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Charlie Munger Speech Psychology Human Misjudgment Essays

Preface: Phil Ordway on “Human Misjudgment Revisited”

August 6, 2017 in Human Misjudgment Revisited

“It seems clear to me that I’ve been wrong for many years in saying that the single greatest challenge for investors is to develop self-control. In fact, the single greatest challenge investors face is to see ourselves as we actually are. What makes Warren Buffett and, perhaps even more, Charlie Munger so remarkable is how honest they are about themselves with themselves.” –Jason Zweig [1]

This preface is part of a multi-part series on human misjudgment by Phil Ordway, managing principal of Anabatic Investment Partners.

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Charlie Munger’s famous speech “The Psychology of Human Misjudgment” has changed my life.[2] In that spirit, the goal of this talk [at the Zurich Project Workshop 2017] is to improve my own understanding of the concepts by updating “The Psychology of Human Misjudgment” with more recent examples and case studies while also incorporating the related work of Kahneman, Tversky, and other prominent researchers. There is no substitute for the original, and this isn’t an attempt to substitute or improve upon it. I highly recommend both the audio recording of the 1995 version and the comprehensive, updated written account in Poor Charlie’s Almanack.

Despite the emphasis on failure and folly, the goal of this talk is not to assign blame or to condemn and ridicule the mistakes; there is no place for schadenfreude here. Learning from the mistakes of others is a very effective and less costly method, but compiling a database of failures – collecting inanities, as Munger would put it – opens us up to accusations of throwing stones in a glass house. To be clear, all of us are prone to these mistakes. By studying failure I’m trying to avoid it myself. An interest in the psychology of human misjudgment is a natural outgrowth from the desire for self-improvement. By seeking an explanation for other people’s mistakes, we can hope to internalize the reasons and improve our own decisions. Just bias from extra-vivid evidence can cause our brains to misfire, the goal in this exercise is to highlight vivid, interesting examples that will sear the misjudgments into our brain. By creating a readily accessible framework for decision-making – by crafting a personal system of psychology – we can all improve our outcomes in life. The idea is to avoid these common psychological traps – to be less stupid – rather than to be brilliant.

I’ve been working on this for quite a while, and it’s an ongoing effort.[3] There are sure to be errors and misapplications here, so corrections and suggestions of all kinds are welcome. This essay is also in dire need of good editing, so please forgive its length and loose writing.

–Philip C. Ordway
June 2017

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[1] Email exchange with the author
[2] I used the audio recording of Munger’s original speech and the updates he made in the reprint in “Poor Charlie’s Almanack.” All errors and mistakes of transcription are my own.
[3] “Investing, Fast and Slow“

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Nivi · March 25th, 2008

In The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6, Marc Andreessen kindly interprets an essay from Charlie Munger‘s book, Poor Charlie’s Almanack:

“Mr. Munger’s magnum opus speech, included in the book, is The Psychology of Human Misjudgment — an exposition of 25 key forms of human behavior that lead to misjudgment and error, derived from Mr. Munger’s 60 years of business experience. Think of it as a practitioner’s summary of human psychology and behavioral economics as observed in the real world.

“In this series of blog posts, I will walk through all 25 of the biases Mr. Munger identifies, and then adapt them for the modern entrepreneur. In each case I will start with relevant excerpts of Mr. Munger’s speech, and then after that add my own thoughts.”

I started making a cheat sheet of Marc and Charlie’s key points—I thought I would share it with you. It’s a handy reference once you’ve read the full article.

(For another great article on cognitive bias, see Cognitive biases potentially affecting judgment of global risks.)

1. Reward and Punishment Super-Response

Once you realize how much incentives influence human behaviour, you need to assume their influence is even bigger than you think. Never think about something else when you should be thinking about incentives.

“If you would persuade, appeal to interest and not to reason.”

– Benjamin Franklin

Incentives are so powerful that every incentive should have a counter-incentive to restrict gaming of the first incentive.

2. Liking and Loving

Liking and loving something conditions you to (1) ignore faults of and comply with wishes of the loved, (2) favor people, products, and actions associated with the loved, and (3) distort other facts to facilitate love.

Wanting to be liked by your teammates impedes you from firing people and making unpopular but good decisions.

3. Disliking and Hating

Disliking or hating something conditions you to (1) ignore virtues in the disliked, (2) dislike people, products, and actions associated with the disliked, and (3) distort other facts to facilitate hatred.

Startups should focus on their customers, not their competition—whom they may dislike.

4. Doubt Avoidance

Execution is often better than further contemplation:

“A good plan, violently executed now, is better than a perfect plan next week.”

— George Patton

Believing that something will happen, and convincing others that it will be so, makes it more likely to happen.

While a hypothesis is still doubted, wise entrepreneurs know whether (1) persistence and iteration will prove the hypothesis, or (2) the hypothesis will not be proven and additional testing is a destructive waste of time—a new hypothesis is required.

Related: Realists vs. Idealists: Thoughts about Creativity and Innovation and Decide To Do Something That Will Probably Fail, Then Convince Yourself And Everyone Else That Success is Certain.

5. Inconsistency Avoidance

Have strong opinions, weakly held. New and correct ideas may not be accepted simply because they are inconsistent with existing ideas.

Your existing ideas may be unknown to you. They may be hidden assumptions. We often make hidden assumptions about unknown unknowns.

If existing customers in the market aren’t ready for a product that is inconsistent with their behaviour, go after customers who aren’t in the market because they can’t afford the existing product or don’t have access to it. See The Innovator’s Dilemma and The Innovator’s Solution.

6. Curiosity

Insufficient curiousity prevents you from learning. Hire curious people and discover your customer’s true needs—not what you think they need.

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