The Psychology of Human Misjudgment by Charlie Munger - Part 1

This is the part one of my summary of the chapter from "Poor Charlie's Almanack" where Munger describes psychology-based tendencies that, while sometimes useful to us, can often mislead. If we are aware of these, we will do better in life.


Reward and Punishment Super Response Tendency

• Incentives are very powerful. When FedEx wanted to make it's nighttime operations faster, they tried everything but nothing seemed to work. Finally, they decided to stop paying the employees by the hour and paid by shift, so that the could go home early if they finished early and it worked.
• "If you would persuade, appeal to interest and not to reason". 
• Prompt rewards work much better in changing the behavior than the delayed ones in changing and maintaining behavior. This has led to improvement in autistic children.
• Look out for incentive caused bias.
• Points to keep in mind when dealing with a professional advisor:
• Fear advise which is good for the advisor
• Learn and use the basic elements of your advisor's trade
• Double check, disbelieve or replace until it seems appropriate objectively
• My corollary: Prioritize advisors who admit what they did wrong and are willing to admit their mistakes to help you.
• Punishments also work similarly as rewards (in the opposite directions) but are not as great at habit changing.

Liking /Loving Tendency

• We are genetically programmed to love/like.
• This acts as a conditioning device that makes the liker/lover tend
• to ignore the faults of, and comply with the wishes of the object of its affection.
• to favor people, products, and actions merely associated with the object of his affection.
• to distort other facts to facilitate love.

Disliking/Hating Tendency

• The reverse of above.

Doubt-Avoidance Tendency

• Evolutionarily, the brain is programmed to quickly remove doubt by reaching some decision.
• This is triggered by a combination of puzzlement and stress.

Inconsistency-Avoidance Tendency

• Evolutionarily, the brain is reluctant to change.
• Thus, habits -- good or bad -- are hard to change once formed.
• "An ounce of prevention is worth a pound of cure."
• The same tendency is responsible for holding onto one's previous conclusions, human loyalties, reputational identity, etc.
• A quickly reached conclusion, triggered by Doubt-Avoidance Tendency, when combined with a tendency to resist any change in that conclusion, will naturally cause a lot of errors in cognition for modern man.
• Keynes pointed out that it was not the intrinsic difficulty of new ideas that prevented their acceptance, but because they were inconsistent with old ideas.
• People are reluctant to change opinion even if there is plenty of opposing evidence.
• One corollary of Inconsistency-Avoidance Tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. This is popularly on display in military and religion.
• Ben Franklin wanted the approval of some important man, so he maneuvered that man into doing him some unimportant favor, like lending a book. Thereafter, the man would admire and trust Franklin more because a nonadmired and nontrusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.
• This works in reverse too. When one is maneuvered into deliberately hurting some other person, one will tend to disapprove or even hate that person.

Envy/Jealousy Tendency

• The more we can relate to someone, the more we envy them. E.g. Sibling rivalry among Children is stronger than that is directed towards strangers.
• Buffet: "It is not greed that drives the world, but envy."

Reciprocation Tendency

• Humans, like many animals, have an extreme tendency to return both favors and disfavors.
• The standard antidote to one’s overactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, ”You can always tell the man off tomorrow, if it is such a good idea.”
• Wise employers try to oppose reciprocate-favor tendencies of employees engaged in purchasing. The simplest antidote works best: Don’t let them accept any favors from vendors. E.g. Sam Walton (Walmart founder) wouldn’t let purchasing agents accept so much as a hot dog from a vendor.
• In a famous psychology experiment, Cialdini brilliantly demonstrated the power of “compliance practitioners” to mislead people by triggering their subconscious Reciprocation Tendency. Carrying out this experiment, Cialdini caused his “compliance practitioners” to wander around his campus and ask strangers to supervise a bunch of juvenile delinquents on a trip to a zoo. Because this happened on a campus, one person in six out of a large sample actually agreed to do this. After accumulating this one-in-six statistic, Cialdini changed his procedure. His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for two years to the supervision of juvenile delinquents. This ridiculous request got him a one hundred percent rejection rate. But the practitioner had a follow-up question: “Will you at least spend one afternoon taking juvenile delinquents to a zoo?” This raised Cialdini’s former acceptance rate of 1/6 to 1/2 – a tripling.
• Guilt is caused by the conflict of reciprocation tendency and reward superresponse tendency.

Influence-from-Mere-Association Tendency

• In this conditioned reflex, a mere association triggers a response. For instance, consider the case of many men who have been trained by their previous experience in life to believe that when several similar items are presented for purchase, the one with the highest price will have the highest quality. It worked wonderfully with high-priced power tools for a long time. And it would work better yet with high-speed pumps at the bottom of oil wells.
• Similarly, military bands play such impressive music because the association of this impressive music with military service helps to attract soldiers and keep them in the army. 
• 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. For instance, a man foolishly gambles in a casino and yet wins. This unlikely correlation causes him to try the casino again.
• The proper antidotes to being made such a patsy by past success are: 1. to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking, and 2. to look for dangerous aspects of the new undertaking that were not present when past success occurred.
• The damage to the mind can come from liking and loving.  We often see a strong misinfluence from love as tearful mothers, with heartfelt conviction, declare before TV cameras the innocence of their obviously guilty sons.
• People disagree about how much blindness should accompany the association called love. In Poor Richard’s Almanack Franklin counseled: “Keep your eyes wide open before marriage and half shut thereafter.” Perhaps this “eyes-half-shut” solution is about right, but I favor a tougher prescription: “See it like it is and love anyway.”
• Hating and disliking also cause miscalculation triggered by mere association. In business, people often under appraise both the competency and morals of competitors they dislike. This is a dangerous practice, usually disguised because it occurs on a subconscious basis.
• Another common bad effect from the mere association of a person and a hated outcome is displayed in Persian Messenger Syndrome. Ancient Persians actually killed some messengers whose sole fault was that they brought home truthful bad news, say, of a battle lost. It was actually safer for the messenger to run away and hide, instead of doing his job, as a wiser boss would have wanted it done. Even today, it is actually dangerous in many careers to be a carrier of unwelcome news. Union negotiators and employer representatives often know this, and it leads to many tragedies in labor relations. Sometimes lawyers, knowing their clients will hate them if they recommend an unwelcome but wise settlement, will carry on to disaster.
• The proper antidote to creating Persian Messenger Syndrome and its bad effects is to develop, through an exercise of will, a habit of welcoming bad news. At Berkshire, there is a common injunction: “Always tell us the bad news promptly. It is only the good news that can wait.” It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.
• Influence-from-Mere-Association Tendency often has a shocking effect that helps swamp the normal tendency to return favor for favor, especially when the favor recipient’s condition is unpleasant, due to poverty, sickness, subjugation, or something else. Sometimes, when one receives a favor, 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. Under such circumstances, the favor-receiver, prompted partly by mere association of the favor-giver with past pain, will not only dislike the man who helped him but also try to injure him. This accounts for a famous response, sometimes dubiously attributed to Henry Ford: “Why does that man hate me so, I never did anything for him.”

Simple, 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.” -- there is something admirable in anyone able to do this.
• One should stay far away from any conduct at all likely to drift into chemical dependency. Even a small chance of suffering so great a damage should be avoided.

Excessive Self-Regard Tendency

• We all commonly observe the excessive self-regard of man. He mostly mis-appraises himself on the high side, like the ninety percent of Swedish drivers that judge themselves to be above average. Such misappraisals also apply to a person’s major “possessions.” One spouse usually over appraises the other spouse. And a man’s children are likewise appraised higher by him than they are likely to be in a more objective view. Even man’s minor possessions tend to be over appraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them. There is a name in psychology for this 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.
• 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. 
• Some of the worst consequences in modern life come when dysfunctional groups of cliquish persons, dominated by Excessive Self-Regard Tendency, select as new members of their organizations, persons who are very much like themselves. Thus, if the English department at an elite university becomes mentally dysfunctional or the sales department of a brokerage firm slips into routine fraud, the problem will have a natural tendency to get worse and to be quite resistant to change for the better.
• Therefore, some of the most useful members of our civilization are those who are willing to “clean house” when they find a mess under their ambit of control.
• In lotteries, the play is much lower when numbers are distributed randomly than it is when the player picks his own number even though the odds are almost exactly the same and much against the player. Because state lotteries take advantage of man’s irrational love of self-picked numbers, modern man buys more lottery tickets than he otherwise would have, with each purchase foolish.
• Excesses of self-regard often cause bad hiring decisions because employers grossly over appraise the worth of their own conclusions that rely on impressions in face-to-face contact. The correct antidote to this sort of folly is to under weigh face-to-face impressions and overweigh the applicant’s past record. "I once chose exactly this course of action while I served as chairman of an academic search committee. I convinced fellow committee members to stop all further interviews and simply appoint a person whose achievement record was much better than that of any other applicant. When it was suggested to me that I wasn’t giving “academic due process,” I replied that I was the one being true to academic values because I was using academic research showing the poor predictive value of impressions from face-to-face interviews."
• There is a famous passage somewhere in Tolstoy that illuminates the power of Excessive Self-Regard Tendency. According to Tolstoy, the worst criminals don’t appraise themselves as all that bad. They come to believe either: 1. that they didn’t commit their crimes or 2. that, considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became.
• The second half of the “Tolstoy effect,” where the man makes excuses for his fixable poor performance, instead of providing the fix, is enormously important. Because a majority of mankind will try to get along by making way too many unreasonable excuses for fixable poor performance, it is very important to have personal and institutional antidotes limiting the ravages of such folly.
• On the personal level, a man should try to face the two simple facts: 
1. 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
2. And 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.
• The main institutional antidotes to this part of the “Tolstoy effect” are: offer meritocratic, demanding culture, plus personal handling methods that build up morale, and severance of the worst offenders.
• When you can’t sever – as in the case of your own child – you must try to fix the child as best you can. 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.”
• Summary: The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn’t easy to do well and won’t work perfectly, but it will work much better than simply letting psychological nature take its normal course.
• Some high self-appraisals are correct and serve better than false modesty. Moreover, self-regard in the form of a justified pride in a job well done, or a life well lived, is a large constructive force.
• Of all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy. Moreover, the trustworthy man, even after allowing for the inconveniences of his chosen course, ordinarily has a life that averages out better than he would have if he provided less reliability.

Overoptimism Tendency

• “What a man wishes, that also will he believe.” - Demosthenes
• The Greek orator was clearly right about an excess of optimism being the normal human condition, even when pain or the threat of pain is absent. Just witness happy people buying lottery tickets or believing that credit-furbishing, delivery-making grocery stores were going to displace a great many superefficient cash-and-carry supermarkets.
• One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal, taught to high school sophomores. The mental rules of thumb that evolution gives you to deal with risk are not adequate.