Charlie Munger's Psychology of Human Misjudgment - Part 1

May 20, 2014 -

Psychology of Human Misjudgment - Cause of Irrational Behaviors 

You are not immune to these human misjudgments. While you may be able to recognize one or two of them when they are separate from each other, but imagine when you have five or six of these working in conjunction. Theses were likely evolutionary survival attributes passed on through human evolution, but times have changed and evolution has not caught up to the changing world. 

Without further adieu, here are twelve of the twenty-four causes of irrational behaviors. 

1) Underestimating the Power of Incentives

Why are you working at a job that you abhor? If it weren't for the money, you would be doing something you truly enjoyed. The answer is that you've been properly incentivized by your bosses.

2) Simple Psychological Denial

Reality is too painful to bear, so you distort the truth until it is bearable.

3) Underestimating the Incentive Bias in Our Own Minds and that of Our Advisers 

Your real estate agent is technically suppose to have your interests in mind. But, the more expensive a place they have you buy the more money they will pocket. Therefore as the buyer, you can not always assume your agent has your best interests.

4) Confirmation Bias

We have a tendency to favor information that confirms what we already believe. This is particularly the case in emotionally charged issues whereby we are so focused on what we believe we do not consider new information.

5) Misconstrue Past Correlations as a Reliable Basis for Decision-Making

Coca-Cola's has branded itself into the happiness drink. They want to be associated with every heroic and wonderful image. Drinking coke has nothing to do with happiness. The more Coke you drink does not increase your happiness, but all that marketing has made you associate positivity with coke.

If something is more expensive, you would think that item holds more value than something not as expensive. But that is not always the case. Costco may sell something for $10 and that exact same thing could be selling at Walmart for $8 and you will still believe the one at Costco is better.

6) Reciprocation Tendency 

This basically happened to me the other day. A cake shop set up a table on the first floor of my work building. I walked past it in the morning without batting an eye, but a co-worker asked to stop by it at lunch. It couldn't hurt right? I wasn't planning on buying anything at all.

The cake shop offered a couple samples and was very cordial. Of course I took the "free" samples and immediately, I felt the need to reciprocate. So I ended up spending $6 on a pastry the size of a muffin.

If you are negotiating salary start high and then peel back. By peeling back you are "giving" something up and this makes the other person feel obligated to meet you at your second asking price.

7) Everyone Else and Their Mother is Doing It 

"Some years ago one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company. And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil and vice versa." - Charlie Munger. Needless to say it was a total disaster.

8) To the Man with a Hammer, Every Problem Looks Pretty Much Like a Nail

When you have a theory of how something works, you try and apply it to as many things as possible. Even when it does not make sense, you believe your theory is applicable.

9) Compared to What I've Experienced, Seen, Have, Done...

Relatively speaking this slightly burnt cookie tastes better than this charcoal cookie, but in absolute terms it may not appear to be edible.

Real estate agents will take you to a ridiculously overpriced house and then to a moderately overpriced house. This actually happened to me the other day. At the end of it all, the agent asked me which ones of those houses I liked best. Well, she only showed me a handful of houses. If I were to only compare the ones that were shown to me, I would be excluding a number of other houses that could have been better priced.

10) My Boss Told Me To Do It 

When I was working at a Big 4 accounting firm, you were suppose to do what your manager asked you to do. However, if your boss' boss ever came back to you and questioned whether or not what you did was the right thing to do, we were never to throw anyone under the bus. We took responsibility for whatever we did even if we were asked to do it by our bosses. But, all too common you'll see people do immoral things just because their bosses asked them to.

11) Rich People Have Money and Will Deploy it When It Is Most Advantageous

If your back is against the wall and you are forcing yourself to make stock trades to make money, you will most likely make decisions that you normally would not when you are working from a position of ample capital. Scarcity will make you behave differently.

12) Jealousy and Envy Drives Irrational Behaviors

For those who have siblings, how many times have you asked why it was unfair that he or she got this and you didn't. "It's not greed that drives the world, but envy." - Warren Buffet

Keep an eye out for Part II!
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