http://vinvesting.com/docs/munger/human_misjudgement.html
THE PSYCHOLOGY OF HUMAN MISJUDGMENT
By Charlie Munger
(Warren Buffett's partner at Berkshire Hathaway)
Speech at Harvard Law School (1995)
Transcription, comments [in brackets] by Whitney Tilson
(feedback@Tilsonfunds.com)
Moderator: ...and they discovered extreme,
obvious irrationality in many areas of the economy that they looked at. And they
were a little bit troubled because nothing that they had learned in graduate
school explained these patterns. Now I would hope that Mr. Munger spends a
little bit more time around graduate schools today, because we've gotten now
where he was 30 years ago, and we are trying to explain those
patterns, and some of the people who are doing that will be speaking with you
today.
So I think he thinks of his specialty as the Psychology of Human Misjudgment,
and part of this human misjudgment, of course, comes from worrying about the
types of fads and social pressures that Henry Kaufman talked to us about. I
think it's significant that Berkshire Hathaway is not headquartered in New York,
or even in Los Angeles or San Francisco, but rather in the heart of the country
in Nebraska.
When he referred to this problem of human misjudgment, he identified two
significant problems, and I'm sure that there are many more, but when he said,
"By not relying on this, and not understanding this, it was costing me a
lot of money," and I presume that some of you are here in the theory that
maybe it's costing you even a somewhat lesser amount of money. And the second
point that Mr. Munger made was it was
reducing...not understanding human misjudgment was reducing my ability to help
everything I loved. Well I hope he loves you, and I'm sure he'll help you. Thank
you. [Applause]
Munger: Although I am very interested in the subject of human misjudgment -- and
lord knows I've created a good bit of it -- I don't think I've created my full
statistical share, and I think that one of the reasons was I tried to do
something about this terrible ignorance I left the Harvard Law School with.
When I saw this patterned irrationality, which was so extreme, and I had no
theory or anything to deal with it, but I could see that it was extreme, and I
could see that it was patterned, I just started to create my own system of
psychology, partly by casual reading, but largely from personal experience, and
I used that pattern to help me get through life. Fairly late in life I stumbled
into this book, Influence, by a psychologist named Bob Cialdini, who became a
super-tenured hotshot on a 2,000-person faculty at a very young age. And he
wrote this book, which has now sold 300-odd thousand copies, which is remarkable
for somebody. Well, it's an academic book aimed at a popular audience that
filled in a lot of holes in my crude system. In those holes it filled in, I
thought I had a system that was a good-working tool, and I'd like to share that
one with you.
And I came here because behavioral economics. How could economics not be
behavioral? If it isn't behavioral, what the hell is it? And I think it's fairly
clear that all reality has to respect all other reality. If you come to
inconsistencies, they have to be resolved, and so if there's anything valid in
psychology, economics has to recognize it, and vice versa. So I think the people
that are working on this fringe between economics and psychology are
absolutely right to be there, and I think there's been plenty wrong over the
years. Well let me romp through as much of this list as I have time to get
through:
24 Standard Causes of Human Misjudgment
1. Under-recognition of the power of what psychologists call 'reinforcement'
and economists call 'incentives.'
Well you can say, "Everybody knows that." Well I think I've been in
the top 5% of my age cohort all my life in understanding the power of
incentives, and all my life I've underestimated it. And never a year passes but
I get some surprise that pushes my limit a little farther.
One of my favorite cases about the power of incentives is the Federal Express
case. The heart and soul of the integrity of the system is that all the packages
have to be shifted rapidly in one central location each night. And the system
has no integrity if the whole shift can't be done fast. And Federal Express had
one hell of a time getting the thing to work. And they tried moral suasion,
they tried everything in the world,
and finally somebody got the happy thought that they were paying the night shift
by the hour, and that maybe if they paid them by the shift, the system would
work better. And lo and behold, that solution worked .
Early in the history of Xerox, Joe Wilson, who was then in the government, had
to go back to Xerox because he couldn't understand how their better, new machine
was selling so poorly in relation to their older and inferior machine. Of course
when he got there he found out that the commission arrangement with the salesmen
gave a tremendous incentive to the inferior machine.
And here at Harvard, in the shadow of B.F. Skinner -- there was a man who really
was into reinforcement as a powerful thought, and, you know, Skinner's lost his
reputation in a lot of places, but if you were to analyze the entire history of
experimental science at Harvard, he'd be in the top handful. His experiments
were very ingenious, the results were counter-intuitive, and they were
important. It is not given to experimental science to do better. What gummed up
Skinner's reputation is that he developed a case of what I always call
man-with-a-hammer syndrome: to the man with a hammer, every problem tends to
look pretty much like a nail. And Skinner had one of the more extreme cases in
the history of Academia, and this syndrome doesn't exempt bright people. It's
just a man with a hammer...and Skinner is an extreme example of that. And later,
as I go down my list, let's go back and try and figure out why people, like
Skinner, get man-with-a-hammer syndrome.
Incidentally, when I was at the Harvard Law School there was a professor,
naturally at Yale, who was derisively discussed at Harvard, and they used to
say, "Poor old Blanchard. He thinks declaratory judgments will cure
cancer." And that's the way Skinner got. And not only that, he was
literary, and he scorned opponents who had any different way of thinking or
thought anything else was important. This is not a way to make a lasting
reputation if the other people turn out to also be doing something important.
2. My second factor is simple psychological denial.
This first really hit me between the eyes when a friend of our family had a
super-athlete, super-student son who flew off a carrier in the north Atlantic
and never came back, and his mother, who was a very sane woman, just never
believed that he was dead. And, of course, if you turn on the television, you'll
find the mothers of the most obvious criminals that man could ever diagnose, and
they all think their sons are innocent. That's simple psychological denial. The
reality is too painful to bear, so you just distort it until it's bearable. We
all do that to some extent, and it's a common psychological misjudgment that
causes terrible problems.
3. Incentive-cause bias, both in one's own mind and that of ones
trusted advisor, where it creates what economists call 'agency costs.'
Here, my early experience was a doctor who sent bushel baskets full of normal
gall bladders down to the pathology lab in the leading hospital in Lincoln,
Nebraska. And with that quality control for which community hospitals are
famous, about five years after he should've been removed from the staff, he was.
And one of the old doctors who participated in the removal was also a family
friend, and I asked him: I said, "Tell me, did he think, 'Here's a way for
me to exercise my talents'" -- this guy was very skilled technically--
"'and make a high living by doing a few maimings and murders every year,
along with some frauds?'" And he said, "Hell no, Charlie. He thought
that the gall bladder was the source of all medical evil, and if you really love
your patients, you couldn't get that organ out rapidly enough."
Now that's an extreme case, but in lesser strength, it's present in every
profession and in every human being. And it causes perfectly terrible behavior.
If you take sales presentations and brokers of commercial real estate and
businesses... I'm 70 years old, I've never seen one I thought was even within
hailing distance of objective truth. If you want to talk about the power of
incentives and the power of rationalized, terrible behavior: after the Defense
Department had had enough experience with cost-plus percentage of cost
contracts, the reaction of our republic was to make it a crime for the federal
government to write one, and not only a crime, but a felony.
And by the way, the government's right, but a lot of the way the world is run,
including most law firms and a lot of other places, they've still got a
cost-plus percentage of cost system. And human nature, with its version of what
I call 'incentive-caused bias,' causes this terrible abuse. And many of the
people who are doing it you would be glad to have married into your family
compared to what you're otherwise going to get. [Laughter]
Now there are huge implications from the fact that the human mind is put
together this way, and that is that people who create things like cash
registers, which make most [dishonest] behavior hard, are some of the effective
saints of our civilization. And the cash register was a great moral instrument
when it was created. And Patterson knew that, by the way. He had a little store,
and the people were stealing him blind and never made any money, and people sold
him a couple of cash registers and it went to profit immediately. And, of
course, he closed the store and went into the cash register business...
And so this is a huge, important thing. If you read the psychology texts, you
will find that if they're 1,000 pages long, there's one sentence. Somehow
incentive-caused bias has escaped the standard survey course in psychology.
4. Fourth, and this is a superpower in error-causing psychological tendency:
bias from consistency and commitment tendency, including the tendency to avoid
or promptly resolve cognitive dissonance. Includes the self-confirmation
tendency of all conclusions, particularly expressed conclusions, and with a
special persistence for conclusions that are hard-won.
Well what I'm saying here is that the human mind is a lot like the human egg,
and the human egg has a shut-off device. When one sperm gets in, it shuts down
so the next one can't get in. The human mind has a big tendency of the same
sort. And here again, it doesn't just catch ordinary mortals; it catches the
deans of physics. According to Max Planck, the really innovative, important new
physics was never really accepted by the old guard. Instead a new guard came
along that was less brain-blocked by its previous conclusions. And if Max
Planck's crowd had this consistency and commitment tendency that kept their old
inclusions intact in spite of disconfirming evidence, you can imagine what the
crowd that you and I are part of behaves like.
And of course, if you make a public disclosure of your conclusion, you're
pounding it into your own head. Many of these students that are screaming at us,
you know, they aren't convincing us, but they're forming mental change for
themselves, because what they're shouting out [is] what they're pounding in. And
I think educational institutions that create a climate where too much of that
goes on are...in a fundamental sense, they're irresponsible institutions. It's
very important to not put your brain in chains too young by what you shout out.
And all these things like painful qualifying and initiation rituals pound in
your commitments and your ideas. The Chinese brainwashing system, which was for
war prisoners, was way better than anybody else's. They maneuvered people into
making tiny little commitments and declarations, and then they'd slowly build.
That worked way better than torture.
5. Fifth: bias from Pavlovian association, misconstruing past correlation as
a reliable basis for decision-making.
I never took a course in psychology, or economics either for that matter, but I
did learn about Pavlov in high school biology. And the way they taught it, you
know, so the dog salivated when the bell rang. So what? Nobody made the least
effort to tie that to the wide world. Well the truth of the matter is that
Pavlovian association is an enormously powerful psychological force in the daily
life of all of us. And, indeed, in economics we wouldn't have money without the
role of so-called secondary reinforcement, which is a pure psychological
phenomenon demonstrated in the laboratory.
Practically...I'd say 3/4 of advertising works on pure Pavlov. Think how
association, pure association, works. Take Coca-Cola company (we're the biggest
share-holder). They want to be associated with every wonderful image: heroics in
the Olympics, wonderful music, you name it. They don't want to be associated
with presidents' funerals and so-forth. When have you seen a Coca-Cola ad...and
the association really works.
And all these psychological tendencies work largely or entirely on a
subconscious level, which makes them very insidious. Now you've got Persian
messenger syndrome. The Persians really did kill the messenger who brought the
bad news. You think that is dead? I mean you should've seen Bill Paley in his
last 20 years. [Paley was the former owner, chairman and CEO of CBS; see http://www.kcmetro.cc.mo.us/pennvalley/biology/lewis/crosby/paley.htm
for his bio.] He didn't hear one damn thing he didn't want to hear. People
knew that it was bad for the messenger to bring Bill Paley things he didn't want
to hear. Well that means that the leader gets in a cocoon of unreality, and this
is a great big enterprise, and boy, did he make some dumb decisions in the last
20 years.
And now the Persian messenger syndrome is alive and well. I saw, some years ago,
Arco and Exxon arguing over a few hundred millions of ambiguity in their North
Slope treaties before a superior court judge in Texas, with armies of lawyers
and experts on each side. Now this is a Mad Hatter's tea party: two
engineering-style companies can't resolve some ambiguity without spending tens
of millions of dollars in some Texas superior court? In my opinion what happens
is that nobody wants to bring the bad news to the executives up the line. But
here's a few hundred million dollars you thought you had that you don't. And
it's much safer to act like the Persian messenger who goes away to hide rather
than bring home the news of the battle lost.
Talking about economics, you get a very interesting phenomenon that I've seen
over and over again in a long life. You've got two products; suppose they're
complex, technical products. Now you'd think, under the laws of economics, that
if product A costs X, if product Y costs X minus something, it will sell better
than if it sells at X plus something, but that's not so. In many cases when you
raise the price of the alternative products, it'll get a larger market share
than it would when you make it lower than your competitor's product. That's
because the bell, a Pavlovian bell -- I mean ordinarily there's a correlation
between price and value -- then you have an information inefficiency. And so
when you raise the price, the sales go up relative to your competitor. That
happens again and again and again. It's a pure Pavlovian phenomenon. You can
say, "Well, the economists have figured this sort of thing out when they
started talking about information inefficiencies," but that was fairly late
in economics that they found such an obvious thing. And, of course, most of them
don't ask what causes the information inefficiencies.
Well one of the things that causes it is pure old Pavlov and his dog. Now
you've got bios from Skinnerian association: operant conditioning, you know,
where you give the dog a reward and pound in the behavior that preceded the
dog's getting the award. And, of course, Skinner was able to create
superstitious pigeons by having the rewards come by accident with certain
occurrences, and, of course, we all know people who are the human equivalents of
superstitious pigeons. That's a very powerful phenomenon. And, of course,
operant conditioning really works. I mean the people in the center who think
that operant conditioning is important are very much right, it's just that
Skinner overdid it a little.
Where you see in business just perfectly horrible results from
psychologically-rooted tendencies is in accounting. If you take Westinghouse,
which blew, what, two or three billion dollars pre-tax at least loaning
developers to build hotels, and virtually 100% loans? Now you say any idiot
knows that if there's one thing you don't like it's a developer, and another
you don't like it's a hotel. And to make a 100% loan to a developer who's going
to build a hotel... [Laughter] But this guy, he probably was an engineer or
something, and he didn't take psychology any more than I did, and he got out
there in the hands of these salesmen operating under their version of
incentive-caused bias, where any damned way of getting Westinghouse to do it was
considered normal business, and they just blew it.
That would never have been possible if the accounting system hadn't been such
but for the initial phase of every transaction it showed wonderful financial
results. So people who have loose accounting standards are just inviting
perfectly horrible behavior in other people. And it's a sin, it's an absolute
sin. If you carry bushel baskets full of money through the ghetto, and made it
easy to steal, that would be a considerable human sin, because you'd be causing
a lot of bad behavior, and the bad behavior would spread. Similarly an
institution that gets sloppy accounting commits a real human sin, and it's also
a dumb way to do business, as Westinghouse has so wonderfully proved.
Oddly enough nobody mentions, at least nobody
I've seen, what happened with Joe Jett and Kidder Peabody. The truth of the
matter is the accounting system was such that by punching a few buttons, the Joe
Jetts of the world could show profits, and profits that showed up in things that
resulted in rewards and esteem and every other thing... Well the Joe Jetts are
always with us, and they're not really to blame, in my judgment at least. But
that bastard who created that foolish accounting system who, so far as I know,
has not been flayed alive, ought to be.
6. Sixth: bias from reciprocation tendency,
including the tendency of one on a roll to act as other persons expect.
Well here, again, Cialdini does a magnificent job at this, and you're all going
to be given a copy of Cialdini's book. And if you have half as much sense as I
think you do, you will immediately order copies for all of your children and
several of your friends. You will never make a better investment.
It is so easy to be a patsy for what he calls the compliance practitioners of
this life. At any rate, reciprocation tendency is a very, very powerful
phenomenon, and Cialdini demonstrated this by running around a campus, and he
asked people to take juvenile delinquents to the zoo. And it was a campus, and
so one in six actually agreed to do it. And after he'd accumulated a
statistical output he went around on the same campus and he asked other
people, he said, "Gee, would you devote two afternoons a week to taking
juvenile delinquents somewhere and suffering greatly yourself to help
them," and there he got 100% of the people to say no. But after he'd made
the first request, he backed up a little, and he said, "Would you at least
take them to the zoo one afternoon?" He raised the compliance rate from a
third to a half. He got three times the success by just going through the little
ask-for-a-lot-and-back-off.
Now if the human mind, on a subconscious level, can be manipulated that way
and you don't know it, I always use the phrase, "You're like a one-legged
man in an ass-kicking contest." I mean you are really giving a lot of
quarter to the external world that you can't afford to give. And on this
so-called role theory, where you tend to act in the way that other people
expect, and that's reciprocation if you think about the way society is
organized.
A guy named Zimbardo had people at Stanford
divide into two pieces: one were the guards and the other were the prisoners,
and they started acting out roles as people expected. He had to stop the
experiment after about five days. He was getting into human misery and breakdown
and pathological behavior. I mean it was...it was awesome. However, Zimbardo is
greatly misinterpreted. It's not just reciprocation tendency and role theory
that caused that, it's consistency and commitment tendency. Each person, as he
acted as a guard or a prisoner, the action itself was pounding in the idea. [For
more on this famous experiment:
http://www.prisonexp.org/]
Wherever you turn, this consistency and commitment tendency is affecting you. In
other words, what you think may change what you do, but perhaps even more
important, what you do will change what you think. And you can say,
"Everybody knows that." I want to tell you I didn't know it well
enough early enough.
7. Seventh, now this is a lollapalooza, and Henry Kaufman wisely talked about
this: bias from over-influence by social proof -- that is, the conclusions of
others, particularly under conditions of natural uncertainty and stress.
And here, one of the cases the psychologists use is Kitty Genovese, where all
these people -- I don't know, 50, 60, 70 of them -- just sort of sat and did
nothing while she was slowly murdered. Now one of the explanations is that
everybody looked at everybody else and nobody else was doing anything, and so
there's automatic social proof that the right thing to do is nothing. That's not
a good enough explanation for Kitty Genovese, in my judgment. That's only part
of it. There are microeconomic ideas and gain/loss ratios and so forth that also
come into play. I think time and time again, in reality, psychological notions
and economic notions interplay, and the man who doesn't understand both is a
damned fool.
Big-shot businessmen get into these waves of social proof. Do you remember some
years ago when one oil company bought a fertilizer company, and every other
major oil company practically ran out and bought a fertilizer company? And
there was no more damned reason for all these oil companies to buy fertilizer
companies, but they didn't know exactly what to do, and if Exxon was doing it,
it was good enough for Mobil, and vice versa. I think they're all gone now, but
it was a total disaster.
Now let's talk about efficient market theory, a wonderful economic doctrine that
had a long vogue in spite of the experience of Berkshire Hathaway. In fact one
of the economists who won -- he shared a Nobel Prize -- and as he looked at
Berkshire Hathaway year after year, which people would throw in his face as
saying maybe the market isn't quite as efficient as you think, he said,
"Well, it's a two-sigma event." And then he said we were a three-sigma
event. And then he said we were a four-sigma event. And he finally got up to six
sigmas -- better to add a sigma than change a theory, just because the evidence
comes in differently. [Laughter] And, of course, when this share of a Nobel
Prize went into money management himself, he sank like a stone.
If you think about the doctrines I've talked about, namely, one, the power of
reinforcement -- after all you do something and the market goes up and you get
paid and rewarded and applauded and what have you, meaning a lot of
reinforcement, if you make a bet on a market and the market goes with you.
Also, there's social proof. I mean the prices on the market are the ultimate
form of social proof, reflecting what other people think, and so the combination
is very powerful. Why would you expect general market levels to always be
totally efficient, say even in 1973-74 at the pit, or in 1972 or whatever it was
when the Nifty 50 were in their heyday? If these psychological notions are
correct, you would expect some waves of irrationality, which carry general
levels, so they're inconsistent with reason.
8. Nine [he means eight]: what made these economists love the efficient
market theory is the math was so elegant.
And after all, math was what they'd learned to
do. To the man with a hammer, every problem tends to look pretty much like a
nail. The alternative truth was a little messy, and they'd forgotten the great
economists Keynes, whom I think said, "Better to be roughly right than
precisely wrong."
9. Bias from contrast-caused distortions of sensation, perception and
cognition.
Here, the great experiment that Cialdini does in his class is he takes three
buckets of water: one's hot, one's cold and one's room temperature, and he
has the student stick his left hand in the hot water and his right hand in the
cold water. Then he has them remove the hands and put them both in the room
temperature bucket, and of course with both hands in the same bucket of water, one
seems hot, the other seems cold because the sensation apparatus of man is
over-influenced by contrast. It has no absolute scale; it's got a contrast scale
in it. And it's a scale with quantum effects in it too. It takes a certain
percentage change before it's noticed.
Maybe you've had a magician remove your watch -- I certainly have -- without
your noticing it. It's the same thing. He's taking advantage of contrast-type
troubles in your sensory apparatus. But here the great truth is that cognition
mimics sensation, and the cognition manipulators mimic the watch-removing
magician. In other words, people are manipulating you all day long on this
contrast phenomenon.
Cialdini cites the case of the real estate broker. And you've got the rube
that's been transferred into your town, and the first thing you do is you take
the rube out to two of the most awful, overpriced houses you've ever seen, and
then you take the rube to some moderately overpriced house, and then you stick
him. And it works pretty well, which is why the real estate salesmen do it. And
it's always going to work.
And the accidents of life can do this to you, and it can ruin your life. In my
generation, when women lived at home until they got married, I saw some
perfectly terrible marriages made by highly desirable women because they lived
in terrible homes. And I've seen some terrible second marriages which were made
because they were slight improvements over an even worse first marriage. You
think you're immune from these things, and you laugh, and I want to tell
you, you aren't.
My favorite analogy I can't vouch for the accuracy of. I have this worthless
friend I like to play bridge with, and he's a total intellectual amateur that
lives on inherited money, but he told me once something I really enjoyed
hearing. He said, "Charlie," he say, "If you throw a frog into
very hot water, the frog will jump out, but if you put the frog in room
temperature water and just slowly heat the water up, the frog will die
there." Now I don't know whether that's true about a frog, but it's sure as
hell true about many of the businessmen I know [laughter], and there, again, it
is the contrast phenomenon. But these are hot-shot, high-powered people. I mean
these are not fools. If it comes to you in small pieces, you're likely to miss,
so if you're going
to be a person of good judgment, you have to do something about this warp in
your head where it's so misled by mere contrast.
10. Bias from over-influence by authority.
Well here, the Milgrim experiment, as it's called -- I think there have been
1,600 psychological papers written about Milgrim. And he had a person posing as
an authority figure trick ordinary people into giving what they had every reason
to expect was heavy torture by electric shock to perfectly innocent fellow
citizens. And he was trying to show why Hitler succeeded and a few other things,
and so this really caught the fancy of the world. Partly it's so politically
correct, and over-influence by authority...
You'll like this one: You get a pilot and a co-pilot. The pilot is the
authority figure. They don't do this in airplanes, but they've done it in
simulators. They have the pilot do something where the co-pilot, who's been
trained in simulators a long time -- he knows he's not to allow the plane to
crash -- they have the pilot to do something where an idiot co-pilot would know
the plane was going to crash, but the pilot's doing it, and the co-pilot is
sitting there, and the pilot is the authority figure. 25% of the time the plane
crashes. I mean this is a very powerful psychological tendency. It's not quite
as powerful as some people think, and I'll get to that later.
11. Bias from deprival super-reaction syndrome, including bias caused by
present or threatened scarcity, including threatened removal of something almost
possessed, but never possessed.
Here I took the Munger dog, a lovely, harmless dog. The only way to get that
dog to bite you is to try and take something out of its mouth after it was
already there. And you know, if you've tried to do takeaways in labor
negotiations, you'll know that the human version of that dog is there in all of
us. And I have a neighbor, a predecessor who had a little island around the
house, and his next door neighbor put a little pine tree on it that was about
three feet high, and it turned his 180 degree view of the harbor into 179 3/4.
Well they had a blood feud like the Hatfields and McCoys, and it went on and on
and on...
I mean people are really crazy about minor decrements down. And then, if you act
on them, then you get into reciprocation tendency, because you don't just
reciprocate affection, you reciprocate animosity, and the whole thing can
escalate. And so huge insanities can come from just subconsciously over-weighing
the importance of what you're losing or almost getting and not getting.
And the extreme business case here was New Coke. Coca-Cola has the most valuable
trademark in the world. We're the major shareholder -- I think we understand
that trademark. Coke has armies of brilliant engineers, lawyers, psychologists,
advertising executives and so forth, and they had a trademark on a flavor, and
they'd spent the better part of 100 years getting people to believe that
trademark had all these intangible values too. And people associate it with a
flavor. And so they were going to tell people not that it was improved, because
you can't improve a flavor. A flavor is a matter of taste. I mean you may
improve a detergent or something, but don't think you're going to make a major
change in a flavor. So they got this huge deprival super-reaction syndrome.
Pepsi was within weeks of coming out with old Coke in a Pepsi bottle, which
would've been the biggest fiasco in modern times. Perfect insanity. And by the
way, both Goizuetta [Coke's CEO at the time] and Keough [an influential former
president and director of the company] are just wonderful about it. I mean they
just joke. Keough always says, "I must've been away on vacation."
He participated in every single decision -- he's a wonderful guy. And by the
way, Goizuetta is a wonderful, smart guy -- an engineer. Smart people make these
terrible boners. How can you not understand deprival super-reaction syndrome?
But people do not react symmetrically to loss and gain. Well maybe a great
bridge player like Zeckhauser does, but that's a trained response. Ordinary
people, subconsciously affected by their inborn tendencies...
12. Bias from envy/jealousy.
Well envy/jealousy made, what, two out of the ten commandments? Those of you who
have raised siblings you know about envy, or tried to run a law firm or
investment bank or even a faculty? I've heard Warren say a half a dozen times,
"It's not greed that drives the world, but envy."
Here again, you go through the psychology survey courses, and you go to the
index: envy/jealousy, 1,000-page book, it's blank. There's some blind spots in
academia, but it's an enormously powerful thing, and it operates, to a
considerable extent, on the subconscious level. Anybody who doesn't understand
it is taking on defects he shouldn't have.
13. Bias from chemical dependency.
Well, we don't have to talk about that. We've all seen so much of it, but it's
interesting how it'll always cause this moral breakdown if there's any need, and
it always involves massive denial. See it just aggravates what we talked about
earlier in the aviator case, the tendency to distort reality so that it's
endurable.
14. Bias from mis-gambling compulsion.
Well here, Skinner made the only explanation you'll find in the standard
psychology survey course. He, of course, created a variable reinforcement rate
for his pigeons and his mice, and he found that that would pound in the behavior
better than any other enforcement pattern. And he says, "Ah ha! I've
explained why gambling is such a powerful, addictive force in this
civilization." I think that is, to a very considerable extent, true, but
being Skinner, he seemed to think that was the only explanation, but the truth
of the matter is that the devisors of these modern machines and techniques know
a lot of things that Skinner didn't know.
For instance, a lottery. You have a lottery where you get your number by lot,
and then somebody draws a number by lot, it gets lousy play. You have a lottery
where people get to pick their number, you get big play. Again, it's this
consistency and commitment thing. People think if they have committed to it, it
has to be good. The minute they've picked it themselves it gets an extra
validity. After all, they thought it and they acted on it.
Then if you take the slot machines, you get bar, bar, walnut. And it happens
again and again and again. You get all these near misses. Well that's deprival
super-reaction syndrome, and boy do the people who create the machines
understand human psychology. And for the high-IQ crowd they've got poker
machines where you make choices. So you can play blackjack, so to speak, with
the machine. It's wonderful what we've done
with our computers to ruin the civilization.
But at any rate, mis-gambling compulsion is a very, very powerful and important
thing. Look at what's happening to our country: every Indian has a reservation,
every river town, and look at the people who are ruined by it with the aid of
their stock brokers and others. And again, if you look in the standard textbook
of psychology you'll find practically nothing on it except maybe one
sentence talking about Skinner's rats. That is not an adequate coverage of the
subject.
15. Bias from liking distortion, including the tendency to especially like oneself,
one's own kind and one's own idea structures, and the tendency to be
especially susceptible to being misled by someone liked. Disliking distortion,
bias from that, the reciprocal of liking distortion and the tendency not to
learn appropriately from someone disliked.
Well here, again, we've got hugely powerful tendencies, and if you look at the
wars in part of the Harvard Law School, as we sit here, you can see that very
brilliant people get into this almost pathological behavior. And these are very,
very powerful, basic, subconscious psychological tendencies, or at least party
subconscious.
Now let's get back to B.F. Skinner, man-with-a-hammer syndrome revisited. Why is
man-with-a-hammer syndrome always present? Well if you stop to think about it,
it's incentive-caused bias. His professional reputation is all tied up with what
he knows. He likes himself and he likes his own ideas, and he's expressed them
to other people -- consistency and commitment tendency. I mean you've got four
or five of these elementary psychological tendencies combining to create this
man-with-a-hammer syndrome.
Once you realize that you can't really buy your thinking -- partly you can, but
largely you can't in this world -- you have learned a lesson that's very useful
in life. George Bernard Shaw had a character say in The Doctor's Dilemma,
"In the last analysis, every profession is a conspiracy against the
laity." But he didn't have it quite right, because it isn't so much a
conspiracy as it is a subconscious, psychological tendency.
The guy tells you what is good for him. He doesn't recognize that he's doing
anything wrong any more than that doctor did when he was pulling out all those
normal gall bladders. And he believes his own idea structures will cure cancer,
and he believes that the demons that he's the guardian against are the biggest
demons and the most important ones, and in fact they may be very small demons
compared to the demons that you face. So you're getting your advice in this
world from your paid advisor with this huge load of ghastly bias. And woe to
you.
There are only two ways to handle it: you can hire your advisor and then just
apply a windage factor, like I used to do when I was a rifle shooter. I'd just
adjust for so many miles an hour wind. Or you can learn the basic elements of
your advisor's trade. You don't have to learn very much, by the way, because if
you learn just a little then you can make him explain why he's right. And those
two tendencies will take part of the warp out of the thinking you've tried to
hire done. By and large it works terribly. I have never seen a management
consultant's report in my long life that didn't end with the following
paragraph: "What this situation really needs is more management
consulting." Never once. I always turn to the last page. Of course
Berkshire doesn't hire them, so I only do this on sort of a voyeuristic
basis. Sometimes I'm at a non-profit where some idiot hires one. [Laughter]
16. Seventeen [he means 16]: bias from the non-mathematical nature of the
human brain in its natural state as it deal with probabilities employing crude
heuristics, and is often misled by mere contrast, a tendency to overweigh
conveniently available information and other psychologically misrouted thinking
tendencies on this list.
When the brain should be using the simple probability mathematics of Fermat and
Pascal applied to all reasonably obtainable and correctly weighted items of
information that are of value in predicting outcomes, the right way to think is
the way Zeckhauser plays bridge. It's just that simple. And your brain doesn't
naturally know how to think the way Zeckhauser knows how to play bridge. Now,
you notice I put in that availability thing, and there I'm mimicking some very
eminent psychologists [Daniel] Kahneman, Eikhout[?] (I hope I pronounced that
right) and [Amos] Tversky, who raised the idea of availability to a whole
heuristic of misjudgment. And they are very substantially right.
I mean ask the Coca-Cola Company, which has raised availability to a secular
religion. If availability changes behavior, you will drink a helluva lot more
Coke if it's always available. I mean availability does change behavior and
cognition. Nonetheless, even though I recognize that and applaud Tversky and
Kahneman, I don't like it for my personal system except as part of a greater
sub-system, which is you've got to think the way Zeckhauser plays bridge. And it
isn't just the lack of availability that distorts your judgment. All the things
on this list distort judgment. And I want to train myself to kind of mentally
run down the list instead of just jumping on availability. So that's why I
state it the way I do.
In a sense these psychological tendencies make things unavailable, because if
you quickly jump to one thing, and then because you jumped to it the
consistency and commitment tendency makes you lock in, boom, that's error number
one. Or if something is very vivid, which I'm going to come to next, that will
really pound in. And the reason that the thing that really matters is now
unavailable and what's extra-vivid wins is, I mean, the extra-vividness creates
the unavailability. So I think it's much better to have a whole list of things
that would cause you to be less like Zeckhauser than it is just to jump on one
factor.
Here I think we should discuss John Gutfreund. This is a very interesting human
example, which will be taught in every decent professional school for at least a
full generation. Gutfreund has a trusted employee and it comes to light not
through confession but by accident that the trusted employee has lied like hell
to the government and manipulated the accounting system, and it was really
equivalent to forgery. And the man immediately says, "I've never done it
before, I'll never do it again. It was an isolated example." And of
course it was obvious that he was trying to help the government as well as
himself, because he thought the government had been dumb enough to pass a rule
that he'd spoken against, and after all if the government's not going to pay
attention to a bond trader at Salomon, what kind of a government can
it be?
At any rate, this guy has been part of a little clique that has made, well, way
over a billion dollars for Salomon in the very recent past, and it's a little
handful of people. And so there are a lot of psychological forces at work, and
then you know the guy's wife, and he's right in front of you, and there's human
sympathy, and he's sort of asking for your help, which encourages reciprocation,
and there's all these psychological tendencies are working, plus the fact he's
part of a group that had made a lot of money for you. At any rate, Gutfreund
does not cashier the man, and of course he had done it before and he did do it
again. Well now you look as though you almost wanted him to do it again. Or God
knows what you look like, but it isn't good. And that simple decision destroyed
Jim Gutfreund, and it's so easy to do.
Now let's think it through like the bridge player, like Zeckhauser. You find an
isolated example of a little old lady in the See's Candy Company, one of our
subsidiaries, getting into the till. And what does she say? "I never did it
before, I'll never do it again. This is going to ruin my life. Please help
me." And you know her children and her friends, and she'd been around 30
years and standing behind the candy counter with swollen ankles. When you're an
old lady it isn't that glorious a life. And you're rich and powerful and there
she is: "I never did it before, I'll never do it again." Well
how likely is it that she never did it before? If you're going to catch 10
embezzlements a year, what are the chances that any one of them -- applying
what Tversky and Kahneman called baseline information -- will be somebody who only
did it this once? And the people who have done it before and are going to do
it again, what are they all going to say? Well in the history of the See's Candy
Company they always say, "I never did it before, and I'm never going to do
it again." And we cashier them. It would be evil not to, because terrible
behavior spreads.
Remember...what was it? Serpico? I mean you let that stuff...you've got social
proof, you've got incentive-caused bias, you've got a whole lot of psychological
factors that will cause the evil behavior to spread, and pretty soon the whole
damn...your place is rotten, the civilization is rotten. It's not the right way
to behave. And I will admit that I have...when I knew the wife and children, I
have paid severance pay when I fire somebody for taking a mistress on an
extended foreign trip. It's not the adultery I mind, it's the embezzlement. But
there, I wouldn't do it like Gutfreund did it, where they'd been cheating
somebody else on my behalf. There I think you have to cashier. But if they're
just stealing from you and you get rid of them, I don't think you need the last
ounce of vengeance. In fact I don't think you need any vengeance. I don't think
vengeance is much good.
17. Now we come to bias from over-influence by extra-vivid evidence.
Here's one that...I'm at least $30 million poorer as I sit here giving this
little talk because I once bought 300 shares of a stock and the guy called me
back and said, "I've got 1,500 more," and I said, "Will you hold
it for 15 minutes while I think about it?" And the CEO of this company -- I
have seen a lot of vivid peculiarities in a long life, but this guy set a world
record; I'm talking about the CEO -- and I just mis-weighed it. The truth of the
matter was the situation was foolproof. He was soon going to be dead, and I
turned down the extra 1,500 shares, and it's now cost me $30 million. And that's
life in the big city. And it wasn't something where stock was generally
available. So it's very easy to mis-weigh the vivid evidence, and Gutfreund did
that when he looked into the man's eyes and forgave a colleague.
18. Twenty-two [he means 18]: Mental confusion caused by information not
arrayed in the mind and theory structures, creating sound generalizations
developed in response to the question "Why?" Also, mis-influence from
information that apparently but not really answers the question "Why?"
Also, failure to obtain deserved influence caused by not properly explaining
why.
Well we all know people who've flunked, and they try and memorize and they try
and spout back and they just...it doesn't work. The brain doesn't work that way.
You've got to array facts on the theory structures answering the question
"Why?" If you don't do that, you just cannot handle the world.
And now we get to Feuerstein, who was the general counsel with Salomon when
Gutfreund made his big error, and Feuerstein knew better. He told Gutfreund,
"You have to report this as a matter of morality and prudent business
judgment." He said, "It's probably not illegal, there's probably no
legal duty to do it, but you have to do it as a matter of prudent conduct and
proper dealing with your main customer." He said that to Gutfreund on at
least two or three occasions. And he stopped. And, of course, the persuasion
failed, and when Gutfreund went down, Feuerstein went with him. It ruined a
considerable part of Feuerstein's life.
Well Feuerstein, [who] was a member of the Harvard Law Review, made an
elementary psychological mistake. You want to persuade somebody, you really tell
them why. And what did we learn in lesson one? Incentives really matter? Vivid
evidence really works? He should've told Gutfreund, "You're likely to ruin
your life and disgrace your family and lose your money." And is Mozer worth
this? I know both men. That would've worked. So Feuerstein flunked elementary
psychology, this very sophisticated, brilliant lawyer. But don't you do that.
It's not very hard to do, you know, just to remember that "Why?" is
very important.
19. Other normal limitations of sensation, memory, cognition and knowledge.
Well, I don't have time for that.
20. Stress-induced mental changes, small and large, temporary and permanent.
Here, my favorite example is the great Pavlov. He had all these dogs in cages,
which had all been conditioned into changed behaviors, and the great Leningrad
flood came and it just went right up and the dog's in a cage. And the dog had as
much stress as you can imagine a dog ever having. And the water receded in time
to save some of the dogs, and Pavlov noted that they'd had a total reversal of
their conditioned personality. And being the great scientist he was, he spent
the rest of his life giving nervous breakdowns to dogs, and he learned a helluva
lot that I regard as very interesting.
I have never known any Freudian analyst who knew anything about the last work of
Pavlov, and I've never met a lawyer who understood that what Pavlov found out
with those dogs had anything to do with programming and de-programming and cults
and so forth. I mean the amount of elementary psychological ignorance that is
out there in high levels is very significant[?].
21. Then we've got other common mental illnesses and declines, temporary and
permanent, including the tendency to lose ability through disuse.
22. And then I've got development and organizational confusion from
say-something syndrome.
And here my favorite thing is the bee, a honeybee. And a honeybee goes out and
finds the nectar and he comes back, he does a dance that communicates to the
other bees where the nectar is, and they go out and get it. Well some scientist
who is clever, like B.F. Skinner, decided to do an experiment. He put the nectar
straight up. Way up. Well, in a natural setting, there is no nectar where
they're all straight up, and the poor honeybee doesn't have a genetic program
that is adequate to handle what he now has to communicate. And you'd think the
honeybee would come back to the hive and slink into a corner, but he doesn't. He
comes into the hive and does this incoherent dance, and all my life I've been
dealing with the human equivalent of that honeybee. [Laughter] And it's a very
important part of human organization so the noise and the reciprocation and so
forth of all these people who have what I call say-something syndrome don't
really affect the decisions.
Now the time has come to ask two or three questions. This is the most important
question in this whole talk:
1. What happens when these standard psychological tendencies combine? What
happens when the situation, or the artful manipulation of man, causes several of
these tendencies to operate on a person toward the same end at the same time?
The clear answer is the combination greatly increases power to change behavior,
compared to the power of merely one tendency acting alone. Examples are:
- Tupperware parties. Tupperware's now made billions of dollars out
of a few manipulative psychological tricks. It was so schlocky that directors of
Justin Dart's company resigned when he crammed it down his board's throat. And
he was totally right, by the way, judged by economic outcomes.
- Moonie [as in Sun Myung Moon and the Unification Church] conversion
methods: boy do they work. He just combines four or five of these things
together.
- The system of Alcoholics Anonymous: a 50% no-drinking rate outcome when
everything else fails? It's a very clever system that uses four or five
psychological systems at once toward, I might say, a very good end.
- The Milgrim experiment. It's been widely interpreted as mere obedience, but
the truth of the matter is that the experimenter who got the students to
give the heavy shocks in Milgrim, he explained why. It was a false explanation.
"We need this to look for scientific truth," and so on. That
greatly changed the behavior of the people. And number two, he
worked them up: tiny shock, a little larger, a little larger. So commitment and
consistency tendency and the contrast principle were both working in favor
of this behavior. So again, it's four different psychological tendencies. When
you get these lollapalooza effects you will almost always find four or five of
these things working together.
When I was young there was a whodunit hero who always said, "Cherche la
femme." [In French, "Look for the woman."] What you should search
for in life is the combination, because the combination is likely to do you in.
Or, if you're the inventor of Tupperware parties, it's likely to make you
enormously rich if you can stand shaving when you do it.
One of my favorite cases is the McDonald-Douglas airliner evacuation disaster.
The government requires that airliners pass a bunch of tests, one of them is
evacuation: get everybody out, I think it's 90 seconds or something like that.
It's some short period of time. The government has rules, make it very
realistic, so on and so on. You can't select nothing but 20-year-old
athletes to evacuate your airline. So McDonald-Douglas schedules one of these
things in a hangar, and they make the hangar dark and the concrete floor is 25
feet down, and they've got these little rubber chutes, and they've got all these
old people, and they ring the bell and they all rush out, and in the morning,
when the first test is done, they create, I don't know, 20 terrible injuries
when people go off to hospitals, and of course they scheduled another one for
the afternoon.
By the way they didn't read[?] the time schedule either, in addition to causing
all the injuries. Well...so what do they do? They do it again in the afternoon.
Now they create 20 more injuries and one case of a severed spinal column with
permanent, unfixable paralysis. These are engineers, these are brilliant people,
this is thought over through in a big bureaucracy. Again, it's a combination of
[psychological tendencies]: authorities told you to do it. He told you to make
it realistic. You've decided to do it. You'd decided to do it twice.
Incentive-caused bias. If you pass you save a lot of money. You've got to jump
this hurdle before you can sell your new airliner. Again, three, four, five of
these things work together and it turns human brains into mush. And maybe you
think this doesn't happen in picking investments? If so, you're living in a
different world than I am.
Finally, the open-outcry auction. Well the open-outcry auction is just made to
turn the brain into mush: you've got social proof, the other guy is bidding, you
get reciprocation tendency, you get deprival super-reaction syndrome, the thing
is going away... I mean it just absolutely is designed to manipulate people into
idiotic behavior.
Finally the institution of the board of directors
of the major American company. Well, the top guy is sitting there, he's an
authority figure. He's doing asinine things, you look around the board, nobody
else is objecting, social proof, it's okay? Reciprocation tendency, he's raising
the directors fees every year, he's flying you around in the corporate airplane
to look at interesting plants, or whatever in hell they do, and you go and you
really get extreme dysfunction as a corrective decision-making body in the
typical American board of directors. They only act, again the power of
incentives, they only act when it gets so bad it starts making them look
foolish, or threatening legal liability to them. That's Munger's rule. I mean
there are occasional things that don't follow Munger's rule, but by and large
the board of directors is a very ineffective corrector if the top guy is a
little nuts, which, of course, frequently happens.
2. The second question: Isn't this list of standard psychological tendencies
improperly tautological compared with the system of Euclid? That is, aren't
there overlaps? And can't some items on the list be derived from combinations
of other items?
The answer to that is, plainly, yes.
3. Three: What good, in the practical world, is the thought system indicated by
the list? Isn't practical benefit prevented because these psychological
tendencies are programmed into the human mind by broad evolution so we can't get
rid of them? [By] broad evolution, I mean the combination of genetic and
cultural evolution, but mostly genetic.
Well the answer is the tendencies are partly good and, indeed, probably much
more good than bad, otherwise they wouldn't be there. By and large these rules
of thumb, they work pretty well for man given his limited mental capacity. And
that's why they were programmed in by broad evolution. At any rate, they can't
be simply washed out automatically and they shouldn't be. Nonetheless, the
psychological thought system described is very useful in spreading wisdom and
good conduct when one understands it and uses it
constructively.
Here are some examples:
- one: Karl Braun's communication practices. He designed oil
refineries with spectacular skill and integrity. He had a very simple rule.
Remember I said, "Why is it important?" You got fired in the
Braun company. You had to have five Ws. You had to tell Who, What you wanted to
do, Where and When, and you had to tell him Why. And if you wrote a
communication and left out the Why you got fired, because Braun knew it's
complicated building an oil refinery. It can blow up...all kinds of things
happen. And he knew that his communication system worked better if you always
told him why. That's a simple discipline, and boy does it work.
- Two: the use of simulators in pilot
training. Here, again, abilities attenuate with disuse. Well the simulator is
God's gift because you can keep them fresh.
- Three: The system of Alcoholics Anonymous, that's certainly a constructive use
of somebody understanding psychological tendencies. I think they just wandered
into it, as a matter of fact, so you can regard it as kind of an evolutionary
outcome. But just because they've wandered into it doesn't mean you can't invent
its equivalent when you need it for a good purpose.
- Four: Clinical training in medical schools: here's a profoundly correct way of
understanding psychology. The standard practice is watch one, do one, teach
one. Boy does that pound in what you want pounded in. Again, the consistency
and commitment tendency. And that is a profoundly correct way to teach clinical
medicine.
- Five: The rules of the U.S. Constitutional Convention: totally secret, no vote
until the whole vote, then just one vote on the whole Constitution. Very
clever psychological rules, and if they had a different procedure, everybody
would've been pushed into a corner by his own pronouncements and his own oratory
and his own... And no recorded votes until the last one. And they got it
through by a whisker with those wise rules. We wouldn't have had the
Constitution if our forefathers hadn't been so psychologically acute. And look
at the crowd we got now.
- Six: the use of granny's rule. I love this. one of the psychologists who
works for the Center gets paid a fortune running around America, and he teaches
executives to manipulate themselves. Now granny's rule is you don't get the ice
cream unless you eat your carrots. Well granny was a very wise woman. That is a
very good system. And so this guy, a very eminent psychologist, he runs around
the country telling executives to organize their day so they force themselves to
do what's unpleasant and important by doing that first, and then rewarding
themselves with something they really like doing. He is profoundly correct.
- Seven: the Harvard Business School's emphasis on decision trees. When I was
young and foolish I used to laugh at the Harvard Business School. I said,
"They're teaching 28-year-old people that high school algebra works in real
life?" We're talking about elementary probability. But later I wised up and
I realized that it was very important that they do that, and better late than
never.
- Eight: the use of post-mortems at Johnson & Johnson. At most corporations
if you make an acquisition and it turns out to be a disaster, all the paperwork
and presentations that caused the dumb acquisition to be made are quickly
forgotten. You've got denial, you've got everything in the world. You've got
Pavlovian association tendency. Nobody even wants to even be associated with the
damned thing or even mention it. At Johnson & Johnson, they make everybody
revisit their old acquisitions and wade through the presentations. That is a
very smart thing to do. And by the way, I do the same thing routinely.
- Nine: the great example of Charles Darwin is he avoided confirmation bias.
Darwin probably changed my life because I'm a biography nut, and when I found
out the way he always paid extra attention to the disconfirming evidence and all
these little psychological tricks. I also found out that he wasn't very smart by
the ordinary standards of human acuity, yet there he is buried in
Westminster Abbey. That's not where I'm going, I'll tell you. And I said,
"My God, here's a guy that, by all objective evidence, is not nearly as
smart as I am and he's in Westminster Abbey? He must have tricks I should
learn." And I started wearing little hair shirts like Darwin to try and
train myself out of these subconscious psychological tendencies that cause so
many errors. It didn't work perfectly, as you can tell from listening to this
talk, but it would've been even worse if I hadn't done what I did. And you can
know these psychological tendencies and avoid being the patsy of all the
people that are trying to manipulate you to your disadvantage, like Sam Walton.
Sam Walton won't let a purchasing agent take a handkerchief from a salesman. He
knows how powerful the subconscious reciprocation tendency is. That is a
profoundly correct way for Sam Walton to behave.
- Ten: Then there is the Warren Buffett rule for
open-outcry auctions: don't go. We don't go to the closed-bid auctions too
because they...that's a counter-productive way to do things ordinarily for a
different reason, which Zeckhauser would understand.
4. Four: What special knowledge problems lie buried in the thought system
indicated by the list?
Well one is paradox. Now we're talking about a type of human wisdom that the
more people learn about it, the more attenuated the wisdom gets. That's an
intrinsically paradoxical kind of wisdom. But we have paradox in mathematics and
we don't give up mathematics. I say damn the paradox. This stuff is wonderfully
useful. And by the way, the granny's rule, when you apply it to yourself, is
sort of a paradox in a paradox. The manipulation still works even though you
know you're doing it. And I've seen that done by one person to another. I drew
this beautiful woman as my dinner partner a few years ago, and I'd never seen
her before. Well, she's married to prominent Angelino, and she sat down next to
me and she turned her beautiful face up and she said, "Charlie," she
said, "What one word accounts for your remarkable success in life?"
And I knew I was being manipulated and that she'd done this before, and I just
loved it. I mean I never see this woman without a little lift in my spirits. And
by the way I told her I was rational. You'll have to judge yourself whether
that's true. I may be demonstrating some psychological tendency I hadn't planned
on demonstrating.
How should the best parts of psychology and economics interrelate in an
enlightened economist's mind? Two views: that's the thermodynamics model. You
know, you can't derive thermodynamics from plutonium, gravity and laws of
mechanics, even though it's a lot of little particles interacting. And here is
this wonderful truth that you can sort of develop on your own, which is
thermodynamics. And some economists -- and I think Milton Friedman is in this
group, but I may be wrong on that --sort of like the thermodynamics model. I
think Milton Friedman, who has a Nobel prize, is probably a little wrong on
that. I think the thermodynamics analogy is over-strained. I think knowledge
from these different soft sciences have to be reconciled to eliminate conflict.
After all, there's nothing in thermodynamics that's inconsistent with Newtonian
mechanics and gravity, and I think that some of these economic theories are not
totally consistent with other knowledge, and they have to be bent. And I think
that these behavioral economics...or economists are probably the ones that are
bending them in the correct direction.
Now my prediction is when the economists take a little psychology into account
that the reconciliation will be quite endurable. And here my model is the
procession of the equinoxes. The world would be simpler for a long-term
climatologist if the angle of the axis of the Earth's rotation, compared to the
plane of the Euclyptic, were absolutely fixed. But it isn't fixed. Over every
40,000 years or so there's this little wobble, and that has pronounced long-term
effects. Well in many cases what psychology is going to add is just a little
wobble, and it will be endurable. Here I quote another hero of mine, which of
course is Einstein, where he said, "The Lord is subtle, but not
malicious." And I don't think it's going to be that hard to bend economics
a little to
accommodate what's right in psychology.
5. Fifth: The final question is: If the thought system indicated by this list of
psychological tendencies has great value not recognized and employed, what
should the educational system do about it?
I am not going to answer that one now. I like leaving a little mystery.
Have I used up all the time so there's no time for questions?
----------------------------------------------------------------------------
Moderator: I think that what we're going to do is we're going to borrow a little
bit of time from the end of the day questions, and we're going to move it and
allocate it to Charles Munger, if that's acceptable to everybody.
Munger: By the way, the dean of the Stanford Law School is here today, Paul
Brest, and he is trying to create a course at the Stanford Law School that tries
to work stuff similar to this into worldly wisdom for lawyers, which I regard as
a profoundly good idea, and he wrote an article about it, and you'll be given a
copy along with Cialdini's book. [The article Mr. Munger is referring to is
called "On Teaching Professional Judgment" by Paul Brest and Linda
Krieger. It was published in the July 1994 edition of the Washington Law
Review.] Questions?
Audience Member #1: Will we be able to get a copy of that list of 24 standard
causes of human misjudgment]?
Munger: Yes. I presumed there would be one curious man [laughter], and I have
it and I'll put it over there on the table, but don't take more than one,
because I didn't anticipate such a big crowd. And if we run
short, I'm sure the Center is up to making other copies.
Audience Member #2: If I had listened to this
talk I might have thought that Charles Munger was a psychology professor
operating in a business school. Every once in a while a micro-issue -- you
told us how you would've deal with one of these issues, for example with the
unfortunate lady See's -- but you didn't tell us how these tendencies affected
you and what's probably the most important, or one of the most important
elements of your success, which was deciding where to invest your money. And I'm
wondering if you might relate some of these principles to some of your past
decisions that way.
Munger: Well of course an investment decision in the common stock of a company
frequently involves a whole lot of factors interacting. Usually, of course,
there's one big, simple model, and a lot of those models are microeconomic.
And I have a little list of -- it wouldn't be nearly 24, of those -- but I don't
have time for that one. And I don't have too much interest in teaching other
people how to get rich. And that isn't because I fear the competition or
anything like that -- Warren has always been very open about what he's learned,
and I share that ethos. My personal behavior model is Lord Keynes: I wanted to
get rich
so I could be independent, and so I could do other things like give talks on
the intersection of psychology and economics. I didn't want to turn it into a
total obsession.
Audience Member #3: Out of those 24, could you tell us the one rule that's
most important?
Munger: I would say the one thing that causes the most trouble is when you
combine a bunch of these together, you get this lollapalooza effect. And again,
if you read the psychology textbooks, they don't discuss how these things
combine, at least not very much. Do they multiply? Do they add? How does it
work? You'd think it'd be just an automatic subject for research, but it doesn't
seem to turn the psychology establishment on. I think this is a man from Mars
approach to psychology.
I just reached in and took what I thought I had to have. That is a different set
of incentives from rising in an economic establishment where the rewards system,
again, the reinforcement, comes from being a truffle hound. That's what Jacob
Viner, the great economist called it: the truffle hound -- an animal so bred and
trained for one narrow purpose that he wasn't much good at anything else, and
that is the reward system in a lot of academic departments. It is not
necessarily for the good. It may be fine if you want new drugs or something. You
want people stunted in a lot of different directions so they can grow in one
narrow direction, but I don't think it's good teaching psychology to the masses.
In fact, I think it's terrible.