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.