Buffett & Munger: Staying Rational And Avoiding Confirmation Bias

Buffett & Munger: Staying Rational And Avoiding Confirmation Bias

From the 2002 Berkshire Hathaway annual meeting. Warren Buffett and Charlie Munger talk about staying rational and avoiding confirmation bias.

Warren Buffett & Charlie Munger on Staying Rational and Avoiding Confirmation Bias

Seth Klarman’s 2021 Letter: Baupost’s “Never-Ending” Hunt For Information

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I'd like to talk about your thinking if you don't mind. In the Fortune magazine article that you sent to all the shareholders you referenced a practice by Darwin that he found something that was contrary to his established conclusions. He quickly wrote it down because the mind would have pushed it out. And if you read The Origin of Species Darwin's very careful to avoid fooling himself. He very carefully asks and answers the hard questions.

It's a feedback mechanism and you've picked up on one of his feedback mechanisms to avoid fooling yourself. So the two questions are this. If you look at model how you think Charlie thinks how physicist things mathematicians think you see the same pattern you want to use logic you're dedicated to logic but logic is not enough. You have to avoid fooling yourself. So you build feedback mechanisms. So the first question is do you see it that way that you're thinking just like mathematicians physicists and some of the other exceptional businessmen. By being logical and being careful to have feedback mechanism. The second question is about other feedback mechanisms. Your partnership. Sitting next to you is is a great feedback mechanism.

It's hard to fool yourself when you partner with Charlie Munger right. This meeting's a feat hard to fool him to.

But that's not an accident. The meeting and one level of feedback mechanism the way you attack the annual report letter is a feedback mechanism. So could you comment. Both of you on other feedback mechanisms you develop. Thank you.

Well you've come up with two very good ones. I mean there's no question that that. Charlie will not accept. Anything I say because I say it. Whereas a lot of other people will know. I mean it's just the way the world works. And.

It's it's terrific to have a partner who will say you know you're not thinking straight.

It doesn't happen very often. There's no question the human mind that what the human being is best at doing. Is. Interpreting all the information so that their prior conclusions remain intact. I mean that is that is a talent everyone seems to have mastered. And how do we guard ourselves against it. Well we don't we don't achieve it perfectly. I mean Charlie and I have made big mistakes. Because in effect we have been unwilling.

To look afresh at something that happens. But we do have I think the annual report is a good feedback mechanism. I think that. Reporting on yourself.

And being report honestly whether you do it through an annual report or do it through some other mechanism is is very useful. But I would say. A partner who is not. Subservient.

And who himself is extremely logical. You know it's probably the. The best mechanism you can have. And I would say that.

On the contrary. Get back to looking things you have to. Have to be sure you don't fall into. I would say the typical corporate organization is designed so that the CEO. Of.

Opinions and biases and previous beliefs are reinforced in every possible way.

I mean having staff around you that know what you want to do.

You are not going to get a lot of. Get a lot of contrary thinking. I mean most. Most staff if they know you want to buy a company.

You're gonna get a recommendation whatever your hurdle rate of its 15 percent internal rate of return which very few deals ever work out at an hour or twelve. You're going to they're going gonna come back and they're gonna come back with whatever they feel that you want and if you arrange your organization so that you basically have a bunch of sycophants who are. Are cloaked in other titles. You're not going to get you're going to leave your prior conclusions intact and you're gonna get whatever you go in with your biases wanting. And the board is not going to be much of a check on that.

I've seen very very few boards that can stand up to the CEO on something that's important to the CEO and just say you know you're not going to get it.

So you've hit on a terribly important point. You know all of us in this room. Want to read no information and have it confirm our cherished beliefs. I mean it is just built into the human system and.

That can be very expensive in the investment and business world.

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Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver
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