The Psychology of Human Misjudgment by Charlie Munger - Part 2

This is the part two and the final 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.

The part one could be found here.


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. That is, the loss seems to hurt much more than the gain seems to help. Moreover; if a man almost gets something he greatly wants and has it jerked away from him at the last moment, he will react much as if he had long owned the reward and had it jerked away.
• In displaying Deprival Superreaction Tendency, man frequently 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.
• A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution or as a whole. This factor among others accounts for much of the wisdom of Jack Welch‘s long fight against bureaucratic ills at General Electric.
• Deprival Superreaction Tendency often protects ideological or religious views by triggering a hatred directed toward vocal nonbelievers.
• It is almost everywhere the case that extremes of ideology are maintained with great intensity and with great antipathy to non-believers, causing extremes of cognitive dysfunction. This happens, I believe, because two psychological tendencies are usually acting concurrently towards this same sad result: Inconsistency-Avoidance Tendency, plus Deprival Superreaction Tendency.
• Antidotes to intense, deliberate maintenance of groupthink: 
1. An extreme culture of courtesy, kept in place despite ideological differences
2. To deliberately bring in able and articulate disbelievers of incumbent groupthink.
• Labor, once paid a certain wage, can't let it be reduced even if it means the closing of the business which is the worse outcome for them.
• The most addictive forms of gambling provide a lot of near misses and each one triggers Deprival Superreaction Tendency. Electronic machines enable the creators to produce a lot of meaningless bar-bar-lemon results that greatly increase play by fools who think they have very nearly won large rewards.
• Deprival Superreaction Tendency often does much damage to man in open-outcry auctions. The social proof that we will next consider tends to convince man that the last price from another bidder was reasonable, and then Deprival Superreaction Tendency prompts him strongly to top the last bid. The best antidote to being thus triggered into paying foolish prices at open-outcry auctions is the simple Buffett practice: Don’t go to such auctions.

Social-Proof Tendency

• It's wiser for parents to rely more on manipulating the quality of the peers of their kids than on exhortations to them to correct their behavior.
• Triggering of Social-Proof Tendency most readily occurs in the presence of puzzlement or stress, and particularly when both exist.
• Because both bad and good behaviors are made contagious by Social-Proof Tendency, it is highly important that human societies stop any bad behavior before it spreads and foster and display all good behavior.
• Inaction by others can also become social proof [ref Bystander effect].
• Summary: Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

Contrast-Misreaction Tendency 

• The contrast in what is seen is registered in the brain.
• Few psychological tendencies do more damage to correct thinking.
• Small-scale damages involve instances such as man’s buying an overpriced $1,000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65,000 car.
• 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.
• A particularly reprehensible form of sales practice occurs in the offices of some real estate brokers. A buyer from out of the city visits the office with little time available. The salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And, boom, the broker often makes an easy sale.

Stress-Influence Tendency

• Sudden stress, for instance from a threat, will cause a rush of adrenaline in the human body, prompting a faster and more extreme reaction.
• Light stress can slightly improve performance – say, in examinations – whereas heavy stress causes dysfunction.
• During the great Leningrad Flood of the 1920s, Pavlov had many dogs in cages. Their habits had been transformed, by a combination of his “Pavlovian conditioning” plus standard reward responses, into distinct and different patterns. As the waters of the flood came up and receded, many dogs reached a point where they had almost no airspace between their noses and the tops of their cages. This subjected them to maximum stress. Immediately thereafter, Pavlov noticed that many of the dogs were no longer behaving as they had. For example, the dog that formerly had liked his trainer now disliked him. This result reminds one of the modern cognition-reversals in which a person’s love of his parents suddenly becomes hate, as new love has been shifted suddenly to a cult. The unanticipated, extreme changes in Pavlov’s dogs would have driven any good experimental scientist into a near-frenzy of curiosity. That was indeed Pavlov’s reaction. Pavlov spent the rest of his long life giving stress-induced nervous breakdowns to dogs, after which he would try to reverse the breakdowns, all the while keeping careful experimental records. He found: 
1. that he could classify dogs so as to predict how easily a particular dog would breakdown; 
2. that the dogs hardest to break down were also the hardest to return to their pre-breakdown state; 
3. that any dog could be broken down; 
4. and that he couldn’t reverse a breakdown except by reimposing stress.

Availability-Misweighing Tendency 

• Man’s imperfect, limited-capacity brain easily 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. 
• The main antidotes to avoid Availability-Misweighing Tendency often involve procedures, including use of checklists, which are almost always helpful.
• Extra-vivid evidence, being so memorable and thus more available in cognition, should often consciously be under weighed while less vivid evidence should be overweighed.

Authority-Misinfluence Tendency

• Humans have the natural tendency to follow leaders.
• Man is often destined to suffer greatly when the leader is wrong or when his leader’s ideas don’t get through properly.
• In the simulator training of copilots, they have to learn to ignore certain really foolish orders from boss pilots because boss pilots will sometimes err disastrously. Even after going through such a training regime, however, copilots in simulator exercises will too often allow the simulated plane to crash because of some extreme and perfectly obvious simulated error of the chief pilot.
• Summary: be careful whom you appoint to power because a dominant authority figure will often be hard to remove, aided as they will be by Authority-Misinfluence Tendency.

Reason-Respecting Tendency

• Human cognition has the natural tendency of complying when given reasoning.
• This is sometimes abused by giving bogus reasons.

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.