Friends of Dave #362: 🐶 dancing with the dogs 🐩
Charlie Munger's secret weapon against being your own worst enemy.
As many of you probably know, Charlie Munger, the trusted business partner to Warren Buffett, passed away this week at the age of 99 years old.
Now Friends, even if you are not a frequent investor, I’m sure you have heard about Warren Buffett. But some of you may not be familiar with Charlie Munger. The funny thing is, while Buffett got all of the attention and praise, it’s very likely Munger may have been the genius behind the whole operation.
I would venture a guess that, among those who knew about Munger, the majority may not realize that his "Psychology of Human Misjudgment" speech at Harvard in 1995 is widely regarded as one of the most provocative roadmaps through the fascinating terrain of our decision-making quirks. In fact, despite writing about similar topics in this space, I did not realize this speech even existed until just this week.
I found it fascinating. A little academic and wonky at times, but fascinating.
As we navigate through the twists and turns of life, Munger's insights based on the patterns he observed from human thinking shed light on the types of biases that influence our choices. If you are interested, here is a relatively short (about 14 minutes) condensed version of the speech covering the highlights:
For those of you who don’t have the time or patience to sit through a video (you do know you can change the speed to 1.5x?), I thought I would use this week’s preamble to share just a few key ideas from the hour long speech that might resonate with you.
If you are interested in diving deeper than what I am sharing here, I suggest you Google any of these with the word “Munger”to find more details.
1. The Lollapalooza Effect: A Symphony of Biases
I’m sure some of you may have actually gone to a Lollapalooza Music Festival at one point in your lives. Charlie Munger's Lollapalooza Effect is like a classic rock band reunion, where the hits keep coming from various cognitive biases teaming up for an unforgettable performance.
Picture it as a compilation of biases, each playing its own tune, creating a powerful ensemble that shapes our decisions.
In life's concert, experiences, emotions, and social influences play different instruments, merging into a harmonious force that guides our choices. Munger warns us to be aware of the intricate interplay of biases, much like the complex dynamics of a legendary rock concert. Just as a music enthusiast appreciates the magic of different instruments creating a symphony, Munger invites us to recognize and navigate the multifaceted orchestra of biases shaping our decisions in the grand performance of life.
2. Reciprocal Inhibition: Locking the Mental Doors
Reciprocal inhibition is like the mental doors closing once we've settled on an idea. Think back to those days when changing your mind felt like a monumental task. Munger warns that this closed-door policy might have limited our perspectives and prevented us from embracing alternative thoughts and ideas.
3. Social Proof: Riding the Trend Wave
We all have gone through periods of time when trends dictate our choices. We buy things or do things not because we have thought through the logical reasons — but because everyone else is doing it. That's social proof — the tendency to follow the crowd. Whether it was the latest fashion or the choice of a gadget, Munger's insights invite us to reflect on how often we've been swayed by the collective decisions of the group and resist the urge to do when they arise.
4. Authority Bias: Trusting the "Experts"
We've probably encountered situations where trusting an expert seemed like the logical choice. Authority bias is precisely that – placing excessive trust in someone simply because they're considered an authority figure. Whether it's medical advice or financial decisions, Munger encourages us to balance respect for expertise with a healthy dose of critical thinking. Don’t just take what a doctor says as gospel, but take time to process the information you have been given, do your own research, think about the data that has been presented to you, and ask questions.
5. Fear of Missing Out (FOMO): The Missed Opportunities
The fear of missing out (FOMO) is a constant companion on our journey through life. Munger labels this as the "deprival superreaction syndrome." Reflect on those times when the fear of missing out led to decisions driven more by emotion than reason. Munger urges us to acknowledge how this fear might have influenced our choices and impacted our satisfaction with those decisions. Ignore giving into FOMO.
6. Psychological Denial: Ignoring Unpleasant Realities
Psychological denial is like sweeping uncomfortable truths under the rug, hoping they'll disappear. Some people refer to this as “putting your head in the sand.” Munger's wisdom urges us to confront these uncomfortable realities head-on. Whether it's health concerns, career challenges, or personal relationships, acknowledging the truth is a crucial step toward making informed decisions.
7. Incentive-Caused Bias: Balancing Short-Term Gains and Long-Term Goals
The allure of short-term rewards can be enticing, especially as we manage the responsibilities of family, career, and personal aspirations. Incentive-caused bias is like the temptation to prioritize immediate gains over long-term goals. Munger's counsel encourages us to evaluate whether the incentives align with our broader life objectives before succumbing to short-term gratification.
8. Commitment and Consistency: The Evolution of Decisions
As we get older, we find ourselves having evolving priorities and values. Even though this is the case, we tend to keep doing things just because “that’s what we always do.” The concept of “commitment and consistency tendency” talks about how we stick with decisions that no longer align with our current selves. Munger reminds us that adapting to change and being open to altering our course based on new information can become a strength, not a weakness.
9. Blind Trust in Others: Navigating Influence
No doubt you have likely encountered situations where blindly following others seemed like the natural choice. Overinfluence by social proof is the tendency to go with the flow without critically assessing the situation. Whether it's choosing investments or making significant life decisions, Munger prompts us to think independently and resist the pull of the herd.
He encourages people to be aware of the psychological pitfalls that can cloud judgment, highlighting the need to recognize one's own biases and those of others. In navigating influence, Munger suggests a multidisciplinary approach, drawing insights from various fields to develop a well-rounded perspective. He underlines the danger of blindly accepting information without rigorous analysis.
He says: "The first rule is that you can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form."
This underscores his belief in the importance of taking a bigger picture approach to counteract the pitfalls of human misjudgment and influence.
10. Contrast Misreaction Tendency: The Impact of Context
In the rich tapestry of life experiences, context often shapes our perceptions and judgments. Contrast misreaction tendency is like evaluating decisions based on recent experiences rather than objective standards. Munger advises us to be aware of this tendency, especially as we consider our choices in the broader context of our lives.
He urges us to be aware of this mental shortcut, reminding us that decisions should stand on their own merits rather than being swayed by the contrast with recent events. It's like realizing that just because it's sunny today doesn't mean you'll always be basking in sunlight. By taking time to recognize contrast misreaction tendency, we are empowered to make decisions that are less influenced by the fleeting highs and lows of the moment, encouraging a more measured and thoughtful approach to navigating life's twists and turns.
In the end, I think you will find Munger's insights serve as a compass, helping you to navigate the complexities of decision-making with a nuanced understanding of our brains work. Whether it's career transitions, financial planning, or personal relationships, reflecting on these key ideas can be a guide to making more intentional and informed choices as we continue to write the chapters of our lives.
It’s like he provided us all a secret weapon against being our own worst enemy and the bad decisions we all inevitably make, helping us make choices that align with our true values and long-term goals. The advice is a practical toolkit for everyday life, teaching us to think independently, question authority, and navigate the noise of social influence.
Perhaps a little academic for a preamble, but worth noting as we reflect on the impact Charlie Munger made in his 99 years on the planet, we roar into December and prepare for the New Year.
Back to our regular programming next week.
XOXO
Dave
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