Charlie Munger and The Psychology of Human Misjudgment- patterns of irrationality

by | August 29, 2018 | 0 comments

It is important to know these psychological patterns of irrationality, no only for personal protection, but also to for business purposes.

In 1995 Charlie Munger gave a speech at Harvard University about irrational patterns of human psychology. I find these distinctions valuable, not only for use/protection in my personal life, but also in business.
I will summarize some of them here for you. Some I will get into in depth than others.

Psychological Denial
The the reality is too painful to bear, so you distort reality to make it more bearable. In the end, reality usually wins out with more disastrous consequences than if it were to be accepted to begin with,

Consistency +Commitment Tendency

The human mind is much like a human egg, once an idea/sperm penetrates, we shut down the possible entry of all else. This doesn’t only apply to religion and morals, but also to things as esoteric as physics. According to the famous physicist Max Plank, much of the old guard in his field failed to accept the newest theories in physics despite strong evidence in favor of them, and it took time, until a new guard took over, before the theories gained broad acceptance through the community.

If physicists can fall victim, who are supposed to hold scientific evidence as the highest standard, what must it be like amongst our peers?
Further, when we publicly promulgate our ideas, whether that be in a paper against a theory, or yelling them at others (hello SJW’s/white nationalists) we embed the ideas even more forcefully into our psyche, making them harder to change.

Pavlovian Association
Misconstruing past correlation as a reliable basis for decision making.
3/4 of advertising is Pavlovian association. Coca-Cola wants to be associated with every positive image or event. They do not want to advertise at President’s funerals or national disasters, no matter how many eyeballs might be on their product.

Reciprocation Tendency
A researcher asked various people on college campuses whether they would be willing to take delinquent juveniles to the zoo once a week. Once establishing that 1/6 agreed, he then conducted a new experiment asking new people whether they would agree to take them twice a week. 100% of people said, “No.” Backing off a little, he asked whether people would be willing to take them once a week. 50% of people agreed. He got three times the compliance rate by asking for a lot and backing off.

There is actually a very good example of social reciprocity in action in the following column. 

Social Proof
Being overly convinced by the conclusions of others, especially under high stress conditions. We all look to others for guidance, whether it be all your friends getting wealthy from real estate, and thus you think you should too, to the following example of  big-shot businessmen getting deluged in social proof- Exxon Mobil buys a fertilizer company, the other oil CEO’s followed suit and went out and purchased fertilizer companies for fear of missing out/ it must be the right thing to do if Exxon does so, with terrible results.

Experimenters will have a woman cry for help from the bushes. A subject walking alone is statistically more likely to help than when he has plants walking beside him who are instructed to keep walking. Why? He looks to them for guidance and follows action.
It’s what leads to bubbles. “Everyone else can’t be wrong,” type syndrome.

Contrast-Caused Distortion
Take three glasses of water, one hot in temperature, one cold, and one room temperature. Put your right hand in the hot, left in the cold, remove them and place them into the room temperature water, in the same bucket of water, one hand will feel hot, the other cold.
The cognition apparatus of man is influenced to a great degree by contrast.
Cognition mimics sensation.
A disreputable real estate broker, in hopes of a quick sale might employ the strategy by first taking a client out to two of the most mediocre, over priced houses available. You then take him to a third which is only moderately overpriced and they’ll be much more likely to buy.
It’s the same as throwing a frog in hot water, he will immediately jump out. Now if you put him into room temperature water and slowly turn up the heat, the frog will allow himself to be cooked to death.
(Editor’s note:) This is why, in my political opinion, we must resist giving up virtually any small part of our individual liberties, or the slow advance of Islamists trying to make it taboo to criticize in any way a religion. Before we know it, we’ll be cooked.

Bias by Over Influence by Authority
The Milgram Experiment- subjects gave heavy electrical shocks to strangers on the other side of a wall repeatedly, because the experimenter justified it in the name of science.
In simulators, you have a pecking order between a pilot and a (subservient) co-pilot. They had the pilot take an action that any decent co-pilot would know would crash the plane, but because the pilot is the authority figure, the plane would crash 25% of the time, despite the fact that a simple correction by the co-pilot would have avoided it.

Envy Jealousy
Warren Buffett says it isn’t greed that drives the world but envy. Many measure our success by looking at the Kardashians and complaining about what we don’t have rather than the fact that almost all Americans have living standards which top 90% of the world population.

Misgambling Compulsion
If you have a lottery where people use a computer to generate their numbers, the lottery doesn’t have a lot of players. But if you allow people to pick their own numbers, you get far more play.
It’s why the rare times I gamble, I choose craps (a dice game). I believe I have “control” over my destiny because I am the one throwing the dice, despite the fact that there is no truth to it.
Making people believe they have some control over events which in reality they have none, will induce more participation.

So, there are some blindspots we have as humans in terms of patterns of irrationality. To employ them, can I ask you to send out this URL to everyone you know and all over your social media accounts?
Okay, how about sending the URL to 5 people you think might benefit from it.


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