6/14/2018 A Summary of “The Psychology of Human Misjudgment” by Charles Munger | Toan Huu Nguyen, CPA | Pulse | LinkedIn

1. Reward & Punishment Super-Response Tendency: In another word – Pavlov’s

experiments. Incentive is a powerful tool to facilitate or prevent certain behaviors in people.
Self-improvement can be supported with Granny’s Rule – “Desert comes after carrot”

2. Liking/Loving Tendency: This is the tendency to (1) ignore faults and comply with
wishes of the object of our affection, (2) to favor people, products and actions merely
associated with the object of our affection and (3) to distort other facts to facilitate love.
“And a man will generally strive, lifelong, for the affection and approval of many people not
related to him”.

3. Disliking / Hating Tendency: Opposite of #2, this is the tendency to (1) Ignore virtues in
the object of dislike, (2) dislike people, products, and actions merely associated with the
object of his dislike, and (3) distort other facts to facilitate hatred.

4. Doubt-Avoidance Tendency: The brain of man is programmed with a tendency to

quickly remove doubt by reaching some decision. What triggers this tendency – Social Proof
Tendency, Stress-Influence Tendency.

5. Inconsistency-Avoidance Tendency: The brain of man conserves programming space by

being reluctant to change, which is a form of inconsistency avoidance. It is therefore highly
possible that a quickly reached conclusion (brought about Doubt-Avoidance Tendency),
when combined with a tendency to resist any change in that conclusion, will naturally cause
a lot of errors in cognition for modern man. Experienced experts and analysts are susceptible
to this errors as they tend to dismiss or underweight evidence pointing to a contrary
conclusion. Charlies Darwin trained himself early to intensively consider any evidence
tending to dis-confirm any hypothesis of his. One collateral tip: if you want to gain approval
from someone, ask them to perform some minor harmless favor.

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6. Curiosity Tendency – “Curiosity – enhanced by the best of modern education – 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.”

7. Kantian Fairness Tendency – Human’s tendency to follow those behavior tendencies

that, if followed by all others, would make the surrounding human system work best for
everybody.

8. Envy/Jealousy Tendency – Quite obvious in investment banks / law firms’ compensation

structure.

9. Reciprocation Tendency – This is the automatic tendency of humans to reciprocate both

favors and disfavors has long been noticed. Two corollary. First, the standard antidote to
one’s overactive hostility is to train oneself to defer reaction. (“You can always tell a man off
tomorrow, if it is such a good idea.”). Second, you should beware of selling technique that
starts with one party dolling out “small / free favors” to the other party. Example: car
saleman offering free coffee/drink/advice/gift to the potential customer.

10. Influence-from-Mere-Association Tendency – This is a tendency by which a mere

association with a man’s pre-existing conception will trigger pre-established response.
Example: investors attributing high-priced stocks with quality stocks because “high price” is
a pre-existing conception that leads to the response of accepting that as “high quality”.
Another consequence is that man will over-confidently engage in certain endeavors because
such endeavors possess seemingly similar traits to past successes. Example: thinking of
Napoleon and Hitler when they invaded Russia. Antidote to be misled by past success: (1)
Carefully examine each past success, looking for accidental, non-causative factors associated
with each success (e.g. buying stock on certain day of the week), (2) look for dangerous
aspects of new undertaking that were not present in past successes. Lastly, do not

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associate “bad news” with “incompetence” in the person who delivers that message to you –
else you risks living in a cocoon, for ever parting with reality.

11. Simple, Pain-Avoiding Psychological Denial – Simply put, this accounts for investors’
reluctance to cut losses in a money-losing investment. “The reality is too painful to bear, so
one distorts the facts until they become bearable”.

12. Excessive Self-Regard Tendency – This is the tendency to overestimate our own ability
or the characteristics of objects within our possession (the latter is called “the endowment
effect”). Consequences of this tendency: (1) the tendency to “love” a stock just because one
owns it; (2) the tendency to select as new member to an organization people who look
similar or have similar background as one’s own (WASP hiring – anyone?); (3) over-
weighting the predictive quality of face-to-face interaction – our ability to judge people on-
spot; (4) the excessive needs to make excuses for one’s failures. The best antidote for this is
to force yourself to be more objective when you are thinking about yourself, your family and
friends. This isn’t easy by any measures.

13. Over-optimism Tendency – Human’s tendency to be over-optimistic, especially when

they are happy mood. In combination with excessive self-regard tendency, this tendency
might result in investors being reckless (overpaying or allocating too high an allocation) to
an investment. The standard antidote is the trained, habitual use of high-school probability
math of Fermat and Pascal.

14. Deprival Super-Reaction 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 lost. “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”.
Observable consequences: (1) politics infighting within organizations; (2) the maintenance
of group-think, (3) union’s reluctance to take small pay-cut.

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15. Social-Proof Tendency – The tendency of man to think and do what he observes to be
thought and done around him. This is the root of the now-popular advice for people to
associate with peers that inspire them and whom they aspire to be. This also accounts for: (1)
group member’s reluctance to stand up against wrong behavior of others in the group; (2)
manias in stock markets (e.g. tech bubble and 2008 financial crisis). Social-Proof tendency is
triggered most readily in the presence of puzzlement and/or stress. Best antidote:
independent and critical thinking.

16. Contrast-Misreaction Tendency – This is man’s tendency to rely on comparison

contrasts to make decision. Example of (mis)usage of this tendency by saleman: “to make an
ordinary price seem low, the vendor will very frequently create a highly artificial price that is
much higher than the price sought, then advertise this standard price as a big reduction from
this phony price”. Consequence: “When a man’s steps are consecutively taken toward
disaster, with each step being very small, the brain’s Contrast-Misreaction Tendency will
often let the man to go too far toward disaster to be able to avoid it. This happen because
each step presents small a contrast from his present position.”

17. Stress-Influence Tendency – Light stress can slightly improve performance (e.g. exam-
taking situation) but high stresses can cause dysfunction. In addition, high stress can cause
large reversal in a being’s behavior (Pavlov’s experiments with dogs). Interestingly, this
might just be the premise that the stress-inducing methods presented in Dead Pool and
Wanted movies are based on.

18. Availability-Misweighting Tendency – This is man’s disposition to put unjustifiably

high weighting on information and data that is easily available and/or extra vivid. Analysts
are most susceptible to this tendency when they rely too much on data that is easily obtained
or quantifiable (e.g. putting too much weight toward industry growth figure but not industry
trend and customers’ preference). Antidote: (1) imposing procedures, check lists; (2) focus
on disconfirming evidence; (3) to remember that “an idea or a fact is not worth more merely
because it is easily available to you”.

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19. Use-it-or-Lose-it Tendency: “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 learning capacity will shrink as he creates gaps in the lattice-work of theory
he needs as a framework for understanding new experience”. “A wise man engaged in
learning some import skill will not stop until he is really fluent in it.”

20. Drug-Misinfluence Tendency – Stay away from substances.

21. Senescence-Misinfluence Tendency – The effects of old age on cognition. “Continuous

thinking and learning, done with joy, can somewhat help delay what is inevitable”.

22. Authority-Misinfluence Tendency – Man’s tendency to follow authority figures even

when it is irrational and foolish to do so. “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”. This tendency accounts for junior/co-pilots’ reluctance to disobey even
irrational orders from their more senior counterparts.

23. Twaddle Tendency – The tendency to engage in trivial or foolish speech even when one
knows nothing on the subject. “And it’s a very important part of wise administration to keep
prattling people, pouring out twaddle, far away from the serious work.”

24. Reason-Respecting Tendency – Man’s tendency to comply with a request if it is

supported with reason and logic. Upside: “Learning is most easily assimilated and used
when, life long, people consistently hang their experience, actual and vicarious, on a
latticework of theory answering question: Why?”. Downside: meaningless or incorrect
reason will also increase compliance.

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25. Lollapallooza Tendency – “The tendency to get extreme consequences from

Confluences of Psychological Tendencies acting in favor of a particular outcome”.

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