.ss.c
Santangel’S InveStor Forum
OctOber 25, 2012New YOrk citY
Charlie Munger atHarvard-Westlake School
January 19, 2010
[Tis conversation about the nancial crisis, moderated by Jim Gibson,took place at a undraising event or the Harvard-Westlake preparatory school, where Charlie Munger is a longtime trustee.]
.sananglsv.om
Let’s just go through the list, briey. Academia ailed. Te proessors at ourgreatest universities [have] perectly asinine ideas -- rst, about ecientmarket theory. One o those peopleinuenced McKinsey [& Company]so much that McKinsey came to the Washington Post at the time it wasselling at one-th o what it wasplainly worth as a share o the totalenterprise, and said, ‘You can’t buy [the stock] in because, under ecientmarket theory, it can’t be worth a tho what people would pay or the wholecompany.’ O course, the kind o mindthat would keep a stupid idea like this when they have a act that would clearly reute it -- it clearly violates traditionso science and mental decency. Tey taught this drivel to our children ordecades and, by God, a lot o peoplethese other people i I just kind o work at it steadily or a long time,’ and thatis what I did.I think part o the popularity o Berkshire Hathaway is that we look likepeople who have ound a trick. It’s notbrilliance. It’s just avoiding stupidity. You say it is the same thing just stateddiferently -- well, maybe it is the samething just stated diferently. But youunderstand it better i you go at it the way we do, which is to identiy themain stupidities that do bright peoplein and then organize your patterns orthinking and developments, so youdon’t stumble into those stupidities. O course, this present situation involvesmassive cognitive ailure at a greatnumber o places dominated by very, very bright people, and that is quiteinteresting.
JIm gIbSon:
Charlie, why did so many smart peopleget it wrong?
CharlIe munger:
Well, that is a marvelous question andit is such a marvelous question that Ihave devoted a big chunk o my lieto studying that exact question. It wasobvious to me or some reason, at anearly age, that a great many very brilliantand disciplined people made perectly screwy decisions that were disastrous --and that it happened, rankly, whereverI looked. I ound this extremely curious,and somehow early in lie I got the ideathat I would never be able to play chessblindolded against six Grandmastersand win. God just did not give CharlieMunger any such skill. But I said, ‘Ohmy gosh, I cannot be as asinine as all
tanspon of hs psnaon povdd y:
chal Mung a Havad-wsla | 2
www.santangelsreview.com
don’t have any coins that are worth alot, that have precious metals that youcan melt down. Nobody cares what themelt-down value o the quarter is inrelationship to the dime, so Gresham’sLaw is a non-starter in the modern world. Bad money drives out good.But the new orm o Gresham’s Law is ungodly important. Te new ormo Gresham’s Law is brought intoplay - in economic thought, anyway -in the savings and loans crisis, whenit was perectly obvious that badlending drives out good. Tink o how powerul that model is. Tink o thedisaster that it creates or everybody. You sit there in your little institution. All o the builders [are not goodcredits anymore], and you are in thebusiness o lending money to builders.Unless you do the same idiotic thing[as] Joe Blow is doing down the street.Pete Johnson up the street wants todo something a little dumber and thething just goes to a mighty tide. You’vegot to shrink the business that you loveand maybe lay of the employees whohave trusted you their careers and soorth or [make] a lot o dumb loans. AtBerkshire Hathaway we try and let theplace shrink. We never re anybody, we tell them to go out and play gol. We sure as hell don’t want to make any dumb loans. But that is very hard todo i you sit in a leadership position insociety with people you helped recruit, you meet their wives and children andso orth. Te bad loans drive out thegood.It isn’t just bad loans. Bad morals driveout the good. I you want to run acheck-cashing agency in [a] downtownbig city, more than 100 percent o all the prot you could possibly earncan only be earned by im-ammingpeople on the nance contracts. Soi you aren’t willing to cheat people -basically minorities - more than 100to the other drivel that was discussed,opportunity cost deserves more thanone sentence.Berkshire Hathaway is constantly kicking of ideas
[audio unintelligible]
inabout two seconds at. We know we’vegot opportunity X, which is betterthan the new opportunity. Why do we want to waste two seconds thinkingabout the new opportunity? Many o you come rom places that don’tdo that. You’ve got to have one horse,one rabbit, one something or rather,and that rabbit is going to be thinkingabout something which would be ruledout immediately by an opportunity cost available generally to the place –but, it’s a diferent department. Youhave to be diversied and so on and soon. It’s easy to drit into this idea thatopportunities don’t matter, you’ve gotso many diferent ways o doing thingsthat are better. It isn’t better. Te right way to make decisionsin practical lie is based on youropportunity cost. When you getmarried, you have to choose the best[spouse] you can nd that will have you. Te rest o lie is the same damn way. You have to gure these things outi you want good results in lie, and i you don’t, well, you have to pretend that you can get good results in lie. I youhave enough sales ability, maybe youcan get by with it. At any rate, these ridiculous ideas cameout o academia. Tis wasn’t true inengineering and arts and science by the way. Te idiotic ideas are all rom thesocial science department and I wouldput economics in the social sciencesdepartment although it has some tingeso reality that remind you o arts andscience.In economics textbooks they teach youGresham’s Law: Bad money drivesout good. But we don’t have any badmoney that amounts to anything. Weare still doing it. It was in the majortextbooks in economics and people assmart as Paul Samuelson [believed it]-- and that is a signicantly smart man.How do smart people get such dumbideas and hold them so long? I’ll try to come back to that theme ater I’veenumerated more examples. Ten these ideas rom economicsdrited into corporate nance, and they got the capital asset pricing model --also pure drivel. Tey taught it to all o our children and the law schools pickedit up. Tey didn’t understand it, butthey could repeat it like a mantra romBuddhism, and people would learn itand regurgitate it on the examinationsand they’d get As and so orth. O course, they got out into the real worldand they were menaces to decency andsound thinking. Tat didn’t bother thepeople at Harvard [University] or any o the people that were doing it. And you say, how can smart people do suchimmensely dumb things? You don’t have to make this stuf up.Lie will constantly surprise you withthese ridiculous examples which teachimportant lessons. Tese are seriously smart people who took up with PaulSamuelson. Alan Greenspan is aseriously smart person although not assmart as Paul Samuelson. Ten they gotother ideas and these spread, and thegood ideas that are buried in economicsby and large weren’t emphasizedenough. I don’t know, 15 years ago orso, I ried through the three leadingtextbooks in introductory economics -I’d never taken a course in the subject- and I read through them. About the20th page o Mankiw’s amous book, which succeeded Samuelson’s amousbook, the guy says smart people maketheir decisions based on opportunity costs. Well, that was the last timeopportunity cost was discussed in 1,000pages. I want to tell you that compared
chal Mung a Havad-wsla | 3
www.santangelsreview.com
all the disciplines and get synthesisand reality across the disciplines. Tey are rewarded in their own little shopor being silly and monomaniacaland with their high IQs. Tey do allthis terrible mischie because they don’t know in a unctional way whatthey teach in Psychology 101. Tepsychology proessors who inventedand discovered a lot that is very important, they are not really helpingthe wider civilization all that much. We’re better of having them than nothaving them [but] in terms o what isthe best that can be in academia, it hasailed us horribly. With hard scienceand engineering excepted - [and] Ithink the cognition o medicine tendsto be quite good in the best places andbiology also tends to be good - butboy, you get into the rest o the socialsciences and you have to be very wary because there is an asininity trying toclobber you up behind every rock. With academia ailing us, now we turnto what happened with our regulators. Well, Alan Greenspan at the FederalReserve overdosed on Ayn Rand.Basically he kind o thought anythingthat happened in the ree market, even i it was an axe murder, had to be ok. He’sa smart man and [a] good man, but hegot it wrong. Generally, an over-belie in any one ideology is going to do you ini you extrapolate it too hard, and that’s what happened in economics. Whathappened in economics that caused Alan Greenspan’s cognitive ailure is very simple. Tey reasoned correctly that a ree market would be way morepredictive than anything else, and they reasoned correctly that once you had aairly advanced capitalist system – i thepeople that were putting up the capitalcould sell their pieces o ownership inthe company to other people, they’dbe more inclined to invest because itgave them an option to get out i they wanted to leave. It’s not like buying
[audio unintelligible]
at the economicsdepartment at a really great university unless he pretended to believe twaddle.O course, employment is ull o this sorto thing. Generally, the employmentrelationship - the need or money -causes more terrible cognition than any other single actor. Upton Sinclair saidit best o all. He said, ‘It is very hard toget a man to believe non-X when his way o making a living requires himto believe X.’ On a subconscious level, your brain plays tricks on you and youthink [that] what is good or the truelittle me is what you should believe.O course, it’s very hard to deal withsince it’s not conscious malevolencethat’s causing the bad cognition -- it’sthe subconscious reality o the humanmind. We have psychology departments withdistinguished proessors, surely they can teach our young to avoid – thepsychology term or this is ‘sel-servingbias.’ Surely the psychology departmentis teaching our children to avoidthis. Well, it’s not so. Te psychology department is ull o people who collectpsychology experiments the way a boy collects butteries. Tey just like listingthem and knowing the other people who collect the butteries and so orth.Very little synthesis is done rom oneexperiment to another, and i you ask them to synthesize - where you usethe ndings o psychology against therisks o reality, and through synthesiscreate a powerul machine that willget the right answer in a complexmess - the psychology proessors arenot going to help you. In act, you’dbe sort o dropped out o a psychology department i you purported to know a lot o non-psychology and integrateit beautiully with psychology. It goesback to what Whitehead said. Hetalked about the atal unconnectednesso academic disciplines. Tose bastardseel no duty to master the big ideas inpercent o the prot can’t be earned. Well, i you inherited the business or your idiot son-in-law is in it, you don’tknow what else to do. Tis is what I would call an adult problem and mostpeople solve it in the adult ashion: Tey learn to tolerate the cheating. Butthat is not the right answer to people who want to live a larger and betterlie. But it is a orm o Greshem’s Law,the new Gresham’s Law. One that isnot taught in economics courses andshould be. It is a really serious problemand, o course, it relates deeply to whathappened to create the economic crisis. All kinds o people who you would beglad to have marry into your amily compared to what you are otherwisegoing to get did things that were very regrettable under these pressures romthe new Gresham’s Law. Well, I’ve done enough or economics,let’s go on. Corporate nance isbeneath contempt. Believing just by buying volatile stocks you make anextra 7 percentage points per annum,I mean those people still believe inthe tooth airy and yet it is taught tothe children. On the other hand, thechildren don’t have to work very hardto get there so it’s a Mad Hatter’s teaparty -- but this is the real world as[it] exists. You have these extremely dumb things being done by these smartpeople. But a lot o them are under biginstitutional pressure like the poorbastard in the law department whohas to ace the new Gresham’s Law.O course, that kind o pressure is onall these other people that are doingthese dumb things, many in academia.I had a riend who had a child in theeconomics department at Chicago, very ree market orthodox economics,and [the child] didn’t believe themarkets were quite as perect as they thought at the University o Chicagoand he had to hide his views. Tere wasn’t the slightest chance he could do
Search History:
Result 00 of 00
00 results for result for
p.
Munger Talk at Harvard-Westlake
Charlie Munger's 2010 talk at Harvard-Westlake School
13.5K
Reads
57
Readcasts
24.5K
Embed Views
Recommended
Notes
Load more
