Psychology of Human Misjudgement

On popular demand, here is a playlist of a few important Charlie Munger speeches from the internet.

If there is one speech you should not miss, it is this one. I anyways wanted to include in the Human Nature series with full credit to Charlie Munger as it was an eye opener to me despite being a behavioural science student.

If you don't have 75 minutes to spare, here is my 15 min summary (4632 words) of all 24 tendencies from Charlie's Harvard speech. The entire transcript of his speech is here.

Munger dedicated his life to avoiding stupid mistakes. He believed that patterns of irrational behavior often lead to repeated mistakes. To avoid these, he sought to understand poor judgements across disciplines and then invert them. This process led him to pin point 24 standard tendencies that human beings are susceptible to and he calls it the Psychology of Human Misjudgement. Listen to him and decoding was hard work at first, probably because of my Indian origin. Slowly I got used to his way of articulation.

Here is a quick breakdown.

  1. Reward and Punishment Super response Tendency:
“Never, ever, think about something else when you should be thinking about the power of incentives.

We tend to work towards rewards and avoid punishments. We are highly influenced by incentives and disincentives, which can lead to biased behaviour or distorted decision-making.

For instance, Xerox salespeople sold inferior machines to maximize their sales commissions, even when superior machines were available. Therefore, when advice is incentivized, it's crucial to verify the information and maintain a level of skepticism. Acknowledge the impact of incentives and strive to "get incentives right".

  1. Liking/Loving Tendency:
“(Hu)Man will generally strive, lifelong, for the affection and approval of many people not related to him.”

We tend to be biased towards people and things we like or love, which can cloud our judgment. It is human to like and love being liked and loved.

Loving tendency is a conditioning device that causes the admirer to overlook the faults of the object of their affection. It also leads them to comply with the wishes of their beloved, and to favor people, products, or actions merely associated with them. This is known as the influence-from-mere-association tendency. This tendency can even distort facts to facilitate love.

However, it's crucial to remember that items like stocks, traded on an exchange, are indifferent to their owners. They cannot reciprocate emotions, yet investors often attach to their investments emotionally. This attachment can make it challenging to let go of investments or anything else one has grown fond of.

To mitigate this, it's essential to acknowledge this inclination and stay aware of what you appreciate or grow fond of. Establishing feedback systems can help preserve objectivity.

  1. Disliking/Hating Tendency:
“In a pattern obverse to Liking/Loving tendency the newly arrived human is also ‘born to dislike and hate’ as triggered by normal and abnormal triggering forces in its life.”

Our judgment can be clouded by dislike or hatred, which can lead to irrational decisions or actions.

Much like a propensity for love, a tendency towards hatred can condition a person to ignore virtues in the object of their dislike. It can also cause them to dislike products, people, or actions merely associated with the object of their disdain. This tendency can distort other facts to facilitate hatred, driving people to be close-minded and manipulate facts to fit their negative narrative. Hatred can provoke anger, and decisions driven by such anger can escalate into self-destruction.

  1. Doubt-Avoidance Tendency:
The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. And so man’s Doubt-Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.

We tend to avoid doubt by manufacturing certainity. We often make decisions quickly to avoid the discomfort of doubt or uncertainty.

Quick decision-making can be useful in emergencies, like when you're being chased by a man-eating tiger. However, this instinct can be less helpful during a market crash. Doubt can also create stress and anxiety around decision-making, potentially causing you to delay or avoid making a decision entirely. Despite the stress and puzzlement, forcing a delay before making a decision can lead to better outcomes.

  1. Inconsistency-Avoidance Tendency:
The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance. We see this in all human habits, constructive and destructive. Few people can list a lot of bad habits that they have eliminated, and some people cannot identify even one of these. Instead, practically everyone has a great many bad habits he has long maintained despite their being known as bad. Given this situation, it is not too much in many cases to appraise early-formed habits as destiny. When Marley’s miserable ghost says, “I wear the chains I forged in life,” he is talking about chains of habit that were too light to be felt before they became too strong to be broken…
It is important not to thus put one’s brain in chains before one has come anywhere near his full potentiality as a rational person.

We tend to be reluctant to change our beliefs, opinions, or habits, even when confronted with new evidence.

Simply put, people are resistant to change as we are creatures of habit. As the saying goes, "The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured. An ounce of prevention is worth a pound of cure." It's easier to prevent a habit than to change it.

With respect to ideas, challenge your confirmation bias. Make a conscious effort to seek counterarguments before drawing conclusions. This helps mitigate the tendency to cling to previous conclusions, loyalties, reputational identities, commitments, roles, etc. People often amass a large collection of fixed ideas and attitudes that are rarely re-examined or altered, even when there is compelling evidence to suggest they are incorrect.

  1. Curiosity Tendency:
Curiosity, enhanced by the best of modern education (which is by definition a minority part in many places), much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.

We tend to be innately curious about new things. Our natural curiosity can sometimes distract us from focusing on more important matters.

“In advanced human civilisation, culture greatly increases the effectiveness of curiosity in advancing knowledge.” Also curiosity can lead to lack of focus and reduced progress. What Munger calls as "man with a hammer" syndrome is greatly reduced by curiosity. It loosens fixed beliefs, opens minds and usually works against inconsistency/avoidance tendencies.

  1. Kantian Fairness Tendency:
Kant was famous for his “categorical imperative,” a sort of a “golden rule” that requires humans to follow those behaviour patterns that, if followed by all others, would make the surrounding human system work best for everybody. And it is not too much to say that modern accultured man displays, and expects from others, a lot of fairness as thus defined by Kant.

We tend to prioritise/seek fairness and reciprocity, which can sometimes result in irrational decision-making.

When someone breaks the "fair-sharing" rules, hostility occurs. When you are nice to people, they are usually nice back. For example: first-come-first-serve leads to people forming lines. When a jerk interjects a line, chaos prevails.

Random jerks do exist. Trolls provoke. You can take it personally, get angry and burn a ton of time and energy on it. Or you can accept that a tiny portion of society is not worth your time and move on. On the other end, breaking this tendency is how abolition of slavery, women's rights, gay rights also came by.

  1. Envy/Jealousy Tendency:
A member of a species designed through evolutionary process to want often-scarce food is going to be driven strongly toward getting food when it first sees food. And this is going to occur often and tend to create some conflict when the food is seen in the possession of another member of the same species. This is probably the evolutionary origin of the Envy/Jealousy Tendency that lies deep in human nature…
Envy/jealousy is extreme in myth, religion, and literature wherein, in account after account, it triggers hatred and injury.

We tend to desire what someone else has that we don't. It applies to food/money/love/power/recognition/material possessions/investment returns and more.

Envy and jealousy can lead to poor decisions and actions driven by spite or resentment. Interestingly, labelling a position as envy-driven is often seen as extremely insulting to the person holding that position, especially when the label is accurate. Envy is considered a taboo.

"It is not the greed that drives the world, but envy" - Warren Buffet.

  1. Reciprocation Tendency:
The human tendency of humans to reciprocate both favors and disfavors has long been noticed as it is in apes, monkeys, dogs, and many less cognitively gifted animals. The tendency facilitates group cooperation for the benefit of members. In this respect, it mimics much genetic programming of the social insects. We see the extreme power of the tendency to reciprocate disfavors in some wars, where it increases hatred to a level causing very brutal conduct…
Reciprocity Tendency subtly causes many extreme and dangerous consequences, not just on rare occasions but pretty much all the time.

We feel obligated to return favors or kindness, which can lead to biased behavior and decision-making. Thanks to Kantian fairness tendency, we tend to return favours and facilitate group cooperations for the benefit of all members (trade, marriage etc). Reciprocation can also be manipulated to return "favors" that they normally would not agree to do. The tendency operates at a sub conscious level.

Special advise for marriage →"Keep your eyes wide open before marriage and half shut thereafter" 🤪

Munger says - "See it like it is and love anyway".

One way to avoid this tendency is to delay reaction by 24 hours. Say No a lot and avoid accepting favors. In short, stop and think about what you are agreeing to before deciding.

  1. Influence-from-Mere-Association Tendency:
“The most damaging miscalculations from mere association do not ordinarily come from advertisers and music providers. 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.”

People are easily swayed by associations, often leading to irrational choices. The correlation of quality with higher price is abused by advertisers. Apple does this. Starbucks does this. Coca-Cola does this too. In one sense all luxury brands do. Sometimes you get what you pay for. Sometimes you pay extra just for the label.

Someone who gambles for the first time on a low probability bet and sees it pay off, repeats the bet and loses, and continues to repeat and loose as he never bothered to consider his first win as pure luck. The association of winning with a low probability bet compounds stupid decisions.

The solution is to weigh decisions independent of the result and stay away from classification stereotypes.

Carefully examine each past success, looking for accidental, non­causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking. Munger says “The proper antidote to creating Persian Messenger Syndrome and its bad effects is to develop, through exercise of will, a habit of welcoming bad news.”

Berkshire way - "Always tell us the bad news promptly. It is only the good news that can wait".
  1. Simple, Pain-Avoiding Psychological Denial:
This phenomenon first hit me hard in World War II when the super athlete, super student son of a family friend flew off over the Atlantic Ocean and never came back. His mother, who was a very sane woman, then refused to believe he was dead. That’s Simple, Pain Avoiding Psychological Denial. The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems. The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency.

We often deny uncomfortable facts or situations to avoid potential pain. When reality becomes too hard to bear, we distort it. To avoid this, we need to accept that things don't always go as planned; however, this doesn't mean it's the end of the world.

In investing, any loss, whether temporary or permanent, is painful. Investors may avoid risks to evade this pain, a phenomenon known as loss aversion. However, this typically leads to poorer long-term returns.

  1. Excessive Self-Regard Tendency:
We all commonly observe the excessive self-regard of man. He mostly misappraises 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 overappraises 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 overappraised. Once owned, they suddenly become worth more to him and he would pay if they were offered for sale to him and he didn’t already own them… And all man’s decisions are suddenly regarded by him as better than would have been the case just before he made them.

We often overestimate our skills, decisions, and possessions, which can lead to poor choices. This overconfidence, also known as the endowment effect, causes us to value what we own more than its true worth. Consequently, we may prefer to associate with similar individuals, leading to biased hiring practices and potentially dysfunctional teams. In such cases, a new leader may need to step in and make significant changes. To avoid poor hiring decisions, it's advisable to place less emphasis on face-to-face interactions and more on proven track records of achievement.

In investing, this overconfidence can lead to people mistakenly believing they can pick successful stocks, overvaluing their investments, and associating with others who hold the same misplaced confidence. Consequently, when their investments fail, they refuse to acknowledge their lack of skill and blame external factors instead.

The solution is to be objective, open-minded, humble, and willing to admit mistakes. Strive for objectivity, especially when considering yourself, your family and friends, your property, and the value of your past and future activities. The most beneficial form of pride is taking justified pride in being trustworthy.

  1. Overoptimism Tendency:
Demosthenes, the most famous Greek Orator, said, “What a man wishes, that also will he believe.”
Demosthenes, parsed out, was thus saying that man displays not only Simple, Pain-Avoiding Psychological Denial but also an excess of optimism even when he is already doing well.

People often display unrealistic optimism, leading to an underestimation of risks and challenges. This mindset causes us to believe the future will be better than the present, influencing our decision-making.

Excessive optimism drives individuals to view the stock market, casinos, or lotteries as quick sources of wealth. A grasp of simple probabilities can serve as a reality check, reminding us of our limited control over the future.

  1. Deprival-Superreaction Tendency:
“I include the natural human reactions to both kinds of loss experience—the loss of the possessed reward and the loss of the almost-possessed reward—under one description, Deprival-Superreaction Tendency.”

We tend to overreact to perceived losses, which can lead to irrational decision-making. This tendency makes smart decisions hard. For example: we often value the loss of a fraction of wages greater than the loss of a job.

Loss aversion comes into play when the pain of loss feels much greater than the pleasure of gain. For instance, the pleasure derived from gaining ten dollars does not match the pain felt from losing the same amount. If someone almost obtains something they greatly desire only to have it taken away at the last moment, they react as if they had owned the reward for a long time and then lost it. If we lose a game or auction, we want to play again to break even. It's human nature to misframe problems and to compare what's close at hand instead of what truly matters.

Losses feel twice as painful as gains feel good, compounded by phenomena like the sunk cost fallacy, loss aversion, and the drive to break even.

To counteract this tendency, it's essential to foster a culture of respect, even when ideologies differ. When possible, bring in innovators, disruptors, and diverse thinkers to challenge groupthink.

  1. Social-Proof Tendency:
The otherwise complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done around him. And such followership often works fine. For instance, what simpler way could there be to find out how to walk to a big football game in a strange city than by following the flow of the crowd. For some such reason, man’s evolution left him with Social-Proof Tendency, an automatic tendency to think and act as he sees others around him thinking and acting.

People often mimic the actions or beliefs of others, sometimes leading to a herd mentality and irrational behavior. This is most often triggered in the presence of confusion, stress, or a combination of both.

The concept of social proof suggests that "it is not only the actions of others that mislead, but also their inaction. When in doubt, others' inaction is taken as social proof that inaction is the correct course."

In the world of investing, being part of the crowd is often comfortable. Most investors prefer to be wrong with the majority, rather than being wrong alone. However, the cyclical nature of investing often makes it more profitable to be independent at the extremes of the cycle.

It's crucial to learn how to disregard others' examples when they are incorrect and to diligently follow decision-making checklists.

  1. Contrast-Misreaction Tendency:
Because of the nervous system of man does not naturally measure in absolute scientific units, it must instead rely on something simpler. The eyes have a solution that limits their programming needs: the contrast in what is seen is registered. And as in sight, so does it go, largely, in the other senses. Moreover, as perception goes, so goes cognition. The result is man’s Contrast-Misreaction Tendency. Few psychological tendencies do more damage to correct thinking. Small-scale damages involve instances such as man’s buying an overpriced $1,000 dashboard merely because the price is so low compared to his concurrent purchase of a $65,000 car…

Our judgment can be skewed by the contrast between two options, leading us to overestimate or underestimate their value. We often respond excessively to high contrast and insufficiently to low contrast. For example, a bad husband might seem excellent compared to an extremely bad father. This tendency causes us to fall for price anchoring and upgrades as well.

Small changes may seem unnoticeable at first, but they accumulate over time. This can result in significant improvements through compounding, but it can also lead to significant problems as small mistakes add up. As Ben Franklin said, "A small leak will sink great ships." This aphorism is particularly useful because our brains frequently overlook the significance of seemingly minor issues.

  1. Stress-Influence Tendency:
Everyone recognizes that sudden stress, for instance from a threat, will cause a rush of adrenaline in a human body, prompting faster and more extreme reaction. In a phenomenon less well recognized, but still widely known, light stress can slightly improve performance — say, in examinations — whereas heavy stress causes dysfunction.

Stress can negatively impact our judgment and decision-making abilities.

It's unsurprising that excess stress can result in poor decisions. Acute stress depression can make thinking dysfunctional due to extreme pessimism, often long-lasting and accompanied by debilitating fatigue. Therefore, eliminating stress factors can significantly improve decision-making.

  1. Availability-Misweighing Tendency:
The mental tendency echoes the words of the song: “When I’m not near the girl I love, I love the girl I’m near.” 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 because it is heavily influenced by one or more psychological tendencies bearing strongly on it, as the fellow is influenced by the nearby girl in the song. And so the mind overweighs what is easily available and thus displays Availability-Misweighing Tendency.

We tend to overestimate the likelihood of events that are easily recalled or imagined. Our innate tendency to overemphasize readily available information results in recency bias. This leads to the belief that "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.”

In investing, this bias can cause mistakes such as chasing returns or assuming that the next crash will resemble the previous one. Implementing a process and establishing checklists can help overcome this tendency.

  1. Use-It-or-Lose-It Tendency:
All skills attenuate with disuse. I was a whiz at calculus until age twenty, after which the skill was soon obliterated by total nonuse.
Throughout his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self. If he reduces the number of skills he practices and, therefore, the number of skills he retains, he will naturally drift into error from man with a hammer tendency.

Skills and knowledge that are not used regularly can deteriorate, impairing our ability to make sound decisions.

If a skill is raised to fluency, you will loose it slowly and it comes back faster when refreshed with new learning. Wise ones do not stop learning skills till fluency. It is a great idea to make a list of skills that you wish to retain. Mine are reading/writing/learning/visual thinking/simple visuals and storytelling.

  1. Drug-Misinfluence Tendency:
This tendency’s destructive power is so widely known to be intense, with frequent tragic consequences for cognition and the outcome of life, that it needs no discussion here to supplement that previously given under “Simple, Pain-Avoiding Psychology Denial.”
In chemical dependency, wherein morals usually break down horribly, addicted persons tend to believe that they remain in respectable condition, with respectable prospects. They thus display an extremely unrealistic denial of reality as they go deeper and deeper into deterioration… 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.

Addiction is destructive. The influence of drugs or alcohol or food or sex can significantly impair our judgment and decision-making abilities.We tend to make irrational decisions when we are under influence.

  1. Senescence-Misinfluence Tendency:
With advanced age, there comes a natural cognitive decay, differing among individuals in the earliness of its arrival and the speed of its progression. Practically no one is good at learning complex news skills when very old. But some people remain pretty good in maintaining intensely practiced old skills until late in life, as one can notice in many a bridge tournament.

Cognitive decline due to aging can lead to reduced decision-making capabilities. You can delay this with curiosity/ continual thinking / learning new skills while practicing old ones with joy.

  1. 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.
But automatic as most human reactions are, with the tendency to follow leaders being no exception, 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 bustle of life and are misunderstood. And so, we find much miscognition from man’s Authority-Misinfluence Tendency.

We tend to go along with those who have authority regardless of why they are right or wrong. This excessive weight to the opinions of perceived authorities can lead to biased decision-making. It is important to be careful around whom you appoint to power because a dominant authority figure will often be hard to remove.

  1. Twaddle Tendency:
Man, as a social animal who has the gift of language, is born to prattle and to pour out twaddle that does much damage when serious work is being attempted. Some people produce copious amounts of twaddle and others very little.

We can be distracted by irrelevant or trivial information, which can impede effective decision-making. We tend to talk just to talk or or because we think we know something when we actually don’t. We try to fake it. Also called as BS.

Understand your circle of competence and be honest with yourself about what you know/don’t know. Also don’t be afraid to say, “I don’t know.” and when you don’t know, just shut up.

  1. Reason-Respecting Tendency:
This tendency has an obvious implication. It makes man especially prone to learn well when a would-be teacher gives correct reasons for what is taught, instead of simply laying out the desired belief ex-cathedra with no reasons given…
In general, learning is most easily assimilated and used when, life long, people consistently hang their experience, actual and vicarious, on a latticework of theory answering the question: Why? Indeed, the question “Why?” is a sort of Rosetta stone opening up the major potentiality of mental life.
Unfortunately, Reason-Respecting Tendency is so strong that even a person’s giving a meaningless or incorrect reason will increase compliance with his orders and requests.

People are more likely to accept an idea if a reason is provided, even if the reason is not relevant or logical. We tend to embrace things that have reasons and avoid things that don’t. Make sure to validate the reasons before making a decision.

Munger calls it a Lollapalooza Tendency when multiple tendencies are at work and we fall victim to the combination at a time. When tendencies combine they are even more powerful and usually lead to bad decision making.

The tendency to get extreme consequences from confluences of psychological tendencies acting in favour of a particular outcome.

Going through the tendencies checklist helps you unravel the biases that might lead to irrational mistakes. When things don't feel right, trust your gut, stop back and reevaluate using a decision making checklist.

🥂to understanding human nature!

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