Charlie Munger: The Psychology of Human Misjudgment - Part II
Discover key from 's 'The Psychology of Human Misjudgment' and learn how they affect investing decisions in Part II of this series.
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I'm happy to kick off a new series diving into the timeless wisdom of Charlie Munger with Part II of The Psychology of Human Misjudgment. 🧠
✨ If you've ever wondered how psychological biases can impact your investing decisions, this series is going to be a game-changer for you!
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Charlie Munger, the legendary investor and former vice chairman of Berkshire Hathaway, has provided invaluable insights into human psychology, particularly how it influences decision-making. One of his most famous contributions is his speech, "The Psychology of Human Misjudgment," where he explores various psychological biases that can lead to poor judgment and costly mistakes.
In this post, we dive into five more of Charlie Munger's key psychological tendencies that influence human behavior: Curiosity Tendency, Kantian Fairness Tendency, Envy/Jealousy Tendency, Reciprocation Tendency, and Influence-from-Mere-Association Tendency. Drawing from Munger’s insights, we’ll explore how these tendencies affect not only investing but also our decision-making in daily life.
TL; DR
Curiosity drives us to seek knowledge, often benefiting long-term decision-making, but must be balanced to avoid overreaching.
Humans strive for fairness, but Munger teaches that absolute fairness isn't always practical in complex systems.
Envy is deeply rooted in human nature but is ultimately destructive, especially in financial decisions.
We are hardwired to reciprocate favors, which can lead to unequal exchanges, often manipulated in marketing.
We often associate products or people with positive or negative traits due to mere association, leading to irrational decisions.
6. Curiosity Tendency
Curiosity is a natural human drive that often leads to significant breakthroughs, especially when used to explore new areas of knowledge. Munger emphasizes that curiosity, when properly channeled, can be a powerful tool for long-term success. In investing, curiosity can help uncover hidden opportunities, but he also warns against excessive curiosity, which can lead to spreading oneself too thin. For example, an investor might be tempted to explore too many industries or make investments in areas where they lack expertise. Striking the right balance is key—use curiosity to fuel learning but remain focused on areas where you have an edge.
I was born innately curious. If that doesn’t work for you, figure out your own damn system.
—CHARLIE MUNGER
7. Kantian Fairness Tendency
Charlie points out that people have an innate desire for fairness, but life—and investing—often requires accepting situations that are not perfectly fair. He references Immanuel Kant's principle of fairness, which states that all actions should be universally acceptable. However, Munger argues that striving for absolute fairness can be counterproductive in complex systems. In investing, this tendency might lead individuals to avoid opportunities that seem unfair to certain participants but are ultimately beneficial in a broader context. He advises focusing on what works for the overall system rather than getting bogged down by individual cases of perceived unfairness.
Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you.
—CHARLIE MUNGER
8. Envy/Jealousy Tendency
Envy is a deeply ingrained human emotion that, according to Munger, leads to destructive behavior, especially in investing. It is natural to feel envy when others succeed, but this tendency often results in poor financial decisions, such as chasing after high-risk investments to "catch up" with someone else's success. Munger cautions against letting envy dictate your actions, especially since someone will always be richer or more successful. He notes that envy offers no joy and only brings pain. In investing, the best approach is to focus on your own goals and strategies rather than comparing yourself to others.
The idea of caring that someone is making money faster [than you] is one of the deadly sins. Envy is a really stupid sin because it’s the only one you could never possibly have any fun at. There’s a lot of pain and no fun. Why would you want to get on that trolley?
Here’s one truth that perhaps your typical investment counselor would disagree with: if you’re comfortably rich and someone else is getting richer faster than you by, for example, investing in risky stocks, so what?! Someone will always be getting richer faster than you. This is not a tragedy.
—CHARLIE MUNGER
9. Reciprocation Tendency
Humans have a strong urge to reciprocate both favors and slights. This tendency can lead to unequal exchanges, especially when someone feels indebted for a favor, even if the value of that favor is small. In the world of marketing, salespeople often exploit this tendency by offering small gifts or "free" services, hoping to push customers toward making larger purchases. For investors, being aware of this tendency can help avoid being swayed by superficial gestures that don't add real value. Recognizing when you are being manipulated by the urge to reciprocate can prevent poor financial decisions.
10. Influence-from-Mere-Association Tendency
The Influence-from-Mere-Association Tendency describes how people often make decisions based on associations, regardless of their actual relevance. For example, an investor might be swayed to buy a product or service simply because it is associated with a celebrity or a positive image. Munger warns against this tendency, explaining that mere association does not imply quality or value. In investing, it's essential to rely on solid data and analysis rather than allowing superficial associations to cloud judgment. This principle also applies when associating products or companies with emotions or memories, which advertisers frequently exploit.
Summary
In this post, we explored five more psychological tendencies that Charlie Munger believes significantly influence human behavior: curiosity, fairness, envy, reciprocation, and influence-from-association. Munger teaches us to be mindful of how these tendencies can impact our decision-making, both in investing and in everyday life. Curiosity can be a double-edged sword—beneficial when focused but detrimental if overextended. The desire for fairness can lead to irrational decisions, and envy can cloud judgment, particularly in financial matters. Understanding how the urge to reciprocate or to follow mere associations can be manipulated helps investors avoid making emotionally driven decisions. By recognizing and managing these tendencies, we can make better, more rational choices in investing and beyond.
Stay tuned for the next post in this series, where we’ll dive deeper into more of Munger’s insights and how they can help you make better decisions.
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