Charlie Munger and The Psychology of Human Misjudgement [Outliers]

0:00:04 I came to the psychology of human misjudgment almost against my will.
0:00:08 I rejected it until I realized that my attitude was costing me a lot of money
0:00:10 and reduced my ability to help everything I love.
0:00:14 That’s a quote by Charlie Munger, and that’s what we’re going to talk about today,
0:00:17 the psychology of human misjudgment.
0:00:21 Welcome to The Knowledge Project.
0:00:23 I’m your host, Shane Parrish.
0:00:25 This podcast is all about learning from others,
0:00:28 mastering the best of what they figured out
0:00:30 so you can use their lessons in your life.
0:00:37 Charlie Munger was a lawyer from Omaha who taught himself psychology
0:00:39 because Harvard Law School refused to.
0:00:41 Munger was the partner of Warren Buffett,
0:00:46 and together they created one of the best track records the world has ever seen,
0:00:48 and they used psychology to do it.
0:00:53 In 1995, Munger formalized what he’d learned into a speech at Harvard.
0:00:56 He called it the psychology of human misjudgment.
0:01:02 And in it, he identified 24 psychological tendencies that caused systematic errors in thinking.
0:01:08 Ten years later, at age 81, he rewrote it from memory, expanding it to 25 tendencies.
0:01:14 I published the full updated version on FS.blog with his personal permission.
0:01:18 We’re the only website, to my knowledge, that has this permission to post it.
0:01:19 I’ll put the link in the description.
0:01:24 The psychology of human misjudgment is one of the most valuable frameworks
0:01:28 for understanding human behavior ever created.
0:01:33 It’s Munger’s map of how your brain systematically fools you and how to fight back.
0:01:35 Let’s dive in.
0:01:42 Pattern one, reward and punishment super response tendency.
0:01:48 Munger opened his talk with what he felt is one of the most important and underrated patterns,
0:01:52 what he called reward and punishment super response tendency,
0:01:56 otherwise known as just incentives and disincentives.
0:01:58 Munger starts by saying,
0:02:03 Well, I think I’ve been in the top 5% of my age cohort all my life and understanding the power of incentives.
0:02:06 And all my life, I’ve underestimated it.
0:02:13 And never a year passes, but what I get some surprise that pushes my limit a little farther.
0:02:17 Munger was perhaps one of the smartest people in business,
0:02:21 someone who spent decades intensely studying this topic in his spare time.
0:02:26 And he said he still underestimated how powerful incentives are.
0:02:29 The simple maxim Munger came up with for this is,
0:02:35 Never ever think about something else when you should be thinking about the power of incentives.
0:02:39 Munger’s favorite example of getting the incentives right is Federal Express.
0:02:44 We had a whole episode on Fred Smith and Federal Express a few months ago,
0:02:49 and this story is part of it, but I’m going to repeat it here because it’s so revealing about incentives.
0:02:53 FedEx built their entire business model on one thing, speed.
0:02:57 Packages had to move through one central airport hub every single night,
0:03:02 get sorted rapidly, and then get on planes heading to their final destination.
0:03:07 The whole system depended on these night shift workers unloading and then loading these planes
0:03:09 all in one overnight shift.
0:03:12 By daybreak, all planes had to be in the air.
0:03:15 But they always had issues getting it done before sunrise.
0:03:17 Night after night, at the end of the shift,
0:03:20 there would still be planes on the ground not loaded.
0:03:23 They tried everything to speed things up.
0:03:26 They tried threats, training programs, more supervisors.
0:03:27 Nothing worked.
0:03:31 Finally, somebody realized they were paying the workers by the hour.
0:03:34 Think about Munger’s statement from a minute ago.
0:03:39 Never ever think about something else when you should be thinking about the power of incentives.
0:03:44 What was FedEx incentivizing on the night shift when they paid workers by the hour?
0:03:46 To work slowly.
0:03:51 Because if they stretched the job out, they’d get paid more money.
0:03:53 A longer shift meant a bigger paycheck.
0:03:57 Finally, someone had the obvious realization.
0:04:01 Pay them by the shift so when they’re done, they can just go home.
0:04:10 Another short and memorable example of incentive is never ask your barber if you need a haircut.
0:04:12 One of Munger’s most famous quotes is simple.
0:04:15 Show me the incentive and I’ll show you the outcome.
0:04:19 Munger offered three antidotes when it came to receiving advice from professionals.
0:04:25 Number one, especially fear professional advice when it is especially good for the advisor.
0:04:32 Number two, learn and use the basic elements of your advisor’s trade as you deal with your advisor.
0:04:37 And number three, double check, disbelieve, or replace much of what you’re told
0:04:41 to the degree that seems appropriate after objective thought.
0:04:47 If someone’s behavior doesn’t make sense to you, ask yourself what the incentives are.
0:04:52 Let’s leave the final word to American novelist Upton Sinclair who said,
0:04:59 It is difficult to get a man to understand something when his salary depends upon him not understanding it.
0:05:03 Pattern number two, liking, loving tendency.
0:05:07 The second tendency is liking, loving tendency.
0:05:10 We believe, we trust, and agree with people we like.
0:05:14 And if someone likes us, we tend to like them back.
0:05:18 Once triggered, this creates three predictable consequences.
0:05:24 First, you ignore their faults and comply with their wishes, even when you otherwise wouldn’t.
0:05:26 You become blind to their flaws.
0:05:31 When made aware of them, you make excuses and rationalize them away.
0:05:36 Second, you favor anything associated with the object of your affection.
0:05:39 This is why influencers are so powerful.
0:05:43 You don’t just like the person, you like the things that they like.
0:05:47 Their favorite restaurant, the products they use, even their political views.
0:05:52 Third, you distort facts to maintain positive feelings.
0:05:54 Your brain rewrites reality.
0:05:59 You remember good times vividly and minimize or forget the bad times.
0:06:02 This creates a feedback loop.
0:06:07 Admiration causes liking, which causes more admiration, which causes more loving.
0:06:13 This can spiral so much that people will deliberately destroy themselves to help what they love.
0:06:18 In investing, this creates what Munger and Buffett call falling in love with your companies.
0:06:20 You buy shares in a business.
0:06:22 You study it thoroughly.
0:06:23 You meet management.
0:06:24 They’re charismatic.
0:06:25 They’re articulate.
0:06:28 And they tell you a compelling story.
0:06:31 You start identifying with the company.
0:06:35 And when somebody criticizes it, you feel personally attacked.
0:06:37 Then the business starts deteriorating.
0:06:39 Numbers weaken quarter by quarter.
0:06:41 Competitors gain ground.
0:06:43 Management makes questionable decisions.
0:06:46 But you can’t see it clearly anymore.
0:06:50 Each quarter, you find reasons why the bad news isn’t all that bad.
0:06:52 It’s temporary, you tell yourself.
0:06:53 They’re investing for the long term.
0:06:56 The market doesn’t understand them like I do.
0:07:00 Meanwhile, your capital evaporates because you can’t see reality.
0:07:03 And of course, this tendency isn’t all bad.
0:07:10 Munger points out that loving, admirable people and ideas with special intensity is a huge advantage in life.
0:07:15 Liking the right people and the right behaviors helps you become a better person.
0:07:19 We’re especially prone to like people similar to us.
0:07:23 Those who share our beliefs, our interests, and our attitudes.
0:07:27 Also, people who are physically attractive, popular, or charismatic.
0:07:32 We’re especially vulnerable to people who make us feel special and compliment us.
0:07:34 We also want to be liked.
0:07:40 We don’t speak the truth or openly question people because we fear the consequences.
0:07:42 My friend Peter Bevelin writes,
0:07:45 We don’t want to be the person that stands out.
0:07:52 This is one reason why people who are overly concerned about what others think prefer to be around like-minded people.
0:07:55 It’s more comfortable than risking social disapproval.
0:07:57 This gets in the way.
0:08:04 We agree with proposals from our political party and disagree with the other parties, even when they’re identical proposals.
0:08:08 This carries over into everything, not just politics.
0:08:12 Stay objective on the issue and what you want to achieve.
0:08:18 The moment you find yourself making excuses for obvious problems, that’s a warning sign.
0:08:21 Don’t dismiss people because you don’t like them.
0:08:25 And remember, your enemy knows your faults better than you do.
0:08:27 And in investing, ask yourself,
0:08:31 If I didn’t already own this, would I buy it today at the current price?
0:08:37 If the answer was no, you might be driven by liking tendency and not rational analysis.
0:08:42 Number 3. Disliking and Hating Tendency
0:08:46 The third pattern is the mirror image of liking-loving tendency,
0:08:51 and Munger recognized it’s just as powerful, if not more so.
0:08:56 When you dislike or hate something, three predictable distortions happen.
0:09:00 One, you ignore the virtues and the object of your dislike,
0:09:03 becoming blind to any good qualities, even obvious ones.
0:09:09 Two, you dislike people, products, and actions merely associated with what you hate.
0:09:14 And three, you distort facts to facilitate hatred.
0:09:19 Your brain literally rewrites reality to justify your negative feelings.
0:09:24 And just like the love version, this creates a powerful feedback loop.
0:09:29 Dislike breeds hatred, which breeds more dislike, spiraling towards extremes.
0:09:33 Munger gives a disturbing example in his talk.
0:09:35 When the World Trade Center was destroyed on 9-11,
0:09:39 many Pakistanis immediately concluded the Hindus did it.
0:09:42 Many Muslims immediately concluded the Jews did it.
0:09:46 These weren’t reasoned conclusions based on evidence.
0:09:52 These were instant cognitive distortions driven by pre-existing hatreds.
0:09:56 The brain simply assigned blame to whoever was already hated.
0:10:03 Munger’s observation, such factual distortions often make mediation between opponents locked
0:10:05 in hatred, either difficult or impossible.
0:10:11 Mediations between Israelis and Palestinians are difficult because facts in one side’s history
0:10:14 overlap very little with facts from the other sides.
0:10:21 When hatred distorts your perception of basic reality, rational discussion becomes impossible.
0:10:24 You’re literally living in different factual worlds.
0:10:27 Munger cites an old English maxim.
0:10:32 Politics is the art of marshalling hatreds, not hopes, not aspiration.
0:10:34 Marshalling hatreds.
0:10:35 Think about that for a second.
0:10:39 This explains why negative political advertising works.
0:10:45 It’s easier to motivate people through hatred of an opponent than through love of your own candidate.
0:10:49 In investing, this tendency is just as dangerous as the love version.
0:10:53 Maybe a company’s CEO said something offensive.
0:10:55 Maybe they compete with a company you already own.
0:10:58 And maybe they just rub you the wrong way.
0:11:01 Suddenly, you can’t see any virtues.
0:11:03 Their successful new product?
0:11:04 It’s just luck.
0:11:05 Their growing market share?
0:11:07 It’s unsustainable.
0:11:08 Their innovation?
0:11:09 It’s a gimmick.
0:11:12 The competitor you hate might be eating your lunch,
0:11:17 but your hatred prevents you from seeing it, learning from it, or responding effectively.
0:11:23 The antidote here is to force yourself to see the virtues even in what you dislike.
0:11:28 Ask yourself, what is this person, company, idea doing well?
0:11:34 If you genuinely can’t think of a single thing, that’s the hating tendency at work.
0:11:37 Almost no one is 100% bad.
0:11:40 The goal isn’t to stop disliking things.
0:11:42 So that’s impossible and probably not even desirable.
0:11:47 The goal, however, is to not let disliking blind you to reality.
0:11:51 Pattern four, doubt avoidance tendency.
0:11:54 The fourth pattern is one of the most fundamental.
0:11:58 We’re programmed to remove doubt by reaching a decision.
0:12:01 Think about why evolution would wire us this way.
0:12:04 If you’re a prey animal and a predator appears,
0:12:07 the worst response is standing there and thinking,
0:12:09 let me carefully weigh my options.
0:12:11 You need to decide fast.
0:12:12 It’s fight or flight.
0:12:16 The animal that takes too long becomes lunch.
0:12:19 We’re deeply uncomfortable with uncertainty.
0:12:20 Our brains want resolution.
0:12:25 We need to close the loop, even if we don’t have enough information.
0:12:33 Munger writes that this tendency is so pronounced in man that behavior counter to it is required from judges and jurors.
0:12:35 They’re forced to delay decisions.
0:12:38 They’re forced to delay decisions and wear a mask of objectivity.
0:12:47 This mask helps create real objectivity because it forces you to keep your mind more open than it naturally wants to be.
0:12:49 What triggers this tendency?
0:12:49 What triggers this tendency?
0:12:52 Two things really, puzzlement and stress.
0:13:00 When you don’t understand something and you feel pressure, anxiety, or scarcity, the doubt avoidance tendency kicks into high gear.
0:13:07 Your brain desperately wants to resolve the uncertainty and will grab onto almost any answer.
0:13:09 In business, this shows up constantly.
0:13:11 You’re in a meeting.
0:13:12 A decision needs to be made.
0:13:14 The data, it’s incomplete.
0:13:17 But sitting with uncertainty feels unbearable.
0:13:22 So someone, often the highest status person, proposes a solution.
0:13:25 And suddenly, everyone feels a little bit of relief.
0:13:29 Not because it’s the right answer, but because it’s an answer.
0:13:31 So what’s the solution?
0:13:34 When the cost of failure is low, decide quickly.
0:13:37 And when the cost of failure is high, slow down.
0:13:40 That means allowing yourself to sit with uncertainty.
0:13:44 When I talked to Daniel Kahneman about this, he said,
0:13:48 You delay intuition by focusing on the separate problems.
0:13:54 Take the separate dimensions and really think about each dimension separately and independently.
0:13:57 Don’t allow people to give the final judgment.
0:14:00 Say, we will wait until we cover the whole thing.
0:14:02 If you find a deal breaker, then you stop.
0:14:06 But if you haven’t found a deal breaker, wait until the end.
0:14:10 Your decision is almost certainly going to be better.
0:14:13 So be slow to form opinions.
0:14:15 And once you do, they’re very hard to change.
0:14:18 When the stakes are high, move very slowly.
0:14:23 Number five, inconsistency avoidance tendency.
0:14:28 Our brains conserve energy by being extremely reluctant to change.
0:14:35 Once something is locked in, whether it’s a habit, a conclusion, a commitment, or even an identity,
0:14:38 your mind will fight to keep it consistent.
0:14:41 Munger’s observation here is brutal.
0:14:45 Few people can list a lot of bad habits that they have eliminated.
0:14:47 And some people cannot identify even one of these.
0:14:56 Instead, practically everyone has a great many bad habits he has long maintained despite their being known as bad.
0:14:58 You know your bad habits are bad.
0:14:59 Everybody knows.
0:15:05 But they persist anyway because this tendency makes changing vastly harder than just continuing.
0:15:09 Habits are like chains that slowly form.
0:15:12 Small, link by link, decision by decision.
0:15:17 The terrifying part, they were too light to be felt before they became too strong to be broken.
0:15:21 The first few times you do something, it feels like nothing.
0:15:22 Just one cigarette.
0:15:24 Just one day skipping the gym.
0:15:26 Just one shortcut on quality.
0:15:28 Each instance seems trivial.
0:15:30 But you’re forging a chain.
0:15:34 By the time you feel the weight, breaking it requires enormous force.
0:15:41 Ben Franklin understood this perfectly when he said an ounce of prevention is worth a pound of cure.
0:15:44 But this doesn’t apply to just habits.
0:15:52 It locks in previous conclusions, loyalties you’ve declared, your reputational identity, commitments you’ve made.
0:15:57 Once you’ve staked out a position, changing it feels like inconsistency.
0:16:00 And your brain will do mental gymnastics to avoid that feeling.
0:16:09 The more time, money, effort, or pain you invest in something, the more you feel the need to continue whether it’s right or not.
0:16:15 We don’t want to waste our efforts, so we protect our ego and avoid the pain of accepting a loss.
0:16:19 Psychologist Alan Tigger wrote about the Vietnam War,
0:16:27 The longer the war continued, the more difficult it was to justify the additional investments in terms of the value of possible victory.
0:16:37 On the other hand, the longer the war continued, the more difficult it became to write off the tremendous losses without having anything to show for them.
0:16:39 This plays out everywhere.
0:16:45 A CEO keeps a disastrous hire because admitting the mistake feels worse than ongoing damage.
0:16:49 You hold a declining stock because selling means facing a loss.
0:16:51 I put $10,000 into this.
0:16:54 I must prove that I made the right choice.
0:16:59 Politicians continue failed policies because reversing course looks weak.
0:17:03 Voters vote for the same party regardless of their policies.
0:17:06 Scottish philosopher Adam Smith wrote,
0:17:13 The opinion which we entertain of our own character depends entirely on our judgments concerning our past conduct.
0:17:24 It is so disagreeable to think ill of ourselves that we often purposely turn away our view from those circumstances which might render that judgment unfavorable.
0:17:27 And Warren Buffet added,
0:17:35 What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.
0:17:38 This happens even in hard science.
0:17:41 Max Planck, a Nobel laureate in physics, observed,
0:17:47 A new scientific truth does not triumph by convincing its opponents and making them see the light,
0:17:53 but rather because its opponents eventually die and a new generation grows up that is familiar with it.
0:17:57 Even Einstein fell victim at the end of his career to this.
0:18:00 Early Einstein was brilliant at destroying his own previous ideas,
0:18:05 but the older Einstein never accepted the full implications of quantum mechanics,
0:18:10 partly because it was inconsistent with conclusions he’d reached at his peak.
0:18:13 If it happened to Einstein, it’s happening to you.
0:18:17 Charles Darwin recognized this tendency in himself,
0:18:20 and he built a systematic defense that Munger decided to copy.
0:18:27 Darwin trained himself early to intensively consider any evidence that disconfirmed his hypotheses,
0:18:32 especially when he thought his hypotheses was particularly good.
0:18:34 Why especially then?
0:18:37 Because that’s when inconsistency avoidance tendency is strongest.
0:18:40 When you’re most convinced that you’re right,
0:18:43 you’re most resistant to contradicting evidence.
0:18:49 The opposite is confirmation bias, seeking only evidence that supports what you already believe.
0:18:52 So how do we protect ourselves?
0:18:54 First, fight up front.
0:18:57 The first time you do something matters enormously.
0:19:00 Prevention is easiest before the chains start forming.
0:19:02 Avoid the cigarette.
0:19:03 Go to the gym.
0:19:05 Do the things that you need to do.
0:19:08 Second, adopt Darwin’s practice.
0:19:11 When you’re most convinced you’re right, seek disconfirming evidence.
0:19:16 Warren Buffett adds, when you find information that contradicts your existing beliefs,
0:19:20 you’ve got a special obligation to look at it, and quickly.
0:19:23 Third, stop the sunk cost trap.
0:19:25 Warren Buffett adds here,
0:19:29 The most important thing to do when you find yourself in a hole is to stop digging.
0:19:35 Ask yourself, if I were making this decision fresh today with no history, what would I do?
0:19:38 If the answer is different, act on it.
0:19:41 Fourth, seek outside perspective.
0:19:44 Let someone who wasn’t committed to the earlier decision review it.
0:19:47 And finally, use it positively.
0:19:49 If you want to change, make a public commitment.
0:19:53 Let your inconsistency avoidance tendency work for you instead of against you.
0:19:56 The rare life that is wisely lived, Munger says,
0:20:01 has in it many good habits maintained and many bad habits avoided or cured.
0:20:03 The key word, avoided.
0:20:07 Because once those chains form, you’ll wear them for life.
0:20:11 Number six, curiosity tendency.
0:20:15 Think of this as the antidote to the biases we’ve been talking about.
0:20:18 Humans are the most curious species.
0:20:20 And when you combine human curiosity with education,
0:20:24 you get the ability to counteract most of these psychological forces.
0:20:28 Curiosity is the tendency that makes you question your own thinking.
0:20:30 Incentive cost bias.
0:20:33 Curiosity prompts you to ask, what’s really motivating this person?
0:20:35 Liking loving tendency.
0:20:37 Curiosity prompts you to say,
0:20:39 What am I not seeing because I like this person?
0:20:40 Or the opposite.
0:20:43 What am I ignoring because I hate this person?
0:20:45 Number three, doubt avoidance.
0:20:48 Curiosity makes us ask, what don’t I know yet?
0:20:51 Number four, inconsistency avoidance.
0:20:53 Curiosity challenges us by asking us,
0:20:55 what if my previous conclusion was wrong?
0:20:58 Munger had a beautiful observation here.
0:21:00 He said the curious are also provided with
0:21:04 much fun and wisdom long after formal education has ended.
0:21:07 And Munger himself was a lifelong learner.
0:21:13 Indeed, that is the pattern I see both across the greats of the past and the present.
0:21:15 They’re all lifelong learners.
0:21:18 Most people stop being curious when their formal education ends.
0:21:20 They stop asking why.
0:21:22 They stop investigating.
0:21:23 And they stop learning.
0:21:26 The curious, like you, keep going.
0:21:27 We keep getting wiser.
0:21:29 And we keep having fun.
0:21:33 Number seven, Kantian fairness tendency.
0:21:37 Most humans have a deep-seated sense of fairness based on the golden rule.
0:21:40 Treat others as you’d like to be treated.
0:21:43 Kant’s idea is that humans follow behavior patterns
0:21:48 that if everyone followed them would make the system work best for everyone.
0:21:51 Munger observed that humans don’t just follow this principle.
0:21:53 We expect it from others.
0:21:59 And when that expectation is violated, we react with intense hostility.
0:22:01 We see this everywhere.
0:22:05 Drivers naturally take turns at a one-way bridge with no signs.
0:22:08 People let others merge on the freeway.
0:22:11 Strangers line up for things first come, first served.
0:22:14 No one enforces these behaviors.
0:22:15 They just happen.
0:22:20 And yet a lot of trouble happens when we expect fairness and it’s not provided.
0:22:22 What happens when somebody cuts in line?
0:22:23 Rage.
0:22:24 That’s injustice.
0:22:27 When someone takes more than their fair share?
0:22:29 We have an intense negative reaction.
0:22:35 The violation triggers hostility because it breaks a deep-seated human norm.
0:22:36 Munger said,
0:22:41 How can you fail if you treat other people the way you’d like if you did it to yourself?
0:22:43 It’s the golden rule.
0:22:44 Of course it works.
0:22:47 Understanding this helps you in two ways.
0:22:48 First, you can harness it.
0:22:50 Go positive and go first.
0:22:52 People will reciprocate.
0:22:54 We’ll talk about reciprocation in a minute.
0:22:56 It’s one of the most powerful forces in the world.
0:22:59 Second, manage the hostility.
0:23:03 When someone responds with disproportionate anger about something small,
0:23:06 often it’s because their sense of fairness was violated.
0:23:09 Sometimes it’s about the current situation,
0:23:12 and sometimes they’re making up for a past injustice.
0:23:15 The specific incident might be minor,
0:23:17 but the response feels major.
0:23:19 And when you’re the one feeling that anger,
0:23:23 recognize that your reaction is partly driven by this tendency.
0:23:24 Sometimes it’s justified,
0:23:26 and sometimes it’s disproportionate.
0:23:31 Knowing the difference requires seeing the tendency operating inside yourself.
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0:24:05 Number eight, envy, jealousy, tendency.
0:24:09 The eighth tendency is our bias towards envy and jealousy.
0:24:12 Warren Buffett has repeatedly said that it is
0:24:14 not greed that drives the world, but envy.
0:24:19 Munger expected psychology textbooks to cover this extensively.
0:24:22 Instead, he found the words envy and jealousy
0:24:27 were often completely absent from the indexes in these textbooks.
0:24:30 Not undercover, just completely absent.
0:24:34 Envy is everywhere, but almost never gets discussed.
0:24:37 We evolved in a world where food was scarce.
0:24:41 Seeing someone else with what you need triggered an automatic reaction.
0:24:42 I want that.
0:24:44 That’s the root of envy.
0:24:48 Munger gives an example of sibling jealousy, and that’s especially intense.
0:24:52 Anyone with siblings knows it’s worse than envying strangers.
0:24:55 Munger says it combines with that sense of fairness.
0:24:57 Why does my sibling get something I don’t?
0:25:00 We’re supposed to be treated equally.
0:25:04 Ancient civilizations understood how dangerous this was.
0:25:06 The Ten Commandments explicitly warned,
0:25:10 don’t covet your neighbor’s house, his wife, his servants, his animals.
0:25:12 Why such an emphasis?
0:25:17 Because they recognized envy as one of the most destructive forces in human affairs.
0:25:21 It’s also extreme in modern life.
0:25:24 Many big law firms fearing disorder from envy and jealousy
0:25:28 have long treated all senior partners alike in compensation,
0:25:31 no matter how different their contributions to firm welfare.
0:25:37 They’re willing to destroy their incentive structure just to avoid triggering envy.
0:25:40 That’s how powerful and destructive this tendency can be.
0:25:43 So why isn’t this covered more?
0:25:50 Well, Munger’s theory is that there’s a taboo against identifying envy as the cause of someone’s argument.
0:25:53 When was the last time someone in a group discussion said,
0:25:56 you’re just arguing that because you’re envious?
0:26:00 It doesn’t happen, even when it’s obviously true.
0:26:07 Munger says labeling a position as envy-driven will be regarded as extremely insulting to the position taker,
0:26:11 possibly more so when the diagnosis is correct than when it is wrong.
0:26:13 And envy is supercharged now.
0:26:19 You open Instagram and you can instantly see both people you know and people you don’t know
0:26:25 with a new car, or on vacation, or with a new watch, or a new and sexy partner, or whatever it is.
0:26:28 Financial historian Charles Kinderberger offered,
0:26:34 there is nothing so disturbing to one’s well-being and judgment as to see a friend get rich.
0:26:36 And Aristotle observed,
0:26:39 envy is pain at the good fortune of others.
0:26:43 We envy those who are near us in time, place, age, or reputation.
0:26:47 For investors, envy is particularly dangerous.
0:26:53 You see a competitor’s stock soaring, a colleague makes a fortune on something you passed on.
0:26:55 The envy clouds your judgment.
0:26:59 You might avoid analyzing competitors, make impulsive decisions to catch up,
0:27:03 or take excessive risk to match someone else’s returns.
0:27:10 Munger and Buffett’s advantage was that they genuinely didn’t seem to experience envy.
0:27:14 When asked about missing opportunities, they’d shrug and move on.
0:27:18 When competitors succeeded, they’d analyze what happened objectively.
0:27:22 This emotional detachment is a massive competitive advantage.
0:27:24 So how do we fight this?
0:27:27 The first step is recognizing it in yourself.
0:27:28 When you feel it, name it.
0:27:32 Don’t let it masquerade as a principled disagreement.
0:27:36 Second, don’t compare yourself to others.
0:27:36 As Munger says,
0:27:40 someone will always be getting richer faster than you.
0:27:42 This is no great tragedy.
0:27:48 Third, understand that much political and social conflict that appears to be above principles
0:27:50 is actually driven by envy.
0:27:54 The principles might be real, but the anger comes from envy.
0:28:01 And finally, remember the best way to avoid causing envy in others is to deserve the success that you get.
0:28:05 Pattern 9 is reciprocation tendency.
0:28:10 And this is one of the most powerful forces in human nature.
0:28:15 The automatic tendency to reciprocate both favors and disfavors.
0:28:18 Reciprocity can be summed up like this.
0:28:20 When you act on things, they act on you.
0:28:22 There’s an action and a reaction.
0:28:25 My friend Peter Kaufman has a perfect example.
0:28:27 You’re in an elevator with a stranger.
0:28:28 You have three choices.
0:28:30 You can smile and say good morning.
0:28:34 And 98% of the time, the other person will smile back.
0:28:36 You could scowl and hiss.
0:28:40 And 98% of the time, they will scowl and hiss back at you.
0:28:42 Or you can do nothing.
0:28:45 98% of the time, you get nothing back.
0:28:47 Here’s the key.
0:28:52 If you want the world to do most of the work for you, you have to go first.
0:28:54 You get back whatever you put out.
0:28:58 So if you’re grumpy, people are grumpy back.
0:29:02 If you take advantage of customers, they don’t stay customers long.
0:29:06 If you step on people to get ahead, they’re going to step on you.
0:29:09 When pushed on, we push back.
0:29:11 The same is true for others.
0:29:14 The harder we push, the harder they push back.
0:29:18 But if you go positive and you go first with no strings attached,
0:29:24 you unlock the most powerful force in the world working for you instead of against you.
0:29:27 Let’s go back to that elevator example for a second.
0:29:33 If there’s a 98% chance of benefit and only a 2% chance someone tells you to screw off
0:29:37 or gives you a dirty look, why don’t more people do it?
0:29:41 Well, we’re much more afraid of loss than we are attracted to gain.
0:29:48 So we’re willing to give up the 98% to protect against the 2% chance of looking foolish.
0:29:50 This is loss aversion.
0:29:52 Legendary singer Bono said,
0:29:55 I know 10% of the people in the world are going to screw me.
0:29:55 That’s okay.
0:30:03 If I’m not willing to be vulnerable and expose myself to that 10%, I’m going to miss the other 90%.
0:30:08 This tendency operates at the subconscious level, which makes it easy to exploit.
0:30:12 The car salesman who gives you a coffee and a comfortable seat,
0:30:17 that small courtesy completely subconsciously tricks you into parting with an extra $500.
0:30:19 His cost is a dollar.
0:30:21 Yours, much more.
0:30:26 Because it happens subconsciously, you never link the $500 to the coffee.
0:30:29 Robert Cialdini demonstrated this brilliantly.
0:30:34 His researchers asked strangers to supervise juvenile delinquents on a zoo trip.
0:30:36 One in six agreed.
0:30:38 Then Cialdini changed it.
0:30:42 First, researchers asked people to supervise delinquents for two years.
0:30:45 This got a 100% rejection.
0:30:46 But then he asked,
0:30:50 will you at least spend one afternoon taking them to the zoo?
0:30:54 And the acceptance rate tripled to 50%.
0:30:55 What happened here?
0:30:57 The researcher made a concession.
0:31:02 The subjects, on the other hand, reciprocated by making their own concession.
0:31:04 So they agreed to something they would have rejected.
0:31:06 if asked directly.
0:31:09 Sam Walden understood this.
0:31:13 At Walmart, he wouldn’t let purchasing agents accept so much as a hot dog from vendors.
0:31:15 And Munger said,
0:31:19 given the subconscious level at which much reciprocation tendency operates,
0:31:22 this policy was profoundly correct.
0:31:25 So how can we use this tendency?
0:31:28 First, go positive and go first.
0:31:32 If you want cooperation, do favors without keeping score.
0:31:35 If you want to de-escalate conflict, make the first concession.
0:31:37 The reciprocation follows naturally.
0:31:40 Second, use the Sam Walden rule.
0:31:43 In positions where favors could compromise judgment,
0:31:46 if you’re in purchasing or negotiating or decision making,
0:31:51 just have a rule, an automatic rule to accept no favors, period.
0:31:54 Third, beware of the concession trap.
0:31:59 When someone makes an outrageous demand and then graciously backs off,
0:32:01 recognize what’s happening.
0:32:04 The smaller request might still be unreasonable.
0:32:08 Finally, defer hostile reciprocation.
0:32:12 When someone wrongs you, resist the immediate urge to reciprocate.
0:32:15 You can always tell the man off tomorrow.
0:32:18 The reciprocation you get back mirrors what you put out.
0:32:20 So go positive and go first.
0:32:25 Pattern 10, influence for mere association tendency.
0:32:31 The 10th pattern explains why advertisers never show Coca-Cola next to news about dead children.
0:32:34 Your brain associates things that happen together,
0:32:37 even when there’s no logical connection.
0:32:42 And once that association forms, it drives your behavior without you realizing it.
0:32:45 There are two types of learning through association.
0:32:46 The first is fairly straightforward.
0:32:50 You try a brand, it works well, so you buy it again.
0:32:51 That’s logical.
0:32:53 The second is more dangerous.
0:32:54 That’s mere association.
0:32:56 And here’s what Munger said.
0:33:00 Many people who have been trained by their previous experience in life to believe
0:33:04 that when several similar items are presented for purchase,
0:33:07 the one with the highest price will have the highest quality.
0:33:11 Knowing this, some seller of an ordinary industrial product
0:33:15 will often change his product’s trade dress and raise its price significantly,
0:33:20 hoping the quality-seeking buyers will be tricked into becoming purchasers
0:33:23 by mere association of his product and its high price.
0:33:28 This industrial practice frequently is effective in driving up sales
0:33:31 and even more so in driving up profits.
0:33:36 For instance, it worked wonderfully with the high-priced power tools for a long time,
0:33:40 and it would work better yet with high-priced pumps at the bottom of oil wells.
0:33:44 With luxury goods, the process works with a special boost
0:33:49 because the buyers who pay high prices often gain extra status
0:33:53 from thus demonstrating both their good taste and their ability to pay.
0:33:56 Even trivial associations have extreme effects.
0:34:00 You’re buying shoe polish, and you are attracted to beautiful women.
0:34:04 So when you choose the polish with the beautiful woman on the package.
0:34:10 Now, there’s zero logical connection between an attractive woman and shoe polish quality,
0:34:12 but the association works anyway.
0:34:16 That’s why Coca-Cola adds picture life as happier than reality.
0:34:21 They’re creating associations between their product and positive feelings,
0:34:24 even though the product has nothing to do with those feelings.
0:34:28 But the most damaging miscalculations don’t come from advertisers.
0:34:33 They come from what gets accidentally associated with your past success,
0:34:37 things you love or hate, and the bad news that you don’t want to hear.
0:34:41 Or consider the person who gambles for the first time and wins.
0:34:46 This success causes them to try again and again, eventually to their detriment.
0:34:51 The first win gets associated with the activity, even though it was pure luck.
0:34:53 Munger offers an antidote to this.
0:34:55 Carefully examine each past success.
0:35:00 Look for accidental factors that had nothing to do with why you succeeded.
0:35:06 Then look for dangerous aspects of the new situation that weren’t present when you succeeded before.
0:35:11 Just because something worked once doesn’t mean the same approach will work again.
0:35:14 Another dangerous association?
0:35:16 Connecting the messenger with bad news.
0:35:23 Ancient Persians literally killed messengers whose only fault was bringing home truthful bad news.
0:35:26 It was safer to run away and hide.
0:35:29 At Berkshire Hathaway, there’s a common injunction.
0:35:32 Always tell us the bad news promptly.
0:35:34 It is only the good news that can wait.
0:35:38 This is a deliberate practice to combat the Persian messenger syndrome.
0:35:43 You develop, through exercise of will, a habit of welcoming the bad news.
0:35:50 Another perverse example of this is when someone is down on their luck, and you could do them a favor, but you don’t.
0:35:54 They remember it forever, and they associate you with this injustice.
0:35:58 Here’s an example of how this works I think most people can relate to.
0:36:04 Imagine you’re in a meeting when someone you have a long history of not liking starts talking.
0:36:06 Your inner voice instantly says,
0:36:28 This first really hit me between the eyes when a friend of our family had a super athlete, super student son who flew off a carrier in the North Atlantic and never came back.
0:36:33 And his mother, who was a very sane woman, just never believed that he was dead.
0:36:37 That’s simple pain-avoiding psychological denial.
0:36:43 The reality is too painful to bear, so one distorts the facts until they become bearable.
0:36:47 We all do that to some extent, often causing terrible problems.
0:37:04 When denial is used to make dying easier, for example, someone with a terminal illness maintaining hope, Munger says that conduct meets almost no criticism.
0:37:10 But in cases of addiction, denial becomes particularly dangerous because it mixes with moral breakdown.
0:37:16 Addicted people tend to believe they remain in a respectable condition with respectable prospects.
0:37:25 They display extremely unrealistic denial of their reality as they go deeper and deeper into their addiction.
0:37:29 They genuinely cannot see what’s obvious to everyone around them.
0:37:40 Munger noted that nowadays, Alcoholics Anonymous routinely achieves about a 50% cure rate by causing several psychological tendencies to act together to counter addiction.
0:37:51 However, Munger notes that sobriety, this cure process, is typically difficult and draining, and a 50% success rate still implies a 50% failure rate.
0:37:53 His conclusion is stark.
0:37:59 One should stay far away from any conduct at all likely to drift into chemical dependency.
0:38:05 Even a small chance of suffering an ounce of prevention is worth a pound of cure.
0:38:08 This is prevention thinking, again, at its core.
0:38:10 Wisdom is prevention.
0:38:14 Don’t rely on your ability to see clearly once denial has set in.
0:38:21 By the time denial activates, you’ve already lost the ability to accurately assess the situation.
0:38:23 Number 12.
0:38:25 Excessive self-regard tendency.
0:38:29 People systematically overestimate themselves and their own opinions.
0:38:35 Munger cites a study where 90% of Swedish drivers judge themselves to be above average.
0:38:36 Think about that mathematically.
0:38:38 It’s literally impossible.
0:38:41 Yet everyone believes something like that about themselves.
0:38:45 We overestimate ourselves in almost everything.
0:38:48 This applies to your major possessions too.
0:38:52 You think your children are smarter, more talented, and better looking than they objectively are.
0:38:55 We even overappraise our minor possessions.
0:39:00 Once we own something, it suddenly becomes worth more to us than we’d pay for it if we didn’t already own it.
0:39:03 Psychology calls this the endowment effect.
0:39:11 And applied to decisions, it means once you commit, your brain rewrites history to make your choice seem smarter than it was.
0:39:13 Munger gives a lottery example.
0:39:17 When numbers are distributed randomly, fewer people pled.
0:39:22 But when people can pick their own number, lotteries become much more popular.
0:39:24 This is completely irrational.
0:39:26 The odds are the same either way.
0:39:32 But because of our irrational love of our own choices, we buy more tickets when we pick the number.
0:39:36 Excessive self-regard causes bad hiring decisions constantly.
0:39:41 Employers grossly overappraised the worth of face-to-face impressions.
0:39:49 The anecdote to this is to underweight face-to-face impressions and overweight the applicant’s past track record.
0:39:51 And Munger practiced this himself.
0:40:00 While chairing an academic search committee, he convinced members to stop all interviews and simply appoint the person whose achievement record was much better than anyone else’s.
0:40:05 When told he wasn’t giving academic due process, he replied,
0:40:14 I was the one being true to academic values because I was using academic research showing poor predictive value of impressions from face-to-face interviews.
0:40:20 There’s a famous observation from Tolstoy, the worst criminals don’t think of themselves as all that bad.
0:40:29 They come to believe either that they didn’t commit their crimes or considering the pressures of their lives, their behavior is completely understandable and forgivable.
0:40:35 That second one, making excuses for poor performance instead of fixing it, is enormously important.
0:40:41 So many people try to get along by making excuses instead of fixing poor performance.
0:40:44 You need personal and institutional anecdotes.
0:40:49 Munger heard of a teaching method so effective of child remembered it 50 years later.
0:41:01 The child later became the dean of the USC School of Music and related what his father said when he saw his child taking candy from an employer with the excuse that he intended to replace it later.
0:41:09 The father said, son, it would be better for you to simply take all you want and call yourself a thief every time you do it.
0:41:13 Don’t make excuses or rationalize bad behavior.
0:41:17 If you’re going to do it, at least be honest with yourself about what you’re really doing.
0:41:29 The best antidote to excessive self-regard is to force yourself to be more objective when thinking about yourself, your family, and your friends, your property, and the value of your past and future activity.
0:41:34 In the words of Biggie Smalls, never get high on your own supply.
0:41:37 Pattern 13.
0:41:40 Over-optimism tendency.
0:41:46 About three centuries before the burst of Christ, the Greek orator Demasis said it perfectly.
0:41:50 What a man wishes, that also will he believe.
0:41:53 We don’t just deny painful realities.
0:41:56 We’re excessively optimistic, even when things are going well.
0:41:59 Over-optimism is the normal human condition.
0:42:01 The evidence is everywhere.
0:42:04 Look at people buying lottery tickets despite terrible odds.
0:42:06 We see what we want to see.
0:42:09 We believe what we want to believe.
0:42:11 The wish creates the belief.
0:42:14 Munger’s antidote to this is straightforward.
0:42:18 Train yourself to use simple probability math, the kind taught to high schoolers.
0:42:24 The mental rules of thumb that evolution gives us to deal with risk are not adequate, Munger writes.
0:42:31 They resemble the dysfunctional golf grip you would have if you relied on evolution instead of golf lessons.
0:42:34 Force yourself to calculate actual probabilities.
0:42:35 Don’t rely on gut feelings.
0:42:39 And don’t expect wishing something true will make it so.
0:42:40 Do the math.
0:42:42 Pattern 14.
0:42:45 Deprival super reaction tendency.
0:42:51 This is the pain of losing something is much higher than the pleasure of gaining the same thing.
0:42:54 Losing $10 hurts more than gaining $10 feels good.
0:43:02 And if you almost get something you want and it’s jerked away from you at the last moment, you react as if you’ve owned it for years and lost it.
0:43:05 We also vis-frame our problems.
0:43:12 A man with $10 million in his brokerage account will often be extremely irritated by losing $100 from his wallet.
0:43:15 He compares what’s near instead of what matters.
0:43:19 Munger used his family dog to illustrate this point.
0:43:24 The dog was totally friendly and sweet-natured, but there was one way to guarantee getting bitten.
0:43:27 Try to take food away that was already in its mouth.
0:43:29 The dog couldn’t help it.
0:43:34 Nothing could be more stupid than biting your own master, but the dog couldn’t control it.
0:43:36 It was pure instinct.
0:43:47 We react with irrational intensity to even small losses or threatened losses of property, love, friendship, territory, opportunity, status.
0:43:50 Basically anything we value.
0:43:54 Munger once bought a house from neighbors locked in permanent hatred.
0:43:55 The cause?
0:44:03 One neighbor planted a tiny tree that blocked maybe one degree out of 180 of the other neighbor’s harbor view.
0:44:05 One degree.
0:44:07 That’s all it took to create a blood feud.
0:44:11 This gets really dark in labor relations.
0:44:16 Entire companies go to business because competition forces them to either cut labor costs or die.
0:44:22 Workers won’t accept the cuts, even when accepting lower pay would save their jobs.
0:44:25 So the whole company goes under instead.
0:44:29 You’d be better off with lower pay than no job at all.
0:44:33 But deprival super reaction makes that logic invisible.
0:44:36 Gambling exploits this ruthlessly.
0:44:39 Slot machines give you tons of near misses.
0:44:40 Bar, bar, lemon.
0:44:41 You almost won.
0:44:43 You’re so close.
0:44:46 But each near miss triggers deprival super reaction.
0:44:49 Open outcry auctions are designed to trigger this too.
0:44:52 You bid and then someone outbids you.
0:44:53 You almost had it.
0:44:55 Just one more bid.
0:44:57 The cycle keeps going.
0:45:00 Social proof convinces you the last price was reasonable.
0:45:06 And deprival super reaction makes you desperate not to lose what was almost yours.
0:45:09 Warren Buffett’s solution to this was very practical.
0:45:10 Don’t go to auctions.
0:45:12 One antidote.
0:45:12 Learn poker.
0:45:15 Because it teaches you when to fold.
0:45:17 So how do you fight this?
0:45:21 First, catch yourself reacting with irrational intensity to a loss.
0:45:24 Ask, am I overreacting because something’s been taken away?
0:45:26 Not because it actually matters.
0:45:28 Second, know when to fold.
0:45:30 Be willing to cut your losses.
0:45:36 Don’t throw good money after bad just because you can’t admit the initial investment was wrong.
0:45:42 Third, in negotiations, watch for fighting too hard over small things just because they feel like losses.
0:45:45 Frame things as gains instead.
0:45:49 The loss of something will always hurt more than it rationally should.
0:45:51 That’s hardwired into us.
0:45:56 You can’t eliminate that feeling, but you can recognize that it’s happening and adjust your response.
0:46:00 Pattern 15, social proof tendency.
0:46:05 This is probably the easiest to understand because you’ve been doing it your whole life.
0:46:07 Think back to your teen years.
0:46:11 Your mom asks you why you did something stupid and your answer, if you were like me anyway,
0:46:14 is because everybody else was doing it.
0:46:18 Well, it turns out that that instinct doesn’t go away when you become an adult.
0:46:20 It just gets way more expensive.
0:46:26 Psychology professors love this tendency because they can make people do ridiculous things with it.
0:46:30 The classic experiment uses an elevator and some actors.
0:46:35 When a stranger walks in, they encounter people already inside who’ve been told to face the back wall.
0:46:38 Just standing there silently facing the wrong direction.
0:46:40 And what does this stranger do?
0:46:43 Often they turn around and face the back wall too.
0:46:49 Your brain sees everyone doing something and assumes it must be right, even when it makes zero sense.
0:46:53 Social proof triggers most powerfully when you’re puzzled or stressed.
0:46:57 When you’re both at the same time, that’s when you’re most vulnerable.
0:47:04 Sketchy sales organizations know this, so they manipulate you into situations that combine isolation and stress.
0:47:11 The isolation means the only social proof you see is the salesman and maybe a few other buyers.
0:47:15 The stress makes you desperate to resolve the situation by going along.
0:47:19 Cults use exactly the same playbook.
0:47:21 Smart business executives aren’t immune either.
0:47:23 We don’t just copy others.
0:47:25 We copy people we admire.
0:47:27 We want what they want.
0:47:29 It’s not about the thing itself.
0:47:32 It’s about the status it signals to others.
0:47:34 Munger tells a story about oil companies.
0:47:38 Big shot businessmen get into these waves of social proof.
0:47:41 Do you remember some years ago when one oil company bought a fertilizer company?
0:47:45 And every other major oil company practically ran out and bought a fertilizer company.
0:47:49 And there was no more damn reason for all these oil companies to buy fertilizer companies.
0:47:51 But they didn’t know exactly what to do.
0:47:54 And if Exxon was doing it, it was good enough for mobile or vice versa.
0:47:57 And of course, I think they’re all gone now.
0:47:59 It was a total disaster.
0:48:00 Why did they copy each other?
0:48:03 Because deciding how to use your capital is hard.
0:48:07 But if Exxon did it, it must be okay, right?
0:48:09 Here’s the real disturbing part.
0:48:11 It’s not just action that misleads you.
0:48:12 It’s inaction too.
0:48:15 When you’re uncertain and you see other people doing nothing,
0:48:18 your brain interprets this inaction as social proof
0:48:21 that doing nothing is the correct thing to do.
0:48:24 There’s a famous case about Kitty Genovese.
0:48:27 She was attacked and killed while many people watched or heard.
0:48:28 Nobody helped.
0:48:29 Why?
0:48:31 Because they looked around and saw nobody else helping
0:48:35 and assumed that meant helping wasn’t the right thing to do in this circumstance.
0:48:39 Each person’s inaction reinforced everyone else’s inaction.
0:48:42 And someone died because of it.
0:48:44 This is why in emergency training,
0:48:47 you’re taught immediately to point to a specific person and say,
0:48:48 you call 911.
0:48:50 Not someone call 911.
0:48:53 You break the diffusion of responsibility.
0:48:56 A similar thing happens in corporate boardrooms.
0:49:01 Outside directors sit there and let almost everything slide until it becomes a public embarrassment.
0:49:03 They don’t want to speak up.
0:49:03 Why?
0:49:05 Well, Warren Buffett answered this.
0:49:06 He said,
0:49:08 it’s a little bit like belching at the dinner table.
0:49:09 If you do it too often,
0:49:12 you’ll find you’re eating in the kitchen pretty soon.
0:49:14 So train yourself to ask,
0:49:18 is everyone doing this because it’s smart or just because everyone else is doing it?
0:49:19 As Munger said,
0:49:25 learn how to ignore the examples from others when they’re wrong because few skills are more worth having.
0:49:27 Pattern 16.
0:49:29 Contrast misdirection tendency.
0:49:33 This pattern is probably costing you money right now.
0:49:36 Your brain doesn’t measure things in absolute terms.
0:49:37 It measures contrast.
0:49:40 Your eyes don’t see absolute brightness.
0:49:42 They see the difference between light and dark.
0:49:43 As your perception goes,
0:49:46 so goes everything else about how you think.
0:49:47 Here’s how this plays out.
0:49:49 You’re buying a $50,000 car,
0:49:51 which is the average price these days.
0:49:55 The salesman offers you a leather dashboard upgrade for $1,000.
0:49:57 In isolation,
0:50:00 you’d never pay $1,000 for the leather dashboard,
0:50:02 but compared to $50,000,
0:50:03 it feels like nothing.
0:50:05 So you say yes.
0:50:07 Your inner monologue says something like,
0:50:10 what’s an extra $1,000 when you’re already spending $50,000?
0:50:13 Car salesmen, of course, know this.
0:50:18 That’s why they save all the expensive add-ons for after you’ve committed to the big purchase.
0:50:21 when your brain measures everything against that huge number.
0:50:24 And this gets more serious with life decisions.
0:50:27 A woman with terrible parents meets a man who’s just okay.
0:50:28 He’s not great.
0:50:29 He’s not terrible.
0:50:30 He’s just okay.
0:50:32 But compared to her awful parents,
0:50:34 he seems amazing.
0:50:35 So she marries him.
0:50:38 Or a guy gets divorced from a difficult spouse.
0:50:40 Spouse number two is also problematic,
0:50:42 but compared to spouse number one,
0:50:43 they seem great.
0:50:46 They’re not judging on absolute merits.
0:50:48 They’re judging based on relative contrast.
0:50:52 And that’s how people end up in suboptimal situations.
0:50:56 This tendency gets really dangerous when changes happen slowly,
0:50:57 one tiny step at a time.
0:51:01 Each step seems fine because the contrast is small,
0:51:03 but you’re walking towards disaster.
0:51:08 Your brain can’t see it because it’s focused on tiny differences between steps,
0:51:12 not the huge difference between where you started and where you’ll end up.
0:51:14 You’ve heard of the boiling frog,
0:51:19 a frog that you put into slowly heating water doesn’t jump out because the temperature change
0:51:19 is gradual.
0:51:22 Meanwhile, if you put the frog into the boiling water,
0:51:23 it will jump out.
0:51:28 Now, I think this is just a story and no frogs were harmed in the making of this podcast,
0:51:30 but I think the example rings true.
0:51:33 Businesses die exactly the same way.
0:51:39 Slow deterioration that nobody notices because each day is only slightly worse than the day before.
0:51:43 Ben Franklin, who said a small leak will sink a great ship.
0:51:47 So how do you protect yourself, force yourself to judge things on absolute merit,
0:51:50 not in contrast to what came before?
0:51:53 When you see an original price crossed out to show a sale price,
0:51:55 recognize what’s happening.
0:51:57 The contrast is manufactured to trick you.
0:52:01 In modern life, the shortcut causes systematic errors constantly.
0:52:05 Pattern 17, stress influence tendency.
0:52:09 Stress changes how you think in ways that can be dangerous.
0:52:12 Light stress helps performance.
0:52:15 That nervous energy before an exam can sharpen your focus.
0:52:19 But heavy stress, that’s where things get weird and dangerous.
0:52:24 Most people think about stress causing depression and acute stress depression is real.
0:52:27 It creates extreme pessimism and crushing fatigue.
0:52:30 But there’s something even more disturbing.
0:52:33 Most people know Pavlov for his salivating dogs.
0:52:38 He trained them to drool when he rang a bell by repeatedly giving them food when he rang it.
0:52:40 Basic conditioning made him famous.
0:52:47 But his last work done in his 70s and 80s was far more disturbing and almost nobody knows about it.
0:52:49 Stress-induced mental changes.
0:52:53 Here my favorite example is the great Pavlov.
0:52:57 He had all these dogs in cages, which had all been conditioned into changed behaviors.
0:53:02 And the great Leningrad flood came and it just went right up and the dog’s in a cage.
0:53:06 And the dog had as much stress as you can imagine a dog ever having.
0:53:09 And the water receded in time to save some of the dogs.
0:53:14 And Pavlov noted that they had a total reversal of their conditioned personality.
0:53:18 This sent Pavlov into what Munger called a near frenzy of curiosity.
0:53:24 So Pavlov spent the rest of his life deliberately giving dogs nervous breakdowns through stress,
0:53:27 then trying to reverse them, keeping very careful records.
0:53:28 He discovered four things.
0:53:33 One, he could predict which dogs would break down easily and which would be harder to break.
0:53:39 Two, the dogs that were hardest to break were also the hardest to fix afterward.
0:53:43 Three, any dog could be broken with enough stress.
0:53:45 There were no exceptions.
0:53:50 Four, he couldn’t reverse the breakdown except by applying more stress.
0:53:56 Munger found this research while trying to understand how cults turn normal people into brainwashed zombies.
0:54:00 When parents want to deprogram their kids captured by cults,
0:54:04 should they be allowed to use stress to undo stress-based programming?
0:54:05 It’s an interesting question.
0:54:07 And here’s why it matters.
0:54:12 First, extreme stress can completely flip your cognitive patterns and loyalties.
0:54:15 People under maximal stress don’t just think worse.
0:54:18 They can end up thinking the complete opposite of what they believed before.
0:54:21 Second, manipulators know this.
0:54:27 Cults, abusive relationships, and certain sales operations use isolation plus stress deliberately.
0:54:28 It breaks people down.
0:54:34 Third, if you’re dealing with someone under serious stress, recognize their judgment is compromised.
0:54:37 Wait to make big decisions together.
0:54:40 Don’t trust major commitments made under extreme pressure.
0:54:45 And finally, if you’re under heavy stress, defer important decisions if you can.
0:54:48 Your brain literally isn’t working normally.
0:54:53 The 18th pattern is availability misweighting tendency.
0:54:54 Your brain is lazy.
0:54:58 It works with what’s available rather than what’s actually important.
0:55:01 There’s an old song Munger reference that captures this perfectly.
0:55:05 When I’m not near the girl I love, I love the girl I’m near.
0:55:08 That’s your brain unavailability bias.
0:55:14 It overweighs whatever is easy to remember or easy to visualize and underweighs everything else.
0:55:17 The anecdote here is simple but not easy.
0:55:22 An idea or fact is not worth more merely because it’s easily available to you.
0:55:27 The 19th pattern is use it or lose it tendency.
0:55:32 If you’ve ever tried to speak a language you learned in high school, you know exactly what this is.
0:55:33 Munger tells a personal story.
0:55:36 He was a whiz at calculus until about age 20.
0:55:37 Then he stopped using it.
0:55:41 This skill vanished, completely obliterated by non-use.
0:55:43 Look at how pilots train.
0:55:48 They use flight simulators to practice emergency procedures they’ll probably never use.
0:55:49 Why?
0:55:53 Because if they wait until the actual emergency to practice, it’s too late.
0:55:57 This skill has to be there, ready, and constantly maintained.
0:56:00 The great pianist Paderewski had a saying.
0:56:05 If he failed to practice for a single day, he could notice his performance getting worse.
0:56:08 After a week without practice, the audience could notice too.
0:56:14 One of the greatest pianists in history, and if his skills degrade that fast, what about yours?
0:56:16 Here’s the good news.
0:56:22 If you actually master a skill, if you push it to real fluency instead of just cramming to pass a test, two things happen.
0:56:25 One, it degrades more slowly.
0:56:28 And when you do need to refresh it, it comes back much faster.
0:56:32 So, the lesson isn’t just practice.
0:56:34 It’s practice until you really know it.
0:56:37 Think about the skills that matter most to your career or life.
0:56:40 Are you practicing them regularly, or are they slowly fading away?
0:56:43 Well, you assume they’ll be there when you need them.
0:56:49 Munger says a wise man practices his useful, rarely used skills as a sort of duty to his better self.
0:56:55 Not just the skills you use every day, but the ones you might need for the next year or five years from now.
0:57:00 The 20th pattern is drug mis-influence tendency.
0:57:01 This one is pretty straightforward.
0:57:05 Drug addiction is one of the worst things that can happen to a human mind.
0:57:08 Remember denial from earlier.
0:57:11 Drug addiction combines that same denial with chemical dependency.
0:57:13 It’s a vicious combination.
0:57:16 Alcoholics Anonymous has a 50% cure rate.
0:57:19 Munger’s conclusion was simple and absolute.
0:57:24 One should stay far away from any conduct at all likely to drift into chemical dependency.
0:57:29 Even a small chance of suffering so great a damage should be avoided.
0:57:31 He doesn’t say use moderation.
0:57:35 He says stay far away from anything that might drift into chemical dependency, period.
0:57:38 Don’t rely on your ability to handle it.
0:57:40 And don’t assume that you’ll be different.
0:57:46 By the time chemical dependency activates, along with your denial mechanisms, you’ve already
0:57:48 lost the ability to see your situation clearly.
0:57:52 The only winning move is not playing at all.
0:57:57 The 21st pattern is senescence mis-influence tendency.
0:57:58 Senescence means aging.
0:58:01 And with advanced age comes natural cognitive decay.
0:58:06 This happens differently for different people, but it happens to everyone eventually.
0:58:09 Learning complex new skills when you’re very old is challenging.
0:58:12 That ability gets harder and harder.
0:58:17 But some people remain sharp at maintaining intensely practiced skills until late in life.
0:58:21 Skills you’ve drilled into yourself over years can stick around.
0:58:23 New complex skills?
0:58:24 That’s much harder to pick up.
0:58:26 Munger made an interesting observation.
0:58:30 He said old people like me get pretty skilled without working at it.
0:58:36 At disguising age-related deterioration because social convention like clothing hides much decline.
0:58:39 Society gives older people cover for declining abilities.
0:58:49 And older people get good at working around their limitations in ways that aren’t always obvious, which means the decline is often worse than it appears.
0:58:57 Munger’s prescription here is continuous thinking and learning done with joy can somewhat help delay what is inevitable.
0:58:59 Notice the honesty.
0:59:02 It can somewhat help delay what is inevitable.
0:59:04 Not prevent, delay.
0:59:06 Keep learning, keep thinking, do it with joy.
0:59:10 That’s your best shot at keeping your mind sharp as long as possible.
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1:00:08 The 22nd pattern is authority misinfluence tendency.
1:00:13 Smart people do incredibly stupid things just because someone in charge told them to.
1:00:16 Humans evolved living in dominance hierarchies.
1:00:18 We’re born mostly to follow leaders.
1:00:24 This is literally baked into our DNA and society reinforces it everywhere.
1:00:27 Companies, governments, militaries, even schools.
1:00:33 But when the leader is wrong or when the leader’s ideas get misunderstood, people suffer, often catastrophically.
1:00:36 Some examples are darkly funny.
1:00:40 A physician left a written order for a nurse treating an earache.
1:00:42 Two drops twice a day, R dot ear.
1:00:44 The R dot ear meant right ear.
1:00:50 But the nurse read it as instructions and administered the eardrops into the patient’s anus.
1:00:52 Other examples are tragic.
1:00:54 Here’s where it gets disturbing.
1:01:00 Co-pilots get simulator training specifically teaching them to ignore foolish orders from boss pilots.
1:01:01 From the captain.
1:01:10 But even after this training, co-pilots in simulators will still allow the plane to crash because of some obvious error created by the chief pilot.
1:01:12 They’ve been trained for thousands of hours.
1:01:16 They know the pilot is making an obvious mistake that will kill everyone.
1:01:21 And yet they still can’t override the authority figure, even in simulations.
1:01:25 Munger tells one more story about how absurd this gets.
1:01:30 An angler went tarpon fishing in Costa Rica with a guide who spoke limited English.
1:01:33 The angler got a big fish on the line and the guide kept giving him directions.
1:01:35 Tip up, tip down, reel in.
1:01:41 Finally, when the guide wanted the angler to apply more pressure by bending the rod, he said in English,
1:01:42 Give him the rod.
1:01:43 Give him the rod.
1:01:47 The angler threw his expensive rod at the fish.
1:01:50 Last seen, it was going down the river toward the ocean.
1:01:54 That’s how powerful the tendency to follow authority figures is.
1:01:56 It can turn your brain into mush.
1:01:58 Here’s Munger’s final example.
1:02:02 A psychology PhD becomes a CEO of a major company.
1:02:08 He creates an expensive new headquarters with a great wine cellar at an isolated site.
1:02:09 Money starts running short.
1:02:12 His underlings tell him they’re running out of cash.
1:02:16 His response, take the money out of the depreciated reserves.
1:02:20 Now, a depreciation reserve is a liability account.
1:02:21 You can’t take money out of it.
1:02:23 That’s not how accounting works.
1:02:24 But he’s the CEO.
1:02:29 So his employees tried to figure out how to do what he said, even though what he said was impossible.
1:02:40 Munger’s observation is that undue respect for authority is so strong that terrible CEOs remain in control of important institutions long after it’s obvious they should be removed.
1:02:43 Authority misinfluence tendency protects them.
1:02:45 So how do you counter this?
1:02:48 First, be very careful who gets appointed to power.
1:02:52 Once someone’s in an authority position, they’ll be hard to remove.
1:02:59 Second, if an authority figure tells you to do something obviously wrong, recognize what’s happening.
1:03:04 Your brain is being turned into mush by their position, not by the logic of their argument.
1:03:08 Third, create systems that allow challenges to authority.
1:03:11 Red teams, devil’s advocates, anonymous feedback.
1:03:15 Make it safe for people to question you because you’re going to make mistakes.
1:03:19 And if people can’t tell you, those mistakes might kill the organization.
1:03:22 Pattern 23.
1:03:23 Twaddle tenancy.
1:03:26 Twaddle means meaningless chatter.
1:03:27 Munger’s point is simple.
1:03:35 Humans are born to twaddle and pour out nonsense that does serious damage when real work needs to get done.
1:03:38 Some people produce copious amounts of twaddle.
1:03:41 Others have very little, but everyone does it to some degree.
1:03:45 Munger tells a great story about a honeybee experiment.
1:03:47 A honeybee goes out and finds the nectar, and he comes back.
1:03:52 He does a dance that communicates to the other bees where the nectar is, and they go out and get it.
1:03:56 Well, some scientist who was clever, like B.F. Skinner, decided to do an experiment.
1:04:00 He put the nectar straight up, way up.
1:04:05 Well, in a natural setting, there is no nectar way the hell straight up.
1:04:11 And the poor honeybee doesn’t have a genetic program that is adequate to handle what he now has to communicate.
1:04:15 And you’d think the honeybee would come back to the hive and slink into a corner.
1:04:16 But he doesn’t.
1:04:19 He comes into the hive and does this incoherent dance.
1:04:23 And all my life, I’ve been dealing with the human equivalent of that honeybee.
1:04:33 And it’s a very important part of human organization to set things up so the noise and the reciprocation and so forth,
1:04:38 of all these people who have what I call say-something syndrome, don’t really affect the decisions.
1:04:43 Munger’s observation, all my life, I’ve been dealing with the human equivalent of that honeybee.
1:04:44 Here’s his prescription.
1:04:53 It’s a very important part of wise administration to keep prattling people, pouring out twaddle, far away from the serious work.
1:04:56 He quotes a famous Caltech engineering professor who said,
1:05:03 the principal job of an academic administration is to keep the people who don’t matter from interfering with the work of the people that do.
1:05:07 Harsh, yes, but often true.
1:05:10 So how do you protect yourself from twaddle?
1:05:12 First, recognize it in yourself.
1:05:15 When you don’t actually know something but feel compelled to talk anyway,
1:05:19 you’re the confused honeybee doing an incoherent dance.
1:05:21 Just stop.
1:05:23 Second, protect your best people.
1:05:28 people from the constant meetings and status updates that don’t move real work forward.
1:05:31 That’s often just twaddle disguised as process.
1:05:39 Third, learn to identify who’s contributing substance versus who’s filling the air with noise and then structure your time accordingly.
1:05:47 The 24th pattern is reason-respecting tendency, and it’s one of the more positive ones.
1:05:52 Humans have a natural love of accurate thinking and a joy in exercising their minds.
1:05:56 That’s why crossword puzzles, Sudoku bridge, and chess are popular.
1:05:58 We enjoy using our brains.
1:06:00 And this has powerful implications.
1:06:04 People learn much better when a teacher gives correct reasons for what’s being taught,
1:06:07 instead of just saying this is how it is.
1:06:15 Few practices are wiser than thinking through reasons before giving orders and then communicating those reasons to the person receiving the order.
1:06:21 Nobody understood this better than Karl Braun, who designed oil refineries with spectacular skill.
1:06:24 He had a simple rule in his company.
1:06:29 You had to tell who was to do what, where, when, and why.
1:06:34 If you wrote a memo or gave an order and left out the why, Braun was likely to fire you.
1:06:39 He knew that ideas get through best when the reasons are meticulously laid out.
1:06:46 The question why is what Munger calls a sort of Rosetta Stone opening up the major potentiality of mental life.
1:06:49 Here’s where it gets interesting and a bit disturbing.
1:06:57 Reason respecting tendency is so strong that even meaningless or incoherent reasons will also increase compliance.
1:07:00 Psychology experiments demonstrated this.
1:07:04 People successfully jumped to the head of lines at copying machines simply by explaining,
1:07:05 I have to make some copies.
1:07:08 But that’s not actually a reason.
1:07:10 Everyone in line has to make copies.
1:07:11 That’s why they’re in line.
1:07:17 But just providing any reason at all, even a meaningless one, increased compliance.
1:07:23 Our brains hear the structure of reason giving and respond positively, even when the content is nonsense.
1:07:28 Naturally, salespeople and cult practitioners use this.
1:07:32 They lay out various claptrap reasons to get what they don’t deserve.
1:07:33 So what should you do?
1:07:37 First, when you’re leading, teaching, or managing, always explain why.
1:07:39 Not just what to do, but why it matters.
1:07:44 Your instructions will be followed better, understood better, and remembered better.
1:07:47 Second, implement Karl Braun’s rule.
1:07:50 Who, what, where, when, and why.
1:07:51 Make the why explicit.
1:07:56 Third, when someone’s giving you reasons, evaluate whether those reasons are real,
1:08:00 or just have the structure of reason giving with no substance.
1:08:03 Because I need to make copies sounds like a reason, but it isn’t.
1:08:07 Number 25, Lollapalooza tendency.
1:08:10 We’ve covered 24 psychological tendencies.
1:08:13 Each one is powerful individually.
1:08:16 Each one is capable of causing serious errors in judgment.
1:08:20 But here’s what Munger realized that academic psychology had missed.
1:08:25 The real danger comes when multiple tendencies combine and reinforce each other.
1:08:28 That’s the 25th and final pattern.
1:08:29 Lollapalooza tendency.
1:08:34 Munger says bluntly, this tendency was not in any of the psychology texts I once examined,
1:08:39 at least in any coherent fashion, and yet it dominates life.
1:08:43 The most important pattern was completely absent from academic psychology.
1:08:49 Remember the Milgram experiment, where they had people give electric shocks to other people?
1:08:54 The academic psychology spent over a thousand papers trying to understand
1:08:57 why ordinary people gave what they thought were massive electric shocks,
1:08:59 just because an authority figure told them to.
1:09:02 And Munger saw it immediately.
1:09:05 It was about six powerful tendencies acting together.
1:09:11 There’s the authority from the professor, the social proof from inactive bystanders.
1:09:13 Commitment from having started small.
1:09:16 Doubt avoidance reducing their ability to think clearly.
1:09:20 Each tendency alone might have been resistible, but all six acting together,
1:09:23 they created a Lollapalooza effect.
1:09:27 The extreme success of cults comes from this as well.
1:09:31 They bring pressure from many psychological tendencies to bear simultaneously.
1:09:34 Isolation removes competing influences.
1:09:36 Stress breaks down patterns.
1:09:38 Social proof from others converts.
1:09:41 Reciprocation from love bombing.
1:09:43 Commitment through small steps.
1:09:45 Authority from charismatic leaders.
1:09:49 Doubt avoidance from providing quick answers.
1:09:53 Enough combined pressure and mind snap into a new configuration.
1:09:55 Remember New Coke?
1:09:56 That was a Lollapalooza.
1:09:58 In the opposite direction.
1:10:03 Deprival super reaction from taking away something consumers felt like they owned.
1:10:05 Liking loving for the brand being violated.
1:10:08 Social proof as outrage spread.
1:10:11 Commitment from decades of loyalty gone.
1:10:12 All working together.
1:10:16 The result nearly destroying one of the world’s most valuable brands.
1:10:18 Here’s another example.
1:10:21 McDonnell Douglas needed to do evacuation tests for plane certification.
1:10:24 They simulated emergency evacuation.
1:10:25 Dark hangar.
1:10:27 25 foot drop to concrete.
1:10:27 Rubber chutes.
1:10:29 The first test went terrible.
1:10:31 There were 20 injuries.
1:10:32 People going to hospitals.
1:10:34 They missed the time requirement to evacuate.
1:10:36 So what did they do?
1:10:38 They did it again the same afternoon.
1:10:39 The second test.
1:10:40 20 more injuries.
1:10:44 And one person with permanent paralysis from a severed spinal column.
1:10:46 As Munger puts it.
1:10:48 Three, four, five of these things work together.
1:10:50 And it turns human brains into mush.
1:10:51 In real life.
1:10:54 Psychological tendencies rarely operate alone.
1:10:56 They consistently combine and reinforce one another.
1:11:01 Creating effects larger and more unpredictable than the sum of the parts.
1:11:02 That’s what changes history.
1:11:04 That’s what builds and destroys companies.
1:11:08 And that’s what turns normal people into fanatics or geniuses.
1:11:11 When you’re analyzing any important situation.
1:11:14 Don’t just look for one psychological tendency.
1:11:17 Look for multiple tendencies working together.
1:11:20 That’s where the real power and danger lies.
1:11:22 When you see extreme outcomes.
1:11:23 Berkshire Hathaway’s success.
1:11:25 Or New Coke disasters.
1:11:26 Cult conversions.
1:11:27 Corporate catastrophes.
1:11:31 Ask what combination of tendencies created this?
1:11:35 Be alert when multiple tendencies are being used to manipulate you.
1:11:36 Cults have figured this out.
1:11:38 Sales organizations have figured it out too.
1:11:41 And political movements have also figured it out.
1:11:44 When you feel overwhelming pressure to do something.
1:11:47 Check whether multiple tendencies are being triggered simultaneously.
1:11:50 It’s the pattern that dominates life.
1:11:54 Charlie Munger died on November 28, 2023.
1:11:56 One month before his 100th birthday.
1:12:00 He spent his final years doing exactly what he’d always done.
1:12:01 Reading, reading, thinking.
1:12:06 And telling anyone who would listen about the systematic errors lurking in the human mind.
1:12:08 He never stopped admitting his mistakes.
1:12:10 Here’s what matters.
1:12:14 Munger’s psychology of human misjudgment isn’t about being smarter than everyone else.
1:12:16 It’s about being honest with yourself.
1:12:19 These tendencies are operating in your brain right now.
1:12:20 Always.
1:12:22 You’re not going to eliminate them.
1:12:25 But what you can do is see them clearly and build defenses against them.
1:12:28 Munger often quoted Richard Feynman.
1:12:31 The first principle is that you must not fool yourself.
1:12:34 And you are the easiest person to fool.
1:12:37 That’s the entire framework in one sentence.
1:12:42 Munger spent 99 years building the checklist, making the mistakes, and sharing the lessons.
1:12:46 And he left us a user’s manual for the human mind.
1:12:47 The framework is yours.
1:12:50 The question is whether you’ll use it.
1:12:53 Thank you for listening and learning with me.
1:12:54 I will see you next week.