The Psychology of Human Misjudgment
Based on Charlie Munger's 1995 Harvard University Commencement Speech
10 minute read
Use this list to evaluate an investment decision. You can improve your decision-making ability by being aware of psychological factors that could be affecting your judgment.
Reward and Punishment Super Response Tendency
Incentives are superpowers
If you would persuade appeal to interest and not reason
Use Granny’s Rule to improve your behavior
Children must eat their carrots before they get dessert.
Thus, you must first do your unpleasant and necessary tasks before rewarding yourself by proceeding to the pleasant task.
Liking/Loving Tendency
What will a man naturally come to like and love, apart from his parent, spouse, and child? Well, he will like and love being liked and loved. Thus, man will generally strive, lifelong, for the affection and approval of many people not related to him.
Doubt-Avoidance Tendency
The brain of a man is programmed with a tendency to quickly remove doubt by reaching some decision.
Inconsistency-Avoidance Tendency
People have a strong desire to maintain internal consistency in their beliefs, attitudes, and actions.
This tendency when combined with a resistance to change, can negatively impact objectivity.
To counteract this bias, you can train yourself to intensively consider any evidence tending to disconfirm any hypothesis of yours, more so if your hypothesis is a particularly good one.
Envy Tendency
It is not greed that drives the world, but envy.
Reciprocation Tendency
The tendency to reciprocate favor for a favor is very intense.
By first doing us a favor, strange, disliked, or unwelcome others can enhance the chance that we will comply with one of their requests. The nature of the reciprocity rule is such that an unwanted gift is still effective at producing feelings of obligation. Thus, be weary, as the rule can trigger unfair exchanges.
Influence from mere association tendency
Liking and loving something or someone can also make people unobjective.
Hating and disliking also cause miscalculations triggered by mere association.
Excessive self-regard Tendency
People tend to overvalue their opinions.
Man’s excess of self-regard typically makes him strongly prefer people like himself.
Over-optimism Tendency
“What a man wishes, that also will he believe.”
Deprival-Super reaction Tendency
People tend to overvalue what they might lose, even if the potential gain is much greater.
Social-Proof Tendency
People tend to act and think like the people around them.
Availability-Missweighing Tendency
People tend to prefer instant gratification over delayed gratification
The main antidote towards this tendency often involves procedures, including the use of checklists.
Emphasize disconfirming evidence
Find smart and articulate people to act as advocates for notions that are opposite to your belief
Authority Misinfluence Tendency
People are more likely to believe an authority figure.
Reason-Respecting Tendency
People like to know why they are doing what they are doing.
Delegate work like Sam Walton at Walmart:
The five W: Tell someone what to do, where, when, and why. If people understand why, they will consider it more important and they will be more likely to comply.
Thank you for reading.