SOURCE: From his Harvard Speech, "CHARLIE MUNGER ON THE
PSYCHOLOGY OF HUMAN MISJUDGMENT".
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.
We ignore the faults of other people, products or companies that we admire.
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.
If we are unsure about a decision we try to quickly remove any doubt by making an ill-informed, quick decision.
We have a reluctance to change. Eliminating bad habits is a rare trait.
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."
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.
Self-explanatory, but Munger makes an interesting point that envy and jealously are surprisingly absent from most psych textbooks.
We tend to want to return the favor when someone helps us, which can be a good thing at times, but it can also lead to poor decisions if you reciprocate business deals based on these minor favors.
We can be easily manipulated by mere association. It can be a group of people, the quality of a product, advertising, etc.
Simple, Pain-Avoiding Psychological Denial
We have a habit of distorting the facts until they become bearable for our own views.
Excessive 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.
Lottery ticket mentality.
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.
This is when we tend to think and act like those around us. It's the herd mentality.
Our problem here is a misunderstanding of comparisons and missing out on the magnitude of decisions. This gets to Phillip Fisher's point when he once said, "the stock market is filled with individuals who know the price of everything but the value of nothing." Evaluate people and objects by themselves and not by their contrast.
Adrenaline tends to produce faster and more extreme reactions. Some stress can improve performance but heavy stress often leads to dysfunction.
We overweight what's easily available. A checklist or set of rules can help with this tendency.
Too many learn a skill to simply cram for a test or presentation instead of trying to actually understand it fluently.
Impaired judgment due to drugs
As we age there is a natural loss of certain skills and abilities. Continuous thinking and learning helps to slow the decay.
Following orders just because someone says so.
Basically, spending too much time on nonsense.
Some people just want the answers, not the reasons or a better understanding.
To get extreme consequences when you combine a number of these misjudgements when trying for a particular outcome.