Via Farnum Street:
The Psychology of Human Misjudgment is considered the magnum opus on why we behave the way we do.
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In the run-up to publishing Poor Charlies Almanack, Charlie Munger remarked that “The Psychology of Human Misjudgment” could use “a little revising” to bring it in line with his most current views on the subject.
Charlie’s “little” revision would amount to a full-scale rewrite, with loads of new material, and a “stop-the-press” completion schedule. The talk features Charlie’s original concept of “behavioral finance,” which has now burgeoned into its own academic field of study.
Charlie also addresses the importance of recognizing patterns to determine how humans behave, both rationally and irrationally. He shares with us his checklist of twenty-five standard causes of human misjudgment, which contains observations that are ingenious, counterintuitive, and important—values Charlie treasures in the work of other great thinkers throughout history. He also emphasizes the “lollapalooza” power of psychological misjudgments in combination.
This talk was written exclusively for Poor Charlie’s Almanack and is published on fs.blog with the written permission of both Peter Kaufman and Charlie Munger. A printable PDF is made available here.
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The Psychology of Human Misjudgment
The extensive revision by Charlie in 2005, made from memory unassisted by any research, occurred because Charlie thought he could do better at age eighty-one than he did more than ten years earlier when he (1) knew less and was more harried by a crowded life and (2) was speaking from rough notes instead of revising transcripts.
Preface
When I read transcripts of my psychology talks given about fifteen years ago, I realized that I could now create a more logical but much longer “talk,” including most of what I had earlier said.
But I immediately saw four big disadvantages.
First, the longer “talk,” because it was written out with more logical completeness, would be more boring and confusing to many people than any earlier talk. This would happen because I would use idiosyncratic definitions of psychological tendencies in a manner reminiscent of both psychology textbooks and Euclid. And who reads textbooks for fun or revisits Euclid?
Second, because my formal psychological knowledge came only from skimming three psychology textbooks about fifteen years ago, I know virtually nothing about any academic psychology later developed. Yet, in a longer talk containing guesses, I would be criticizing much academic psychology. This sort of intrusion into a professional territory by an amateur would be sure to be resented by professors who would rejoice in finding my errors and might be prompted to respond to my published criticism by providing theirs. Why should I care about new criticism? Well, who likes new hostility from articulate critics with an information advantage?
Third, a longer version of my ideas would surely draw some disapproval from people formerly disposed to like me. Not only would there be stylistic and substantive objections, but also there would be perceptions of arrogance in an old man who displayed much disregard for conventional wisdom while “popping-off” on a subject in which he had never taken a course. My old Harvard Law classmate, Ed Rothschild, always called such a popping-off “the shoe button complex,” named for the condition of a family friend who spoke in oracular style on all subjects after becoming dominant in the shoe button business.
Fourth, I might make a fool of myself.
Despite these four very considerable objections, I decided to publish the much-expanded version. Thus, after many decades in which I have succeeded mostly by restricting action to jobs and methods in which I was unlikely to fail, I have now chosen a course of action in which (1) I have no significant personal benefit to gain, (2) I will surely give some pain to family members and friends, and (3) I may make myself ridiculous. Why am I doing this?
One reason may be that my nature makes me incline toward diagnosing and talking about errors in conventional wisdom. And despite years of being smoothed out by the hard knocks that were inevitable for one with my attitude, I don’t believe life ever knocked all the boy’s brashness out of the man.
A second reason for my decision is my approval of the attitude of Diogenes when he asked: “Of what use is a philosopher who never offends anybody?”
My third and final reason is the strongest. I have fallen in love with my way of laying out psychology because it has been so useful for me. And so, before I die, I want to imitate to some extent the bequest practices of three characters: the protagonist in John Bunyan’s Pilgrim’s Progress, Benjamin Franklin, and my first employer, Ernest Buffett. Bunyan’s character, the knight wonderfully named “Old Valiant for Truth,” makes the only practical bequest available to him when he says at the end of his life: “My sword I leave to him who can wear it.” And like this man, I don’t mind if I have misappraised my sword, provided I have tried to see it correctly, or that many will not wish to try it, or that some who try to wield it may find it serves them not. Ben Franklin, to my great benefit, left behind his autobiography, his Almanacks, and much else. And Ernest Buffett did the best he could in the same mode when he left behind “How to Run a Grocery Store and a Few Things I Have Learned about Fishing.” Whether or not this last contribution to the genre was the best, I will not say. But I will report that I have now known four generations of Ernest Buffett’s descendants and that the results have encouraged my imitation of the founder.
The Psychology of Human MisjudgmentI have long been very interested in standard thinking errors.
However, I was educated in an era wherein the contributions of non-patient-treating psychology to an understanding of misjudgment met little approval from members of the mainstream elite. Instead, interest in psychology was pretty well confined to a group of professors who talked and published mostly for themselves, with much natural detriment from isolation and groupthink.
And so, right after my time at Caltech and Harvard Law School, I possessed a vast ignorance of psychology. Those institutions failed to require knowledge of the subject. And, of course, they couldn’t integrate psychology with their other subject matter when they didn’t know psychology. Also, like the Nietzsche character who was proud of his lame leg, the institutions were proud of their willful avoidance of “fuzzy” psychology and “fuzzy” psychology professors.
I shared this ignorant mindset for a consider- able time. And so did a lot of other people. What are we to think, for instance, of the Caltech course catalogue that for years listed just one psychology professor, self-described as a “Professor of Psycho- analytical Studies,” who taught both “Abnormal Psychology” and “Psychoanalysis in Literature”?
Soon after leaving Harvard, I began a long struggle to get rid of the most dysfunctional part of my psychological ignorance. Today, I will describe my long struggle for elementary wisdom and a brief summary of my ending notions. After that, I will give examples, many quite vivid and interesting to me, of both psychology at work and antidotes to psychology-based dysfunction. Then, I will end by asking and answering some general questions raised by what I have said. This will be a long talk....
....MUCH MORE
