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We saw the first 10 of the 24 Cognitive Biases from Charlie Munger’s 1995 speech – Human Misjudgement. In this post, we will go through the rest.

11. Bias from deprival super-reaction syndrome: This is akin to the loss aversion bias, illustrating how we react when possessions, even trivial ones, are taken away. Consider, for instance, the intensity of employee-management negotiations where every inch is fiercely contested.

12. Bias from envy/jealousy:

13. Bias from chemical dependency, 14. Bias from gambling dependency: These biases don’t need a lot of explanation. They trigger attentional bias, leading individuals to allocate disproportionally more attention to addiction-relevant cues than to neutral stimuli. Businesses, whether pubs or casinos, are well-versed in exploiting these vulnerabilities. Being aware of these tactics can help you navigate such situations more effectively.

15. Bias from liking distortion: It’s about liking oneself, one’s ideas, and community. And making stupid ideas only because they came from someone you liked.

16. Bias from disliking distortion: Opposite of liking distortion. In this case, you dismiss ideas from people who you don’t like.

17. Bias from the non-mathematical nature of the human brain: Human brains in their natural state (i.e., untrained state) are notoriously inefficient when dealing with probabilities. Within this entity, Munger conveniently folds various fallacies of the human mind – crude heuristics, availability, base-rate neglect, hindsight – into one.

18. Bias from fear of scarcity: The fear of scarcity can bring out pure dumbness in otherwise perfectly normal people. A familiar example is the toilet paper rush during the early days of the Covid pandemic.

19. Bias from sympathy: It’s about leaders keeping employees with dubious personal qualities. Often, this happens out of pity for the person or her family. Munger says that while paying them the proper severance is essential, keeping such people in jobs can make the whole organisation poor.

20. Bias from over-influence and extra evidence:

21. Bias caused by confusion due to information not being properly processed by the mind: Munger stresses the need to understand the reasons (answer to the question – why?) for the information to be properly registered in the brain. Like for individuals themselves, it is also important for people to explain the reasoning clearly while communicating the key decisions and proposals to their stakeholders.

22. Stress-induced mental changes: What later happened to the Pavlovian dogs (conditioned for certain behaviours) after their cages were flooded was a good example of what stress can do. The canines forgot all the training and responses that they had acquired.

23. Common mental declines:

24. Say-something syndrome: It’s a habit of many individuals to do the talk irrespective of their expertise and capacities to impact the decision-making process. They remain just soundbites, and Munger cautions to watch out for those quiet selves that eventually add quality.

One of the greatest investors in history, Charles Munger, passed away on the 28th of November 2023, 33 days short of his 100th birthday. His celebrated talk at Harvard University in 1995 on the subject of ‘Human Misjudgment’ is undoubtedly a masterclass about the patterns of human irrationality. This and the next posts are about those 24 tendencies of the human brain that Mr Munger has immortalised in his celebrated lecture.

1. Underrecognition of the power of incentives: Munger illustrates his point using the cases of FedEx and Xerox, demonstrating that it was not logic but incentives that drove their employees. The incentives were intended to speed up work and improve sales. However, the workers maximised the commissions and overtime by selling inferior products and working longer.

2. Psychological denial: It is a type of mechanism by the brain to avoid reality, as it can cause deep pain and anxiety. Examples are parents refusing to believe the loss of their children or youths getting into crimes.

3. Incentive-caused bias: It’s also known as the Principal-Agent problem in companies. The people entrusted to lead companies (on behalf of the owners/shareholders) erode the long-term value of companies (principals’ interest) by going after short-term fixes or management’s vested interests (agent’s gain).

4. Self-confirmation bias: People tend to persist on already-made conclusions even when (newly) available evidence disproves them.

5. Bias from cognitive dissonance: It is similar to the earlier one. Cognitive dissonance bias is the mental discomfort that a person goes through if they have to hold two conflicting views about something. Most often, the receiver of the new information revolts with it, leading to selective perception and decision-making.

6. Bias from Pavlovian association: This refers to the famous experiments on dogs carried out by Pavlov. The experiments prove a great deal about the mental shortcuts of humans in making decisions. In other words, people choose a ‘go’ for an incentive stimulus, whereas they select a ‘no go’ on punishment stimuli. A wonderful example is how advertisements work in our minds.

7. Bias from reciprocation tendency: Humans return favour when they receive something from others. While this may seem a virtue, the behaviour can be manipulated, compelling individuals to substantially lower the cost of services.

8. Bias from over-influence of social proof: This is the absolute compliance to the ‘wisdom of the crowd’ or inability to act against social norms. Social proof works in unclear social situations where people follow what the surrounding people do. Munger gives an example of how all major oil companies started buying fertiliser companies when one of them initiated the trend. Another term closely related to this topic is the ‘power of reinforcement‘. Typical causes of bull or bear runs of stock markets.

9. Bias from distortions caused by distortion, sensation, and perceptions: In Cialdini’s famous experiment, students who first dipped their hands in hot water felt cold and cold water felt hot on a subsequent dip in the water at room temperature. He cites the familiar trick of a real estate broker who manages to sell her client a moderately over-priced house by first showing an outrageously overpriced house.

10. Bias from over-influence by authority: It is a tendency of the brain to be influenced by the opinion of an authority figure, even when the content is inaccurate. Like all cognitive biases, the authority bias is a shortcut our brains use to save energy in decision-making.

Reference

The Psychology of Human Misjudgement – Charlie Munger Full Speech: Warren Buffett