Archive for Charlie Munger

Bias 1 – Reward and Punishment Super-Response Tendency

25 Cognitive Biases - Bias 1 Reward and Punishment Super-Response Tendency

The power that incentives and disincentives have on the actions of others cannot be overstated. Munger says this should be obvious but so many people don’t understand the how important incentives are for shaping people’s motivation to complete a task.

Incentives and disincentives are extremely important in changing behavior.

Just follow Benjamin Franklin’s Maxim:

“If you would persuade, appeal to interest and not to reason”

“Never think about something else when you should be thinking about the power of incentives.”

“Incentives will almost always trump any moral duty”

‘The most important rule in management “Get the incentives right”‘

“Bad behavior is intensely habit forming when it is rewarded.”

These were some quotes from Charlie Munger on Reward and Punishment Super Response…

From Poor Charlies Almanac

I place this tendency first in my discussion because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. for instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower.

One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. And the system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And, finally , somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.

Bias 2 – Liking/Loving Tendency

25 Cognitive Biases - Bias 2 Liking-Loving Tendency

We ignore the faults of other people, products or companies that we admire.

According to Charlie Munger, a newly arrived human is born to like and love, and the strongest inborn tendency to love is that of a mother for its child.

Liking/Loving tendency makes the liker or lover tend to:

  • To ignore the faults of, and comply with wishes of the object of its affection.
  • To favor people, products and actions merely associated with the object of his affection as seen in bias 10 – influence from mere association.
  • To distort other facts to facilitate love.
  • Bias 3 – Disliking/Hating Tendency

    25 Cognitive Biases - Bias 3 Disliking-Hating Tendency

    We also ignore the virtues of those things we dislike and distort the facts to facilitate that hatred while putting on blinders to other options and opinions.

    Disliking/Hating Tendency happens from the time the newly arrived human is also born to “dislike and hate”

    1) Ignore the virtues in the object of dislike.
    2) Dislike people products and actions merely associated with the object of his dislike.
    3) Distort other facts to facilitate hatred.

    Disliking distortions often makes mediation between opponents locked in hatred either difficult or impossible.

    All from Charlie Munger’s Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger, Expanded Third Edition

    Bias 4 – Doubt-Avoidance Tendency

    25 Cognitive Biases - Bias 4 Doubt-Avoidance Tendency

    If we are unsure about a decision we try to quickly remove any doubt by making an ill-informed, quick decision, this is doubt-avoidance tendency

    Doubt-avoidance tendenty is triggered by some combination of puzzlement and stress.

    Bias 5 – Inconsistency-Avoidance Tendency

    25 Cognitive Biases - Bias 5 Inconsistency Avoidance Tendency

    We have a reluctance to change. Eliminating bad habits is a rare trait.

    The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance.

    Factors that create an anti-change and Inconsistency Avoidance Tendency mode in humans:

    1. It facilitated faster decisions when speed of decision was an important contribution to the survival on nonhuman ancestors that were prey.
    2. It facilitate the survival advantage that our ancestors gained by cooperating in groups, which would have been more difficult to do if everyone was always changing responses.
    3. It was the best form of solution that evolution could get to in the limited number of generations between the start of literacy and today’s complex modern life.

    Bias 6 – Curiosity Tendency

    25 Cognitive Biases - Bias 6 Curiosity Tendency

    There is not enough curiosity to learn, even though you receive so many benefits from a continuous learning process. Munger says, “the curious are also provided with much fun and wisdom once formal education has ended.”

    Curiosity tendency has been one of the main drivers in human progress throughout history, the amount of curiosity in the human species is much more than any other mammal species

    Bias 7 – Kantian Fairness Tendency

    25 Cognitive Biases - Bias 7 Kantian Fairness Tendency

    Life isn’t fair, but many can’t accept this. Tolerating a little unfairness should be okay if it means a greater fairness for all. The example Munger uses is letting in other drivers on the freeway knowing they will reciprocate in the future.

    Kantian Fairness Tendency

    Kant’s “Categorical imperative” or golden rules consists of humans require to follow those behavior patterns that, if followed by all others, would make the surrounding human system work best for everybody.

    Bias 8 – Envy/Jealousy Tendency

    25 Cognitive Biases - Bias 8 Envy/Jealousy Tendency

    Self-explanatory, but Munger makes an interesting point that envy/jealously tendency is surprisingly absent from most Psychology textbooks.

    Envy/jealously tendency comes from the need to get often-scarce food, this occurs often when the food is seen in possesion of another member of the same species

    “it is not greed that drives the world, but envy”

    – Warren Buffet

    Bias 10 – Influence-From-Mere-Association Tendency

    25 Cognitive Biases - Bias10 Influence From Mere Association Tendency

    We can be easily manipulated by mere association. It can be a group of people, the quality of a product, advertising, etc.

    Bias 11 – Simple, Pain-Avoiding Psychological Denial

    25 Cognitive Biases - Bias11 Simple Pain-Avoiding Psychological Denial

    We have a habit of distorting the facts until they become bearable for our own views.

    Bias 12 – Excessive Self-Regard Tendency

    25 Cognitive Biases - Bias 12 Excesive Self-Regard Tendency

    We all think we’re above average. This is where overconfidence comes from. Munger says the greatest type of pride should be taking pride in being trustworthy to avoid developing an ego.

    This is the sickness of dictators…

    Bias 13 – Over-Optimism Tendency

    25 Cognitive Biases - Bias13 Over-Optimism Tendency - over-optimism bias meme

    Over-optimism bias usually shows that excess of optimism is the normal human condition

    Bias 14 – Deprival-Superreaction Tendency

    25 Cognitive Biases - Bias 14 Deprival Super-Reaction Tendency

    Deprival-Superreaction in a way is loss aversion. Loss aversion refers to people’s tendency to strongly prefer avoiding losses to acquiring gains. Most studies suggest that losses are twice as powerful, psychologically, as gains.

    A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status or any other valued thing

    Bias 15 – Social-Proof Tendency

    25 Cognitive Biases - Bias 15 Social-Proof Tendency

    Social-Proof Tendency is an automatic tendency to think and act as others around think and act

    Bias 16 – Contrast-Misreaction Tendency

    25 Cognitive Biases - Bias 16 Contrast-Misreaction Tendency 25 Cognitive Biases – Bias 16 Contrast-Misreaction Tendency

    Our problem here is a misunderstanding of comparisons and missing out on the magnitude of decisions, it is better to evaluate people and objects by themselves and not by their contrast.

    An example of Contrast Misreaction Tendency

    Contrast Misreaction Tendency is routinely used to cause disadvantge for a customer, making an ordinary price seem low, a vendor will very frequently create a highly artificial price that is much higher than the price always sought, then advertise the standard price as a big reduction from his phony price.

    Bias 17 – Stress-Influence Tendency

    25 Cognitive Biases - Bias 17 Stress-Influence Tendency

    Adrenaline tends to produce faster and more extreme reactions. Some stress can improve performance but heavy stress often leads to dysfunction.

    Bias 19 – Use-it-or-Lose-It Tendency

    25 Cognitive Biases - Bias 19 Use-it-or-Lose-it Tendency

    Too many learn a skill to simply cram for a test or presentation instead of trying to actually understand it fluently

    Skills attenuate with disuse.

    Throughout his life, a wise man engages in practice for all his useful, rarely used skills, may of them outside his discipline, as a sort of duty to his better self.

    Skills of a very high order can be maintained only with daily practice.

    Use-it-or-lose-it tendency postulates that When a skill is raised to fluency then the skill (1) will be lost more slowly and (2) will come back faster when refreshed with new learning.

    Bias 20 – Drug-Misinfluence Tendency

    25 Cognitive Biases - Bias 20 Drug-Misinfluence Tendency
    This is a very strong tendency that costs lives. It can only be supplemented by Simple pain-avoiding psychological denial

    Bias 21 – Senescence-Misinfluence Tendency

    25 Cognitive Biases - Bias 21 Senescence-Misinfluence Tendency

    As we age there is a natural loss of certain skills and abilities. Continuous thinking and learning helps to slow the decay.

    Bias 22 – Authority-Misinfluence Tendency

    25 Cognitive Biases - Bias 22 Authority-Misinfluence Tendency

    Following orders just because someone says so.

    Living in dominance hierarchies as he does, man was born mostly to follow leaders, with only a few people doing the leading. And so, human society is formaly organized into dominance hierarchies.

    Bias 23 – Twaddle Tendency

    25 Cognitive Biases - Bias 23 Authority-Misinfluence Tendency

    This is basically spending too much time on nonsense

    Bias 24 – Reason – Respecting Tendency

    25 Cognitive Biases - Bias 24 Reason-Respecting Tendency

    Bias 25 – Lollapalooza Tendency

    25 Cognitive Biases - Bias 25 Lollapalooza Tendency

    The Tendency to Get Extreme Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome