This is Good: Understanding Psychological Patterns

As investors and leaders we want to avoid being "a one-legged man in an ass-kicking contest”!

That is Charlie Munger’s description for one who is not cognizant of psychological patterns that lead to poor judgment.?

To provide this education, Munger gave a now-infamous talk at Harvard Law School in 1995 called “Standard Causes Of Human Misjudgment”.??

The lecture is good.?It is subtly brilliant and funny.

It’s also a plea. Inviting us into an understanding of these patterns in order to protect ourselves from our own blind spots.

Munger trains himself to mentally run down this list to protect against misjudgment. I love that idea.

I took the liberty (hope that’s ok, Charlie) to simplify each bias in one sentence. I then added a question we might ask to test if the tendency is at play.

Copy and paste the below. Print it out. I hope understanding these patterns helps us more clearly see what is true.

THIS IS GOOD: UNDERSTANDING PSYCHOLOGICAL PATTERNS

A Checklist of Munger’s 20 Biases To Improve Our Judgement:

1) Incentive or Reinforcement Bias

• Summary: People work towards rewards, and away from punishments.
• Question: What are the incentives at play that are driving me?

2) Man with a Hammer Bias?

• Summary: To the man with a hammer, every problem looks like a nail.
• Question: Have I too quickly or easily seen the problem as a “nail”?

3) Psychological Denial Bias?

• Explanation: When reality is too painful to bear, we distort it.
• Question: Is this situation so painful that I am distorting reality?

4) Incentive-Caused Bias?

• Explanation: Actions in a system correlate to incentivization.??
• Question: Are there incentives at play creating or preventing bad behavior?

5) Commitment + Self-Confirmation Bias?

• Explanation: We “pound in” ideas when we publicly commit to them.
• Question: Am I irrationally committed to this idea because I have stated it in public?

6) Pavlovian Association Bias?

• Explanation: Subconscious associations. Most advertising is rooted in pure Pavlov.?
• Question: What associations do I have at play in this situation?

7) Reciprocation Tendency Bias?

• Explanation: The tendency we have to reciprocate favors and disfavors.
• Question: Do I observe a tendency to reciprocate in this situation?

8) Social Proof Bias

• Explanation: We tend to overweight the correlation of the majority making a decision to it being the right decision.
• Question: Am I not thinking clearly because of my tendency to follow the crowd or look for social validation??

9) Contrast Bias?

• Explanation: We make decisions based on contrast. We can lower our standards by comparing two options that are equally bad.?
• Question: Are my standards being lowered by comparing a false choice between too bad options??

10) Authority-Misinfluence Bias

• Explanation: There exists within people a natural follow-the-leader tendency and overweighted trust of authority.?
• Question: Am I irrationally influenced by authority where I am not able to see what is true?

11) Deprival-Superreaction Bias

• Explanation: Losses (even if they are perceived losses) hurt more than gains seem to help.
• Question: Am I misframing by having an overweighted response to what I lost (perceived or real)?

12) Envy Bias

• Explanation: Envy can be a big driver of behavior and often operates on a subconscious level.
• Question: Is there envy or unhealthy comparison that is operating beneath the surface affection my decision?

13) Chemical Dependency Bias

• Explanation: Aggregates the tendency to distort reality to make things bearable, and leads to moral failure.
• Question: Is any chemical dependency influencing my decision?

14) Mis-Gambling Compulsion Bias

• Explanation: In examples like the lottery, we make the number choice, we believe the odds of winning are higher be better.
• Question: Do I add unjustified probability to the success of my decision based on my involvement?

15) Liking Distortion Bias

• Explanation: Over-influence/mislead by someone we like - including ourselves.
• Question: Is how much I like the person or myself irrationally influencing this decision?

16) Disliking Distortion Bias

• Explanation: Under-influence by someone we dislike - especially if they are right and we are wrong.
• Question: Is my dislike of the parties involved causing miss judgment?

17) Non-Mathematical Nature Bias

• Explanation: Many people don’t naturally use simple probability mathematics and assumptions of value in predicting outcomes.?
• Question: Am I bringing and using simple probability mathematics available to help this decision?

18) Extra-Vivid Evidence Bias

• Explanation: Extra-vivid evidence, being so memorable, should often consciously be underweighed.
• Question: Is extra-vivid evidence being overweighted in my decision making?

19) Lack Of Actual Understanding Bias

• Explanation: Memorizing is not understanding. We need to be able?to array first principles answering the question “Why?”
• Questions: Do I understand the situation clearly enough to explain “why” and the first principles at play?

20) Stress-Influence Bias:

• Explanation: Light stress can slightly improve performance—say, in examinations—whereas heavy stress causes dysfunction.
• Question: Do I have light or heavy stress in this situation. Is stress causing dysfunction in me??

Can these psychological tendencies get stacked together in different cases? Where you can have 3, 4, or 5 of them all interacting? Absolutely. As you might imagine this leads to a substantial increase in the changed behavior. Leading to severe misjudgment or to reinforcing behavior that creates good outcomes. May we be aware enough to decrease the former and increase the latter.?

POSTSCRIPT?

Terry Looper details his decision-making process in his book?Sacred Pace. He has a four-step process that allows him to “Get to Neutral” on a decision. One step in the process is what he calls “Gathering The Facts”.?Gathering facts helps us determine what is true.?

In our house, we occasionally ask “What is true?” out loud. We ask it when it is obvious our minds and hearts are clouded with things that are not true. In those moments we probably have a lot of the tendencies above turning our minds to mush.

I believe there is truth and I believe we can find it. It is so good when we do. Truth can also be difficult to find. There is nuance in the truth and our own misjudgments muddy up our ability to see clearly.?

Munger’s list is not perfect or comprehensive. It is a wonderful tool to help us see "what is true”. To protect ourselves from our blind spots based on tendencies that are common to all people.?May this help our investments, our businesses, and our families. May we use this list so that we can better see what is true. In doing so, may your misjudgment decrease and your wisdom, good conduct, and power increase. That would be very good.