Munger’s Psychology of Human Misjudgment

Published on December 6, 2016

When making decisions, most of us have mental processes that we tend to follow on a more-or-less automatic basis.  For the most part, these processes have developed over a lifetime and are not explicitly based on following some set of standardized principles or checking items off a list.  Human beings have evolved to make decisions quickly that can be expected to work out reasonably well most of the time.  Without some element of an “auto-pilot”, we would be paralyzed by constant indecision.  We learn to live with some element of inefficiency and risk in exchange for being able to function with a reasonable amount of ease in day-to-day life.

The challenge comes when making decisions where mistakes result in serious negative consequences.  Most people have enough common sense to at least pause when making decisions involving important business or personal matters.  However, when we pause, we may not be directing our attention in ways that necessarily reduce risk or improve outcomes.  Many decisions of great magnitude are made without any real analytical rigor, relying instead on “gut feelings” and other emotional shortcuts.  How many investors, for example, prepare detailed financial models, read company filings, listen to management presentations, and take the other standard steps only to make the final buy or sell decision based on instinct?  And, let’s be honest, making important decisions of a personal nature based on instinct alone is even more common.

Poor Charlie's Almanack

Charlie Munger always had a strong interest in the study of standard thinking errors associated with human misjudgment, yet he found that his time in academia failed to provide adequate knowledge of the practical application of human psychology in everyday life.  As is the case with many professional disciplines, psychologists tended to operate in silos populated by other psychologists rather than in consultation with individuals from multiple disciplines.  Furthermore, other disciplines, such as economics, were taught without much regard for psychology.  In a series of talks, Mr. Munger outlined his framework of human misjudgment which was later significantly expanded in written form as a chapter in Poor Charlie’s Almanack.

Given the failure of academia to provide a coherent framework, Charlie Munger began his law practice surrounded by “much extreme irrationality, displayed in patterns and sub-patterns.”:

So surrounded, I could see that I was not going to cope as well as I wished with life unless I could acquire a better theory-structure on which to hang my observations and experiences.  By then, my craving for more theory had a long history.  Partly, I had always loved theory as an aid in puzzle solving and as a means of satisfying my monkey-like curiosity.  And, partly, I had found that theory-structure was a superpower in helping one get what one wanted, as I had early discovered in school wherein I had excelled without labor, guided by theory, while many others, without master of theory, failed despite monstrous effort.  Better theory, I thought, had always worked for me and, if now available, could make me acquire capital and independence faster and better assist everything I loved.  And so I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin and with the determination displayed in the refrain of the nursery story: “‘Then I’ll do it myself,’ said the little red hen.”

At the outset, Mr. Munger made two unconventional decisions regarding how he would construct his system.  First, he did not attempt to study instances of good judgment but rather focused on cases of bad judgment.  Most people seeking to achieve a certain outcome would naturally look to others who had succeeded rather than those who have failed.  However, by inverting and looking at causes of human misjudgment and then attempting to avoid those pitfalls, one has the potential to get on the path to success.  Second, Mr. Munger made no attempt to restrict his system to the field of academic psychology, instead opting to pay no attention to which academic discipline a concept belonged to.  By using a multi-disciplinary approach, it is possible to take the best that individual disciplines have to offer and meld them into a coherent overall system.

Charlie Munger began his law practice in the 1950s and his type of multi-disciplinary thinking was uncommon, to say the least.  In recent decades, much more progress has been made in understanding the practical implications of human psychology with perhaps the most important work being Daniel Kahneman’s Thinking, Fast and SlowMr. Munger credits Robert Cialdini’s Influence: The Psychology of Persuasion with bringing many of the principles of academic psychology to a popular audience and inspiring him to make a more formal study of psychology textbooks. The combination of Mr. Munger’s early thinking on human misjudgment coupled with his study of psychology decades later resulted in a fully developed set of psychological tendencies associated with human misjudgment.

Of course, these are tendencies that we want to avoid, or at least be conscious of and control, when making decisions but most of us will identify many that have negatively impacted our prior decisions.  A case can be made to go through the list of tendencies prior to making any major professional or personal decision to ensure that one is not falling into these traps. 

Each of the twenty-five tendencies listed below deserve separate consideration and we plan to look at several of them in the coming months.  When one of the tendencies is covered in a separate article, a link will appear in the list below.  In the meantime, we highly recommend buying and reading Poor Charlie’s Almanack since the subject matter that is covered goes far beyond the chapter on human misjudgment.

  1. Reward and Punishment Superresponse Tendency
  2. Liking/Loving Tendency
  3. Disliking/Hating Tendency
  4. Doubt-Avoidance Tendency
  5. Inconsistency-Avoidance Tendency
  6. Curiosity Tendency
  7. Kantian Fairness Tendency
  8. Envy/Jealousy Tendency
  9. Reciprocation Tendency
  10. Influence-from-Mere-Association Tendency
  11. Simple, Pain-Avoiding Psychological Denial
  12. Excessive Self-Regard Tendency
  13. Overoptimism Tendency
  14. Deprival-Superreaction Tendency
  15. Social-Proof Tendency
  16. Contrast-Misreaction Tendency
  17. Stress-Influence Tendency
  18. Availability-Misweighing Tendency
  19. Use-It-or-Lose-It Tendency
  20. Drug-Misinfluence Tendency
  21. Senescence-Misinfluence Tendency
  22. Authority-Misinfluence Tendency
  23. Twaddle Tendency
  24. Reason-Respecting Tendency
  25. Lollapalooza Tendency
Munger’s Psychology of Human Misjudgment