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Charliemunger Biases Simmons Chew Final PDF
Charliemunger Biases Simmons Chew Final PDF
PsychologicalBiases
ThatCauseUsToMake
BadDecisions
ByMichaelSimmonsWithIanChew
Itisremarkablehowmuchlongtermadvantagepeoplelikeushave
gottenbytryingtobeconsistentlynotstupid,insteadoftryingtobe
veryintelligent.Theremustbesomewisdominthefolksaying,`Its
thestrongswimmerswhodrown.
CharlieMunger
Illustrationcredit:
SuccessLabs
CopyrightMichaelSimmons2015.AllRightsReserved.
Overview
Wehumanshaveevolvedovertensofthousandsofyearsinanenvironmentthatisvery
differentthantheoneweliveinnow.Duringthisevolutionprocess,wedeveloped
unconsciousbiases,whichhelpedussurviveinthosetoughenvironments,butcanhinderus
intodaysmodernsociety.
Byrecognizingthosebiasesandapplyingthemtoourdecisionmaking,wecanmakeinfinitely
betterdecisions.Overhis70yearcareer,CharlieMunger(WarrenBuffettslongtime
businesspartner)hasdoneexactlythis.Theendresultarethebiasesbelow,whichwe
excerptedandcondensedfromseveralofMungersspeeches.
UnderstandingthesebiaseshavehelpedCharlieandWarreninseveralways:
AvoidingSmartPeopleMistakes. Therearecertaintypesofmistakesthatpeople
whoaresmartandambitiousareparticularlyproneto.Inhisbook,PoorCharlies
Almanack, Charlietalksaboutthecolossalfailureofthehedgefund,LongTerm
CapitalManagementinthelate1990s.Ledbysomeofthesmartestpeopleinthe
worldincludingNobelLaureates,itultimatelywentbankruptanddestroyedthenet
worthsandreputationofitsleaders.
IftheyhadusedCharliesmodel,theywouldhaveseenthecolossalrisktheywere
takingandthefactthattheywerealreadyextremelysuccessfulandhadbuiltup
reputations,sotheriskwasparticularlynotworthit.
MakingCriticalDecisions. Theyhavemadethebiasesactionablebyturningthem
intochecklistsandusingthemwhenmakinginvestmentdecisions.Thesebiases
uniquelyhelpthemunderstandbehaviorsandpredictthefuturebetterthantheir
competitors.
ProtectingThemselvesFromManipulation. Thebiasesbelowoccurata
subconsciouslevel.Therefore,itshardtoidentifywhenpeopleareusingtheseto
influenceyourbehavior.Knowingthesebiasesandhavingachecklisttoprotect
againstthemhelps.
Table Of Tendencies
Ouraimistohelpyourealizewhatthebiasesare,howtheyarerelevanttoyourlife,andto
giveyouresourcestogodeeper.(Ofcourse,theultimateresourceisCharlies500page
book,
PoorCharliesAlmanack .)
1. 2. 3. 4. 5.
Reward& Liking/Loving Disliking/Hating Doubt/Avoidance Inconsistency
Punishment Avoidance
6. 7. 8. 9. 10.
Curiosity KantianFairness Envy/Jealousy Reciprocation InfluenceFrom
MereAssociation
InMungersexperience,peopletendtobemostmotivatedbyincentivesespeciallybythe
rightrewards.
Byunderstandingincentives,youcanmoreeffectively:
InfluenceOthers. Wanttogetanindividualorateamtodosomething?Mungersays
youneedtoanswerthisquestioncorrectly:Whatsinitforthem?
ProtectYourselfFromBadAdvice. Mungercautionsustobecarefulofprofessional
advicethatmightbeshapedbytheadvisorspersonalinterest.
InfluenceYourself. Byunderstandingwhatreallydrivesyou,youcandriveyourself.
Quotes
Ifyouwouldpersuade,appealtointerestandnottoreason.BenFranklin
Perhapsthemostimportantruleformanagementisgettheincentivesright.
Munger
Antidotes
Bewaryofpeoplesactionsandbehaviors. analyzethecontexttoseeifthereare
anyulteriormotives.
ObeyMungersGrannyRule. GrannysRuleischildreneattheircarrotsbefore
theygetdessert.Getyourhardestworkdonebeforerewardingyourself.
Example
Studentswhoarerewardedfortheirhardworkatschoolbutnottheirtestscores
have
higheracademicachievements .
Resource
Drive:TheSurprisingTruthAboutWhatMotivatesUs
2. Liking/Loving Tendency
Mungerarguesthatwearewiredtonaturallyfavorpeoplewelikeandlovetothepointof
irrationality.
Insocialpsychology,thistendencyisknownas
ingroupbias
.
Inordertokeeplikingandlovingthem,wedothefollowingbehaviorsthatwemaynothave
doneotherwise:
Distortfacts
Ignorefaults
Complywithwishes
Favorpeople,products,andactionsmerelyassociatedwiththeobjectofaffection.
Weevengotogreatlengthsinordertokeepbeinglikedandlovedbyothersevenpeoplewe
dontknow.
Quotes
...[Man]willgenerallystarve,lifelong,fortheaffectionandapprovalofmanypeople
notrelatedtohim.Munger
Examples
IfyouidentifyasDemocrat,youwould
findBarrackObamamoreattractivethanSarah
Palinandviceversa.
Inoneresearchstudy,babieswereshownto favorresearchersofthesamerace
.
Antidotes
Beawareofhowlikingorlovingothersdistortsyourlogic.
Whenbuildingrelationshipswithothers,dowhateveryoucanto
startthe
relationshipoffaspartoftheingroup.
Resource
14HabitsOfExceptionallyLikablePeople
3. Disliking/Hating Tendency
Theoppositeoftheliking/lovingtendencyisalsotrue.Wetendtodisfavorpeoplewealready
dislikeandhatetolevelofirrationality.Thisresultsin:
Ignoringvirtuesofpeoplewedislike.
Dislikingpeople,products,andactionsmerelyassociatedwiththeobjectofourdislike.
Distortingfactsinordertofacilitatethehatred.
Quotes
[A]majordifferencebetweenrichandpoorpeopleisthattherichpeoplecanspend
theirlivessuingtheirrelatives.WarrenBuffetasquotedbyMunger
Politicsistheartofmarshallinghatreds.Anonymous
Examples
WhentheWorldTradeCenterwasdestroyed,manyPakistanisimmediately
concludedthattheHindusdidit,whilemanyMuslimsconcludedthattheJewsdidit.
Munger
Similarly,post911yearssawinvestmentfundmanagerswithforeignsoundingnames
experiencingreducedfundflowfrominvestors,incomparisontocounterpartswith
commonplaceAmericannames.
Inotherwords,beforehavingevidence,theyusedthetragedytofurthertheir
preexistinghatred.
Resource
ElizabethLesserTaketheOthertoLunc
h
(TEDTalk)
4. Doubt/Avoidance Tendency
Thehumanbrainhasevolvedtoresolveopenissues(i.e.,
cognitivedissonance
)bymaking
decisions.Partofourspeedydecisionmakingprocesscomesataprice:weeliminateany
potentialdoubts,whichmightcauseustomakemistakes.
Whatnormallytriggersthetendencyissomecombinationof:
1. Puzzlement
2. Stress
Quotes
Afterall,theonethingthatissurelycounterproductiveforapreyanimalthatis
threatenedbyapredatoristotakealongtimeindecidingwhattodo.Munger
Sopronouncedisthetendencyinmantoquicklyremovedoubtbyreachingsome
decisionthatbehaviortocounterthetendencyisrequiredfromjudgesandjurors.
Munger
Antidotes
Forceyourselfto
takeabreak
and/ordelaybeforemakingadecision.
Example
Toyotaengineerspracticeaproductionsystemofdelayingdecisions,dubbed
thesecond
Tokyoparadox
,toproducebetterandcheapercars.
Resources
ImproveYourDecisionMakingSkillsByDoingThisOneSimpleThing
MistakesWereMade(ButNotbyMe):WhyWeJustifyFoolishBeliefs,BadDecisions,
andHurtfulActs
5. Inconsistency-Avoidance Tendency
Werarelydothingsthatareinconsistentwithouridentity,beliefs,andhabits.Tosaveenergy,
weareoftenreluctanttochangeourhabits,especiallybadones.Suchbadhabitsinclude
biasedthinkingpatterns.Thesepatternsleadtocognitiveerrors,limitingourchoiceofactions
inlife.
Quotes
WhenMarleys[ ChristmasCarol]miserableghostsays,IwearthechainsIforgedin
life,heistalkingaboutchainsofhabitthatweretoolighttobefeltbeforethey
becametoostrongtobebroken.Munger
Therarelifethatiswiselylivedhasinitmanygoodhabitsmaintainedandmany
badhabitsavoidedorcured.Munger
Anounceofpreventionisworthapoundofcure. PoorRichardsAlmanack
OnecorollaryofInconsistencyAvoidanceTendencyisthatapersonmakingbig
sacrificesinthecourseofassuminganewidentitywillintensifyhisdevotiontothe
newidentity[i.e.,hazingatfraternities].Munger
Antidotes
Realizethateveryactionyoutakeleadstogoodhabitsorbadhabits .So,
endeavortoconstantlybecreatingnew,positivehabits.
Becarefulaboutthebeliefsyoutakeon. First,findsufficientevidencetodisprove
yourpointfirstbeforebelievinginit.CharlesDarwintrainedhimself,early,to
intensivelyconsideranyevidencetendingtodisconfirmanyhypothesisofhis,moreso
ifhethoughthishypothesiswasaparticularlygoodone.
Findwaystochallengeyourpreconceivedbeliefs. ElonMusk proactivelyseeks
outideasthatchallengehisexistingbeliefs.Athispeak,Einsteinwasagreat
destroyerofhisownideas.
Example
Stanfordprofessor,BJFogg ,isoneoftheworldstopexpertonhabits.Hesharesthatthe
simpleactofflossingonetoothcan leadtomuchbetterhabitsinlife
.Notonlythesmallhabit
minimizestheresistancetowardsnewhabitscausedbyourinconsistencyavoidance
tendencyitbreakstheunproductivecognitivepatternwemighthaveinourlifestyleand
helpsusbuildbigger,betterhabits.
Resources
UnleashYourPotential:HowToChallengeYourAssumptionsAnd
ExpandYourThinking
WednesdayWorkout:TestingYourAssumptions
TinyHabitsMethodology
6. Curiosity Tendency
Mungerarguesthatcuriositynotonlycountersthenegativeeffectsofourpsychological
tendencies,italsoletsusenjoytheprocessoflearningandacquiringknowledge.
Quotes
Manscuriosity,inturn,ismuchstrongerthanthatofhissimianrelatives.Munger
Curiosity,enhancedbythebestofmoderneducation(whichisbydefinitiona
minoritypartinmanyplaces),muchhelpsmantopreventorreducebad
consequencesarisingfromotherpsychologicaltendencies.Thecuriousarealso
providedwithmuchfunandwisdomlongafterformaleducationhasended.
Munger
Example
LateMITprofessor,AmarBose,used insatiablecuriosity
todiveintosubjectslikenuclear
physics,aswellascreatehisaudioequipmentcompanyfromscratch.
Resources
HowtoThinkLikeLeonardodaVinci:SevenStepstoGeniusEveryDay
Curious:TheDesiretoKnowandWhyYourFutureDependsOnIt
7. Kantian Fairness Tendency
CitingKantandhiscategoricalimperative,Mungerarguesthatreciprocalcourtesy isa
societalnorm,atleastinUnitedStates.Whenwearenottreatedfairly,oftenwebecomevery
angryand/orfrustrated.
InafamousPrisonersDilemmaexperiment,whenonepersonfeelsbetrayedbyanother,that
personwillnotactoutofhis/herownimmediateselfinterestinordertopunishtheother
person.
Quotes
[There]is,inmodemhumanculture,alotofcourteousliningupbystrangerssothat
allareservedonafirstcomefirstservedbasis.Munger
Example
Asearlyas15months, babiescanrecognizetheconceptoffairness
whenitcomesto
sharingfood.Inoneofthetasksduringtheresearchstudy,babieswhopreviouslyreactedto
unequalfooddistributionsharedtheirpreferredtoyswithastranger.
Resource
SuperCooperators:Altruism,Evolution,andWhyWeNeedEachOthertoSucceed
8. Envy/Jealousy Tendency
Mungerpointshowoutourevolutionarydesiretoownotherspossessionsleadstoworse
situationslikehatred,fightsandsoon.AbrahamTessers
academicresearch onthe
SelfEvaluationModelcounterintuitivelyshowsthatourselfesteemsuffersandtherefore,feel
themostjealousofotherpeoplewhentheyre:
Closetous(iesibling,friend)
Outcompetingusinareasthatareimportanttous
Quotes
Itisnotgreedthatdrivestheworld,butenvy.WarrenBuffetasquotedbyMunger
Antidotes
Disarmotherpeoplesjealousyofyou
withvulnerability.
Practicemindfulness whenyoufeeljealousorenviousacceptandappreciateyour
emotions.Youremotionsoftenaretellingyousomethingaboutyourself,andbeing
awareofwhatmessagestheybringcanbringyounewpersonalinsights.
Example
IntheWescoAnnualMeeting(2000),Munger madethefollowingremarkontheimportanceof
beingsatisfiedwithonesownlife:
Here'sonetruththatperhapsyourtypicalinvestment
counselorwoulddisagreewith:ifyou'recomfortablyrichandsomeoneelseisgettingricher
fasterthanyouby,forexample,investinginriskystocks,sowhat
?!Someonewillalways
be
gettingricherfasterthanyou.Thisisnotatragedy.
Resources
ToCreateaRealConnection,ShowVulnerability
BeHappierwithYourLife:6WaystoLetJealousyGuideYou
9. Reciprocation Tendency
Wearewiredtoreciprocate.Ifpeoplegivetous,wefeelweowetheotherperson.Similarto
thefairnesstendency,ifsomeonehurtsus,wefeeltheneedtohurtthemback.
Companiescanusethisapproachto:
Startarelationshipbygivingsomething,evenifitssmall.
Negotiatebyaskingforsomethingbigandunrealisticatfirst,andthenwhenthe
personsaysno,askforsomethingthatissmallerthatistheultimatethingyouwanted
anyway.InanexperimentperformedbyRobertCialdini,thisapproachwasincredibly
effective.
Usethefootinthedoortechnique(a.k.a.,
FranklinEffect)byaskingforsomething
smallthateveryonewillsayyestoandthenincreasethesizesoftheasks.
Quotes
Theautomatictendencyofhumanstoreciprocatebothfavorsanddisfavorshaslong
beennoticedasitisinapes,dogs,andmanylesscognitivelygiftedanimals.The
tendencyfacilitatesgroupcooperationforthebenefitofmembers.Munger
Antidotes
Startanddeveloprelationshipsbyproactivelygiving.Mostpeoplewillreciprocate.
Wiseemployers,therefore,trytoopposereciprocatefavortendenciesofemployees
engagedinpurchasing.Thesimplestantidoteworksbest:Dontletthemacceptany
favorsfromvendors.
Thestandardantidotetoonesoveractivehostilityistotrainoneselftodeferreaction.
AsmysmartfriendTomMurphysofrequentlysays,Youcanalwaystellthemanoff
tomorrow,ifitissuchagoodidea.
Example
JohnCorcoran,anattorneywhoworkedasaWhiteHousespeechwriterat23yearsold,
sharedhowBillClintonwouldnotonlywritehandwrittennotes tofollowupwithcontacts,he
wouldfreelygivehistimetostrangersateventstofulfilltheirvariousrequestslike
autographing.Bygivingfirst,peoplewilltendtoreciprocatewhenyouaskforfavors.
Resources
Influence:ThePsychologyofPersuasion
GiveandTake:WhyHelpingOthersDrivesOurSuccess
IfYouWantToGoFast,GoAlone.IfYouWantToGoFar,GoTogether
Weperceivepeopleorthingsdifferentlydependingonwho/whattheyareassociatedwith.
Advertisershavelongunderstoodthis.Theylinktheirproductstothingsthatwilltriggerthe
responsestheywantyoutohave.Thisisalsoknownas classicalconditioning
.
Sometimeswhenpeoplereceiveafavorwhentheyreinpain(poor,sick,etc.),theyassociate
thepersonthatgavethemthefavorwiththepain.Asaresult,thefavorjustreinforcesthe
pain.
Ifwelinkapasteventwherewegotluckytoskillratherthanluck,thenwewillmakepoor
choicesaboutthefuture.
Quotes
Advertisersknowaboutthepowerofmereassociation.Youwontsee Coke
advertisedalongsidesomeaccountofthedeathofachild.Instead,Cokeadspicture
lifeashappierthanreality.Munger
Someofthemostimportantmiscalculationscomefromwhatisaccidentally
associatedwithonespastsuccess,oroneslikingandloving,oronesdislikingand
hatingwhichincludesanaturalhatredforbadnews.Munger
Hatinganddislikingalsocausemiscalculationtriggeredbymereassociation.In
business,Icommonlyseepeopleunderappraiseboththecompetencyandmoralsof
competitorstheydislike.Thisisadangerouspractice,usuallydisguisedbecauseit
occursonasubconsciouslevel.Munger
Antidotes
Carefullyexamineeachpastsuccess,lookingforaccidental,noncausativefactors
associatedwithsuchsuccessthatwilltendtomisleadasoneappraisesoddsimplicit
inaproposednewundertaking.
Lookfordangerousaspectsofthenewundertakingthatwerenotpresentwhenpast
successoccurred.
Dontshootthemessengermakeahabitofwelcomingbadnewstocounterthis
tendency!Alwaystellusthebadnewspromptly.Itisonlythegoodnewsthatcan
wait.commoninjunctionatBerkshire
Example
Bycontinuously
associatingtopathleteswithitsproductsoverdecades,Nikehasbuilta
globalbrandthatistrustedbyconsumers.Ithaslinkedthisfeelingwithitsswooshlogo.
Resource
Don'tShoottheDog!:TheNewArtofTeachingandTraining
Wetendtodistortfactsforourownpsychologicalcomfort.Thispsychologicaldiscomfortis
knownas cognitivedissonance .
Ifwemakeahabitofcontinuallyavoidinginformationthatispainful,wellnotonlydevelopa
distortedviewofreality,welltrainotherpeoplenottotellusthetruth.
Quotes
Itisnotnecessarytohopeinordertopersevere.WilliamtheSilent
Antidote
Dontresolvecognitivedissonancebydistortingrealityinordertomakeyoufeel
better.Findawaytoalwayskeepyourselfopentothefactsofanysituationsoyou
canmakethemostsoundchoices.
Example
IntheclassicAesopsfable ,thefoxclaimedthatthegrapesweresourafterfailingtogetthem
inordertocopewiththefactthathecouldntreachthem.Areallifecomparisonwouldbethe
cultleaderwho failstopredicttheendoftheworldtimeandagain
andeachtimecomesup
withadifferentexcuse.
Resource
MistakesWereMade(ButNotbyMe):WhyWeJustifyFoolishBeliefs,BadDecisions,and
HurtfulActs
Weareoverconfidentthinkingwerebetterthantheaverageperson.Severalstudiesof
selfperception,showthatforanygiventrait,morethan50%ofpeoplethinktheyreabove
averagefromunsophisticatedcomputeruserswhothink theyarecybercrimeexperts,to
HarvardBusinessSchoolstudentswhothinkthat theyarebetterlookingthaneveryoneelse.
Thisisknownasthe EndowmentEffect .Beingoverconfidentcanleadtomanyshortcomings
forexample,overconfidentstudents dosignificantlypoorerontests
.
Theresultofthisisoverappraisingthingsweown,decisionswemake,andpeoplelikeus
underappraisingthingsthatchallengeourselfregard.
Quotes
Mansexcessofselfregardtypicallymakeshimstronglypreferpeoplelikehimself.
Munger.Thisisalsoknownas homophily .
Evenmansminorpossessionstendtobeoverappraised.Onceowned,they
suddenlybecomeworthmoretohimthanhewouldpayiftheywereofferedforsale
tohimandhedidntalreadyownthem.Munger.
[A]manshouldtrytofacethetwosimplefacts:
Fixablebutunfixedbadperformanceisbadcharacterandtendstocreatemore
ofitselfcausingmoredamagetotheexcusegiverwitheachtoleratedinstance.
Indemandingplaces,likeathleticteamsandGeneralElectric
,youarealmost
suretobediscardedinduecourseifyoukeepgivingexcusesinsteadof
behavingasyoushould.Munger
Antidotes
Excessesofselfregardoftencausebadhiringdecisionsbecauseemployersgrossly
overappraisetheworthoftheirownconclusionsthatrelyonimpressionsin
facetofacecontact.Thecorrectantidotetothissortoffollyistounderweigh
facetofaceimpressionsandoverweightheapplicantspastrecord.Munger
ThemaininstitutionalantidotestothispartoftheTolstoyeffectare:
Offermeritocratic,demandingculture,pluspersonalhandlingmethodsthat
buildupmorale,and
Severanceoftheworstoffenders.Munger
Thebestantidotetofollyfromanexcessofselfregardistoforceyourselftobemore
objectivewhenyouarethinkingaboutyourself,yourfamilyandfriends,yourproperty,
andthevalueofyourpastandfutureactivity.
Ofallformsofusefulpride,perhapsthemostdesirableisajustifiedprideinbeing
trustworthy.Moreover,thetrustworthyman,evenafterallowingfortheinconveniences
ofhischosencourse,ordinarilyhasalifethataveragesoutbetterthanhewouldhave
ifheprovidedlessreliability.Munger
Resources
ManagingOverconfidence
TheWinnerEffect:TheNeuroscienceofSuccessandFailure
Wetendtobefoolishlyoptimisticwithoutcalculatingtherisks.Inanticipationofgoodfuture
outcomesandhowmuchcontrolwehaveoverthemwe overestimatehowmuchcontrolwe
haveoverthem .NeuroscientistTaliSharotsresearchsuggeststhattheoptimismbiashas
evolvedtobecomeanintegralpartofthehumanpsyche, regardlessofonesrace,gender
andnationality
.
Twosoberingexamplesareweareoveroptimisticregardinghowfastwecanpayoffour
studentdebt
,orhowwellwecanuse ourdrivingskills
.
Quotes
Whatamanwishes,thatalsowillhebelieve.Demosthenes,themostfamous
Greekorator
Antidotes
Onestandardantidotetofoolishoptimismistrained,habitualuseofthesimple
probabilitymathof
Fermat
and
Pascal,taughtinmyyouthtohighschool
sophomores. Munger
Example
ThelateSteveJobsrefusedsurgeryatfirst
whenhewasfirstdiagnosedwithcancer,
thinkingthathecouldbeattheailmentbyusingalternativemedicinaltreatments,but
noneworkedtohisavail.
Resource
TheOptimismBias:Whywe'rewiredtolookonthebrightside
TheMungerNetworkOfMentalModels(page5)
Wetendtointenselyreacttoanyreallossorpotentiallossirrationally
.Thisexplains
infightingthatoccurswithinbureaucracies.
Quotes
Amanordinarilyreactswithirrationalintensitytoevenasmallloss,orthreatened
loss,ofproperty,love,friendship,dominatedterritory,opportunity,status,orany
othervaluedthing.Munger.
Timeandagain,studieshaveshownthatlossandthethreatofitisapowerful
motivationforhumanbeings,from highstakeinternationalpolitics
to
daily
consumptionbehavior .Examplesofhowwefearpotentiallossesaboundinreallife:
losingacointoss,
missingashoppingdeal ,andsoon.
DeprivalSuperreactionTendencyisalsoahugecontributortoruinfromcompulsion
togamble.First,itcausesthegamblertohaveapassiontogetevenoncehehas
sufferedloss,andthepassiongrowswiththeloss.Second,themostaddictveforms
ofgamblingprovidealotofnearmissesandeachonetriggers
DeprivalSuperreactionTendency.Munger
Antidotes
Oneantidotetointense,deliberatemaintenanceofgroupthinkisanextremeculture
ofcourtesy,keptinplacedespiteideologicaldifferences,likethebehaviorofthe
justicesnowservingonthe U.S.SupremeCourt .
Munger
Anotherantidoteistodeliberatelybringinableandarticulatedisbelieversof
incumbentgroupthink.Successfulcorrectivemeasurestoevilexamplesofgroupthink
maintenancehaveincludedactionslikethatof DerekBok when,aspresidentof
Harvard,hestarteddisapprovingtenureappointmentsproposedbyideologuesat
HarvardLawSchool .
Munger
Oneofthebestantidotestothisfollyisgoodpokerskilllearnedyoung.Theteaching
valueofpokerdemonstratesthatnotalleffectiveteachingoccursonastandard
academicpath.Munger
Resources
LettersfromaStoic
OvercomingtheFearofLoss:5StepstoGetUnstuck
Wearewiredtomakeahugenumberofdecisionsinourlifebasedpurelyonotherpeoples
actions.Theeffectissostrongthatevenifwearesurroundedbyasmallgroupofpeoplewho
insistthatblueisgreen,thenwellquestionourownreality
.
Entrepreneurswhocreatepublicsocialproofoftheirproduct(i.e.positivecustomerreviews)
getmoresales .
Quotes
WhenwilltheSocialProofTendencybemosteasilytriggered?Heretheansweris
clearfrommanyexperiments:Triggeringmostreadilyoccursinthepresenceof
puzzlementorstress,andparticularlywhenbothexist.Munger
Insocialproof,itnotonlyactionbyothersthatmisleadsbutalsotheirinaction.Inthe
presenceofdoubt,inactionbyothersbecomessocialproofthatinactionistheright
course.Munger
Insocialproof,itisnotonlyactionbyothersthatmisleadsbutalsotheirinaction.In
thepresenceofdoubt,inactionbyothersbecomessocialproofthatinactionisthe
rightcourse.Thus,theinactionofagreatmanybystandersledtothe deathofKitty
Genoveseinafamousincidentmuchdiscussedinintroductorypsychologycourses.
Munger
Monkeysee,monkeydoAnonymous
Antidotes
Learnhowtoignoretheexamplesfromotherswhentheyarewrong,becausefew
skillsaremoreworthhaving.Munger
BecausebothbadandgoodbehavioraremadecontagiousbySocialProof
Tendency,itishighlyimportantthathumansocieties:
Stopanybadbehaviorbeforeitspreads.
Fosteranddisplayallgoodbehavior.
Example
Restaurantownersshouldespeciallypayattentiontotheimpactofcustomerreviewsontheir
products,becauseaHarvardBusinessSchoolstudypointedoutthat aonestarincreasein
Yelpratingleadstoa59percentincreaseinrevenue
,largelybecause
customerstrustother
customersthemostingeneral .
Resource
Influence:ThePsychologyofPersuasion
Contagious:WhyThingsCatchOn
Ourconsciousmindislimited.Therefore,wecantregistereverydetailthatwesee,hear,feel,
taste,andsmellineverymoment.Ourbrainunconsciouslymakeschoicesaboutwhereour
attentionflows.Oneofthewaysthatitmakesthisdecisionisbysuddenchange.Ifweheara
loudsoundallofasudden,ourattentionimmediatelygoesthere.
Thissameprincipleappliestotheworldofvalue.Wedontmeasurethevalueofthingsina
vacuum.Weoftennoticevaluebycontrastingitwithsomethingelse.Retailerstake
advantageofthisbyattachinganartificiallyhighpricetotheirproductandthenprovidinga
significantdiscount.
Quotes
Thestockmarketisfilledwithindividualswhoknowthepriceofeverythingbutthe
valueofnothing.PhillipFisher
Asmallleakwillsinkagreatship.Theutilityoftheaphorismislargeprecisely
becausethebrainsooftenmissesthefunctionalequivalentofasmallleakinagreat
ship.BenFranklin
Cognition,misledbytinychangesinvolvinglowcontrast,willoftenmissatrendthat
isdestiny.Munger
Antidotes
Trainyourselftonoticesmallchangesthatotherpeoplemiss. Thisgivesyouthe
abilitytostopbadchainreactionsbeforetheyspread,andinvest/nurturepositiveones
beforetheyspread.Mostfamously,CharlesDarwintrainedhimselftometiculously
trackverysmallvariationsofanimalfeaturesovermanyyears.Theseobservations
ultimatelyledDarwintotheTheoryofEvolution.
Trainyourselftomakesmallchangestoyourhabits .Makeamicroresolutiona
small,specificmeasurablegoalthatwillkeepyouaccountableonaregularbasis,
withouttriggeringyourInconsistencyAvoidanceTendency.
Examples
Byrunningfiveminutesaday,youcanreducechancesofdyingprematurely
by30%
.
Resources
Mastermind:HowtoThinkLikeSherlockHolmes
HowtoMakeaMicroresolution
Somestresshelpsusfocus,buttoomuchdestroysourdecisionmakingcapabilities.
Therefore,wemustlearnhowtomanagestressinsituations,sothatwemakethebest
decisionspossible.
InethicallyquestionableexperimentsperformedbyNobelLaureate,IvanPavlov,wherehe
stressinducednervousbreakdownsindogsandtriedtoreversetheeffects,hefound:
Hecouldclassifydogssoastopredicthoweasilyaparticulardogwouldbreakdown.
Thedogshardesttobreakdownwerealsothehardesttoreturntotheir
prebreakdownstate.
Anydogcouldbebrokendown.
Hecouldntreverseabreakdownexceptbyreimposingstress.
Quotes
...Theheavyhandedimpositionofstressmightbetheonlyreversalmethodthat
wouldworktoremedyoneoftheworstevilsimaginable:astolenmind.Munger
Antidotes
Listentoyourbody. Whenyoufeelpersistentlyoverwhelmed,takeastepback.
Meditate.
Multipleresearchstudies
haveproventhatmeditationishighlyeffectivein
regulatingouremotions,especiallyourcapacitytocopewithstress,mainlyby
increasingourmindfulnesstowardsnegativeemotions.
Rest,nap,sleep. No,noskimpingyourbrain
needs100%ofitsresttime
.
Resources
Mindfulness:AnEightWeekPlanforFindingPeaceinaFranticWorld
8ReasonsWhyYouShouldDefinitelyTakeThatLunchBreak
Wetendtooveremphasizeinformationthatisthemostavailableandvividfromour
surroundingsandourmind.Intheacademicworld,thisisknownasthe AvailabilityBias.
Unfortunately,Theeasinessdoesntmeanthattheinformationisthemostusefulone.
Thiscanworktopeoplesbenefitintheworldofpersuasionandmemory.Bypaintingavivid
pictureofsomething,wecanmoreeffectivelyinfluenceothersandkeepideasinourown
memories.
Wheningroupenvironments,simpleexplanationsofcomplexphenomenacanrapidlygain
currencyandspreadeveniftheyrewrong.Thisisknownasthe availabilitycascade .
Quotes
Anideaorafeatisnotworthmoremerelybecauseitiseasilyavailabletoyou.
Munger
WhenImnotnearthegirlIlove,IlovethegirlImnear.FrankSinatra
Antidotes
Trainyourselftobrainstormallpossibilities openlyratherthanjumpingonyour
firstconclusions.Developyour
strategicthinkingabilitiestotacklecomplexproblems.
Useachecklist,orprocedures,tocurbthistendency.
Alwayslookforevidencethatdisprovesyourpoints,andconsistentlydoso.
Getskepticalpeopleonboardorassignadeviladvocateroletosomeoneyoutrust,so
thatyouropinionsarechallengedbydisconfirmingevidence.
Wheninmeetings,letotherpeopletalkfirstsoyoudontbiashowtheyrespond.
Resource
MakingDumbGroupsSmarter
Wetrustandrespectleaderstoomuch,evenwhentheymakemistakes.
Wealsotrustleadersinareaswheretheyarenotexperts.Thisisknownasthe HaloEffect
.
Quotes
[Man]isoftendestinedtosuffergreatlywhentheleaderiswrongorwhenhis
leadersideasdontgetthroughproperlyinthebustleoflifeandaremisunderstood.
Munger
Antidotes
[Be]carefulwhomyouappointtopowerbecauseadominantauthorityfigurewilloften
behardtoremove,aidedashewillbebyAuthorityMisinfluenceTendency.Munger
Useachecklistandacriticalmindtocounteroratleastreducetheinfluenceof
authority.
Resource
Influence:ThePsychologyofPersuasion
20. Twaddle Tendency
Peopletendtotalkalotaboutthingstheyrenotanexpertin.Beverycarefulofthesepeople.
Instead,trytosurroundyourselfwithpeoplewhoshowrestraintinsharingtheiropinionsuntil
theyremoreprovenorthoughtthrough.
Quotes
Man,asasocialanimalwhohasthegiftoflanguage,isborntoprattleandtopour
outtwaddlethatdoesmuchdamagewhenseriousworkisbeingattempted.Some
peopleproducecopiousamountsoftwaddleandothersverylittle.Munger
Example
DavidOgilvy,oneofthefoundingfathersinmodernadvertising, hadthistosaywhenit
comestohiringathisagency
:Ourofficesmustalwaysbeheadedbythekindof
peoplewhocommandrespect.Nophonies,zerosorbastards.Hiswisdominhiring
talentswhoupholdprofessionalintegrityintheworktheydoisapowerfulsolutionto
thetwaddletendencya.k.abullshit.
Antidotes
Theprincipaljobofanacademicadministrationistokeepthepeoplewhodont
matterfrominterferingwiththeworkofthepeoplethatdo.
Caltech
engineering
professor
Resources
Managingyourself:TheBossAsHumanShield
AreYouListeningLikeALeader
Beforedoingthings,welovetohavereasons.Therefore,whendelegatingthingstoother
people,besuretosharethereasonswhythetaskisimportant.
Ina
famousstudybyresearcher,EllenLanger,sheshowedthatwhenaskingforafavorfrom
astranger,simplygivingareasonfortherequest,evenifitsartificial,greatlyincreasesthe
oddsofthepersoncomplying.
Quotes
Thereisinman,particularlyoneinanadvancedculture,anaturalloveofaccurate
cognitionandajoyinitsexercise.Munger
Ingeneral,learningismosteasilyassimilatedandusedwhen,lifelong,people
consistentlyhangtheirexperience,actualandvicarious,onalatticeworkoftheory
answeringthequestion:Why?Indeed,thequestionWhy?isasortof Rosettastone
openingupthemajorpotentialityofmentallife.Munger
Unfortunately,ReasonRespectingTendencyissostrongthatevenapersonsgiving
ofmeaninglessorincorrectreasonswillincreasecompliancewithhisordersand
requests.Munger
Antidotes
Keeptrackoftheevidenceforyourvalidbeliefssothatwhenyouexplainittoothers,it
makessense.
Resource
XeroxMindfulnessExperiment
LollapaloozaTendencyisthetendencytogetextremeconsequencesfromconfluencesof
psychologicaltendenciesactinginfavorofaparticularoutcome.Althoughitislastedlast
here,Mungercountsitasoneofthemostimportant.
Thistendencyworksinoneoftwoways:
Effectsbolstereachother. InthefamousMilgramexperimentsatStanford,test
subjectsdevolvedintoterriblebehaviorinjustafewdaysasaresultofsixtendencies
beingtriggeredatonce.InMungersexperience,whenyoucombinetwoforces
together,youdontgetsimpleaddition,yougetanuclearexplosion.
Effectscanceleachotherout. Ascompaniesgrow,theygetbenefits(ieeconomies
ofscale)anddisadvantages(iebeauracracy).
Byunderstandingallofthebiases
and howtheyrelatetoeachother,youwillhaveahuge
advantageinyourlife.
Quotes
Quotes
Lifeisjustonedamnrelatednessafteranother.JulianHuxley
EveryonewhohastakenPscyh101knowsthatstressmakesSocialProofTendency
morepowerful.Munger
Example
Acombinationoffactors
causedApplestockpricestogodownbyalmost50%last
year.
Resource
ExamplesOfLollapaloozaEffectInTheRealWorld
OneofMungersbiggestinsightsintopsychologicalbiasesisusingchecklists.Checklists
allowMungertousetherightmodelsattherighttimewhenhesmakingimportantdecisions.
AssharedinChecklistManifesto ,checklistsaredeceivinglypowerful.Theauthor
,
Atul
Gawande,shareshowsimplechecklistsusedinsurgeriessavelives.Avoidablemistakes
happenwhensmartpeoplewhothinktheyknowitalldontusechecklists.
In
SeekingWisdom (294295),
abookfullyendorsedbyCharlieMungerandWarrenBuffett,
thefollowingchecklistisproposedforunderstandingtheimpactofourbiasesonanygiven
decision:
Whatiscausingmetodothis?
Whatisthecontext?
CanIjudgehim?
Whatisinhisselfinteresttodo?
Whatarethepsychologicaltendenciesandshortcutsthatinfluencehimandcancause
misjudgment?
Whataretheconsequences?
WhatsystemwouldIliketohaveiftheroleswerereversed?
Isthistherightsystem?
Two-Track Analysis
AnotherchecklistCharlieusesisTwoTrackanalysis.Itcombinesinsightsfrompsychology,
neuroscienceandeconomicsaboutthenatureofhumanbehavior.Thismodelinstructsthat
whenanalyzinganysituationinwhichdecisionmakingbypeopleisinvolved,whichofcourse
coverseverybusinesssituation,hemustconsidertwotracks:
Howtheywouldactiftheybehavedrationally,accordingtotheirtruebestinterests.
Howtheywouldsuccumbtothepullofanumberofirrationalpsychologicalbiasesthat
seemtobeprogrammedintothehumanbrain.
Credits
ThankyouIanChewfortheresearchassistance.