“I could improve your ultimate financial welfare by giving you a ticket with only twenty slots in it so that you had twenty punches representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all. Under those rules, you’d really think carefully about what you did and you’d be forced to load up on what you’d really thought about.” Charlie Munger and Buffett did caveat their investing method with a disclaimer. If you want to concentrate your bets, only invest in things you understand. But we can be fooled and think that we understand something, only to learn that we don’t know much about it. Buffett and Munger are very good at looking at things objectively and prevent their biases from acting up. The untamed mind of the average investor can often delude him. And it is scary to recognize that you have put a big chunk of money in a wrong idea.
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Pictured above - Charlie Munger By Nick (Charlie Munger) [CC BY 2.0], via Wikimedia Commons
In 1995 Charlie Munger gave a speech at Harvard wherein he introduced the Standard Causes of Human Misjudgment, most of which are rooted in psychological biases and habits that subconsciously influence our decision making process. They are listed below.
- Under-recognition of the power of what psychologists call ‘reinforcement’ and economists call ‘incentives.’
- Simple psychological denial.
- Incentive-cause bias, both in one’s own mind and that of ones trusted advisor, where it creates what economists call ‘agency costs.’
- This is a superpower in error-causing psychological tendency: bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance. Includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won.
- Bias from Pavlovian association, misconstruing past correlation as a reliable basis for decision-making.
- Bias from reciprocation tendency, including the tendency of one on a roll to act as other persons expect.
- Now this is a lollapalooza, and Henry Kaufman wisely talked about this: bias from over-influence by social proof — that is, the conclusions of others, particularly under conditions of natural uncertainty and stress.
- Persian Messenger Syndrome
- Bias from contrast-caused distortions of sensation, perception and cognition.
- Bias from over-influence by authority.
- Bias from deprival super-reaction syndrome, including bias caused by present or threatened scarcity, including threatened removal of something almost possessed, but never possessed.
- Bias from envy/jealousy.
- Bias from chemical dependency.
- Bias from mis-gambling compulsion.
- Bias from liking distortion, including the tendency to especially like oneself, one’s own kind and one’s own idea structures, and the tendency to be especially susceptible to being misled by someone liked. Disliking distortion, bias from that, the reciprocal of liking distortion and the tendency not to learn appropriately from someone disliked.
- Bias from the non-mathematical nature of the human brain in its natural state as it deal with probabilities employing crude heuristics, and is often misled by mere contrast, a tendency to over weigh conveniently available information and other psychologically misrouted thinking tendencies on this list.
- Bias from over-influence by extra-vivid evidence.
- Mental confusion caused by information not arrayed in the mind and theory structures, creating sound generalizations developed in response to the question “Why?” Also, mis-influence from information that apparently but not really answers the question “Why?” Also, failure to obtain deserved influence caused by not properly explaining why.
- Other normal limitations of sensation, memory, cognition and knowledge.
- Stress-induced mental changes, small and large, temporary and permanent.
- Common mental illnesses and declines, temporary and permanent, including the tendency to lose ability through disuse.
- Development and organizational confusion from say-something syndrome.