomes in human affairs, including manias and panics in markets.
To know what you don't know is more useful than to be brilliant.
The first rule of compounding: never interrupt it unnecessarily.
If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.
Quickly grasp the main idea. The five most dangerous words in business: "everybody else is doing it."
— Charlie Munger
I had little interest in academic psychology textbooks — a fact later reflected in my consequences as I painfully discovered I needed psychology and that it was largely missing from the soft sciences. The lesson I drew from this is that you must wear the worldly wisdom of your discipline lightly, expecting always to revise it from the cross-checks of other disciplines.
Twenty-Five Tendencies of Human Misjudgment
1. Reward and Punishment Superresponse Tendency. Never, ever, think about something else when you should be thinking about the power of incentives. The acid test of an incentive system is whether it produces what you want, and the absence of which produces what you don't want. The federal welfare system is a master class in unintended incentive failure.
2. Liking/Loving Tendency. People will distort other facts to facilitate love.
3. Disliking/Hating Tendency. The converse of liking, with similar distorting power. We tend to ignore virtues in the objects of our dislike, exaggerate vices, and find it easy to misappropriate them in our minds.
4. Doubt-Avoidance Tendency. The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. Religion and tradition exist in part to satisfy this tendency.
5. Inconsistency-Avoidance Tendency. The brain of man conserves programming space by being reluctant to change. The result is rampant first-conclusion bias. The brain has an antifoolishness device — but it isn't very strong, and the man who has avoided foolish error all his life has saved less than expected because subsequent improvement is hard.
6. Curiosity Tendency. There is a lot of innate curiosity in mammals, but its nonhuman version is highest among apes and monkeys. Man's curiosity, in turn, is much greater than that of his fellow mammals.
7. Kantian Fairness Tendency. Modern man often acts unfairly through the medium of laws — most especially through unfair, government-induced inflation.
8. Envy/Jealousy Tendency. A member of a species, designed to grab quickly food sufficient for survival, naturally became envious or jealous when another member of the species had more food or chow earned by a fellow.
9. Reciprocation Tendency. The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as extreme.
10. Influence-from-Mere-Association Tendency. The standard conditioned reflex generates skewed reasoning in adults that is hard to overcome.
11. Simple, Pain-Avoiding Psychological Denial. This is first cousin to "Persian Messenger Syndrome" — the practice of beheading the messenger with bad news.
12. Excessive Self-Regard Tendency. We all commonly observe the excessive self-regard of man. He mostly misappraises himself on the high side.
13. Overoptimism Tendency. Anyone in possession of a good supply of innate optimism will frequently take poorly evaluated risks.
14. Deprival-Superreaction Tendency. The quantity of man's pleasure from a ten-dollar gain does not exactly match the quantity of his displeasure from a ten-dollar loss. The displeasure is much greater.
15. Social-Proof Tendency. The human tendency to think and act as one sees others around one thinking and acting is a powerful force.
16. Contrast-Misreaction Tendency. Because the contrast between the perceived option and the alternative is high, real estate brokers show clients overpriced houses first, etc.
17. Stress-Influence Tendency. Light stress can slightly improve performance — say, in examinations — but heavy stress causes dysfunction.
18. Availability-Misweighing Tendency. Our perception of risk is biased by easily available memory.
19. Use-It-or-Lose-It Tendency. Skills attenuate from disuse.
20. Drug-Misinfluence Tendency. This needs no further description.
21. Senescence-Misinfluence Tendency. The ravages of old age impair cognition.
22. Authority-Misinfluence Tendency. Living in dominance hierarchies as he does, like all his ancestors before him, man was born mostly to follow leaders, with only a few people doing the leading. And so, human society is formally organized into dominance hierarchies, with their culture augmenting the natural follow-the-leader tendency of man.
23. Twaddle Tendency. Man, as a social animal who is also a "language animal," is born to prattle "twaddle."
24. Reason-Respecting Tendency. There is in man an automatic tendency to respect a request that comes accompanied by an explanation, even when the explanation is meaningless.
25. Lollapalooza Tendency — The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. When several of these factors are acting together in the same direction, they can produce far greater consequences than the sum of the individual tendencies.
A check list of the tendencies prevents one from missing important factors. The lollapalooza effect — when several of these tendencies operate together — is what produces extreme outcomes in human affairs, including manias and panics in markets.
To know what you don't know is more useful than to be brilliant.
The first rule of compounding: never interrupt it unnecessarily.
If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one-legged man in an ass-kicking contest.
Quickly grasp the main idea. The five most dangerous words in business: "everybody else is doing it."
— Charlie Munger