the psychology of human misjudgment marginalia...the psychology of human misjudgement notes and...

The Psychology of Human Misjudgement

Notes and marginalia on the power of mental models, written after reflection on Charlie Munger’s 1995 talk titled “The Psychology of Human Misjudgment” at Harvard.

Posted to: Marginalia and Notes on http://tyler.is/essays

The Psychology of Human Misjudgement

https://youtu.be/pqzcCfUglws

This is marginalia, it’s my quick notes from the talk above. Assume their may be inaccuracies/misquotes/half-baked notes. Enter at your own risk.

https://youtu.be/pqzcCfUglws

Charlie Munger

“Time and time again, in reality, psychological notions and economic

notions interplay.

The man who doesn’t understand both is a

damn fool.”Posted to: Marginalia and Notes on http://tyler.is/essays

Finding the Causes of Misjudgment❖ This talk is about how to avoid misjudgment, which can make life much better.

❖ People clearly make big mistakes all the time, that was clear. Munger looked for the patterns that drove those mistakes so he could avoid them.

❖ This talk is based on his personal attempt to create a crude system for avoiding bad judgements.

❖ Influence by Cialdini is a great book and helped Munger fill in some of the holes in his personal system when he discovered it later in life.

❖ A few really big ideas give you most of the value of improved decision-making — this talk is an attempt to highlight 24 or so big ideas that are the most useful.


All reality must respect other reality❖ Building mental models for how the world works is a naturally

interdisciplinary thing.

❖ The models discussed here are most interesting when they interplay with a few of the other models to lead to a spectacular effect.

❖ We learn more when we try to understand the different factors that might influence a particular problem or decision.

❖ Learning broadly will help you, and it will also help you avoid “man with the hammer” syndrome where you overly rely on one model.


You Can’t Outsource Thinking❖ You have to understand these biases because it’s not possible to outsource your thinking. Many of

these biases apply just as strongly (if not more so) to others that may be your agents in some capacity.

❖ This isn’t malicious, it’s not that everyone wants to fleece you, it’s that they suffer these same biases as well. They may not understand that what’s psychologically good for them is actually a very bad outcome for you.

❖ What you can do (but it still generally is hard):

❖ Hire your advisor and then apply safeguards to their judgement. Set it up where mistakes or miscalculations won’t hurt you too much.

❖ Learn the basics of that persons field or job, enough that you can have them describe their decisions to you and you can evaluate whether those are good decisions.


24 standard causes of human misjudgment

1. Under-recognition of reinforcement (psychology) or incentives (economics)

2. Simple Psychological Denial

3. Incentive-caused Bias

4. Bias from Commitment and Consistency

5. Skipped in talk

6. Bias from Pavlovian Association

7. Bias from Reciprocation

8. Bias from the Conclusions of Others

9. Bias from Contrast

10. Bias from Authority

11. Bias from Deprival or Loss

12. Bias from Envy/Jealousy

13. Bias from Chemical Dependency

14. Bias from Gambling Compulsion

15. Bias from Likability

16. Bias from Dislike

17. Bias from Inability to Understand Probability

18. Bias from Inconsequential Evidence

19. Not having a Global Framework

20. Limitations of the Brain

21. Stress-induced Mental Changes

22. Mental Illness or Decline

23.“Say Something Syndrome”

24. Concatenated into another bias

All of these causes work primarily on a sub-sub-conscious level, which makes them particularly insidious. Conscious knowledge and diligent reflection while making decisions can help us avoid falling prey to them.


1. Under-recognition of reinforcement (psychology) or incentives (economics)

❖ Incentives are powerful, but even when we know that, we underestimate just how powerful they are. I still underestimate it at my age.

❖ Example: FedEx needed to have faster processing of packages, and they tried everything. Finally, they realized they were paying the night shift by the hour — switching to paying them by the shift solved FedEx’s problem.

❖ Example: Xerox’s new machines were selling poorly because the inferior machine had better compensation incentives for the sales people.

❖ B.F. Skinner’s work clearly shows the power of this.


One Additional Note on B.F. Skinner

❖ He’s lost some reputation, but he was a genius that did counter-intuitive and important work.

❖ Unfortunately, he developed an extreme case of “man with the hammer” syndrome.

❖ As we go through this list, you’ll start seeing why people get man with the hammer syndrome.

❖ When you work deeply in one area, you start assuming


2. Psychological Denial

❖ We all like to avoid pain. Reality is too painful to bear, so you distort it.

❖ We all do this to some extent, but it causes terrible problems

❖ Examples:

❖ Mother who lost a son in the military refuses to believe he’s dead

❖ Parents of murderers who know their son is innocent


3. Incentive-caused Bias❖ Becoming an expert in something or being incented to believe something creates bias in your world-

view

❖ This is one of the most important sources and it barely gets discussed in literature or survey courses.

❖ Can affect both yourself and someone you trust to act as a proxy (agency costs)

❖ Example:

❖ Doctor who removed large amounts of normal gallbladders because he focused on gallbladders and begun to see issues where they didn’t exist

❖ Cost-plus contracts are a great example of how awful this can be. Government contracts intelligently moved away from this, but many examples still exist (professional services firms, utility companies)


Making Misbehavior Hard is Saintly❖ There will always be thieves and frauds around, you must design your thinking to be resistant to their

efforts.

❖ The more misbehavior our society allows, the more misbehavior we’ll have.

❖ You have a moral obligation to not let ethical misbehavior spread.

❖ People with loose accounting systems invite unethical behavior (intentional or not) from those around them. If you can constantly measure value, you’ll avoid falling prey to misbehavior or catch it much sooner.

❖ Example:

❖ Cash Registers make theft hard

❖ Firing someone who’s stolen from the company

❖ Westinghouse and Joe Jett


4. Bias from Consistency and Commitment

❖ The human mind treats thoughts like the human egg treats sperm – when one thought gets in, the brain creates a protective barrier so competitive thoughts can’t.

❖ Including tendency to avoid cognitive dissonance and the tendency towards self-confirmation of anything we’ve previously thought or expressed (especially those conclusions we had to work hard to discover)

❖ Example: Max Planck, the innovative new psychics was never accepted by the old guard, eventually they were replaced by a new cohort.


Consistency and Commitment Bias (cont.)❖ The more you publicly express something, the deeper into your thought

process it gets cemented.

❖ The things you say and do become the things you think.

❖ The earlier you do this, the more cemented it becomes.

❖ This can be artificially boosted by things like painful qualifying and initiation rituals.

❖ Example: The Chinese war-prisoner brainwashing system focused on many small commitments and declarations that built up into a new way of thinking.


6. Bias from Pavlovian Association

❖ Mistakenly using past correlations as a basis for decision-making.

❖ Pavolv’s dogs is a well-known story, but is almost never explained in the context of how it effects us — which it does every day in massive ways.

❖ Examples:

❖ Most of advertising is primarily pavlovian (association with positive images and experiences)

❖ Persian messenger syndrome.


Persian Messenger Syndrome

❖ If you shoot the messenger if they give you bad news, they just stop bringing you the bad news. They associate pain with doing the right thing, so they stop thinking of it as the right thing.

❖ That means the leader gets insulated from reality and can’t make good decisions.

❖ You can see this clearly with Bill Paley (CBS) in his last few years; people knew it was bad for your career to bring him bad news, so they didn’t and Bill made some really bad decisions in his last few years running CBS.


Re-enforcement / Skinnerian Conditioning

❖ When we’re rewarded or almost rewarded while doing something, we learn to do more of it — regardless of whether the reward was tied to benefit.

❖ Being successful in one are can lead us to over-trust ourselves in others.

❖ Measuring real value in a granular way is one way to avoid making big mistakes based on overconfidence.


7. Bias from Reciprocation

❖ We want to act as others expect us to, following the norms of our society.

❖ Example:

❖ When someone asks us to do something big, we’re more likely to do one small thing.

❖ When someone gives us something, we’re more likely to reciprocate with what they want (why Walmart buyers can’t take anything from sales people)


8. Bias from the Conclusions of Others

❖ Social proof is exceptionally powerful, particularly when we’re uncertain or stressed. We’re conditioned to believe in “safety in numbers.”

❖ Example:

❖ One oil company bought a fertilizer company, so they all did, and it ended in disaster.

❖ You see this with irrational exuberance in markets


Bias from Specificity and Elegance

❖ Over-trusting a complex system that looks precise and elegant. “It is better to be roughly right than precisely wrong” -Carveth Read (commonly misattributed to Keynes)


9. Bias from Contrast-caused Distortions❖ We judge things by contrast to our other experiences, not by objective reality.

❖ Getting broader experience can help you avoid over-reacting to the contrast between any two items or events.

❖ If you one hand in cold water, one in hot water, and then put both in the same water — each hand will feel like the new bucket is a different temp. Your thinking works the same way.

❖ Example: Anchoring someone on price. Having a bad second marriage because it’s a slight improvement over a worst first marriage.

❖ How to boil a live frog, slowly heat up the water. “may not be true about the frog, but it definitely is true about most businessmen.


10. Bias from Influence of Authority

❖ If someone in a position of authority tells you something, you’re

❖ Example:

❖ https://en.wikipedia.org/wiki/Milgram_experiment

❖ Co-pilots will often be afraid to over-rule a pilot, even if it’s obvious they should (25% of the time in simulation, they fail to over-rule)


https://en.wikipedia.org/wiki/Milgram_experiment

11. Bias from Deprival, Scarcity, or Loss❖ People are much more attuned to loss than to gain. When we believe we have

something, we fight viciously not to lose it.

❖ This works just as well on things we’ve almost got, not just things we have.

❖ This is one reason labor negotiations at struggling companies are so hard, no one wants to lose their piece, even if the new reality means there’s less to go around.

❖ People don’t react symmetrically to loss and gain unless you’ve trained that response (e.g. Zeckhauser playing bridge)

❖ Example: New Coke, consumers hated losing the taste they’d decided they loved.


12. Bias from Envy or Jealousy

❖ Warren Buffett: “It’s not greed that drives the world, but envy.”

❖ This is an innately understood experience, we’ve all seen it. It’s 2 of the 10 commandments. Yet it’s not mentioned in entry-level psychology texts.


13. Bias from Chemical Dependency

❖ Being dependent on something like drugs or alcohol always causes moral breakdown and is always accompanied by massive denial.

❖ Aggravates the need to distort reality so that it’s endurable.


14. Bias from Missed Gambling Compulsion

❖ Munger calls this out as a separate bias, but I think it’s more of an example of a few of the other biases (deprival, re-enforcement, consistency and commitment, etc.).

❖ Studying how lotteries or gaming machines operate will show you these biases being utilized.


15. Bias from Likability

❖ You have a bias towards people you like (nation, race, personality type, etc.). You also have a bias to like yourself and the way you think.

❖ You are more likely to listen to and learn from these people. And you’re more likely to weight your worldview and ideas more heavily.


16. Bias from Dislike

❖ You’re likely to avoid, discount, or not learn from people you dislike.

❖ When you dislike someone, ask yourself, what can you learn from them. How can the be valuable in a situation?


Man with a Hammer Syndrome❖ This may be the most important part of the talk, because it shows what you want to avoid

and the interplay between different models.

❖ B.F. Skinner ruined his reputation by focusing exclusively on conditioning, which he’d discovered and popularized, but then over-relied on.

❖ Incentive-caused bias: his professional reputation

❖ Bias from likability: he liked himself and his own ideas

❖ Consistency and commitment: he’s heavily expressed and defended his ideas.

❖ Be a welder, not a hammerer. Bring together a different frameworks and tools to create something new.


17. Bias from Inability to Understand Probability

❖ Our brains aren’t mathematical in their natural states. It deals with probabilities using crude heuristics and is often misled by contrast and overweighs available information.

❖ “Brains should use simple probability mathematics (Fermat, Pascal) applied to all reasonably attainable and correctly weighted items of information… You should make decisions the way Zeckhauser plays bridge, that’s all there is to it.”

❖ Notice that I’m using availability as part of this bias, not on it’s own. Availability is powerful, but it’s better when considered in this list entirely so I can teach myself to run down the full list, not just default to the easy answer of availability.


Deep Example: John Gutfreund❖ Ran Salomon Brothers but his career ended in disgrace.

❖ Discovered an employee who had lied to the government, and who appealed to Gutfreund for a second change.

❖ Lots of these biases were at play: Reciprocation (the employee had made Salomon billions and was asking for help), Likability (he was a close friend), Consistency (he had been backed by Salomon as well), etc.

❖ Gutfreund didn’t fire him, and that employee did it again. Easy mistake to make, but ended his career.


What Should he have done?❖ Probability: If we catch a limited number of these, how likely is it this is a real

case of “I never did it before and will never do it again.” People who are innately bad will of course claim they aren’t.

❖ You have to fire them. It’s evil not to, because if you allow this behavior ever, these biases we all have will now help that behavior spread throughout your organization or society (incentive-caused bias, social proof, etc.).

❖ You don’t need vengeance (Munger’s even paid severance pay in these cases if the person was stealing from you, not for you). You do need to cut the cancer out.


18. Bias from Inconsequential Evidence❖ We are hard-wired to avoid negatives or weirdness in others, even if that

particular trait has no bearing on the decision we’re making.

❖ We have to consider the traits that matter in a particular decision and weight them properly. A CEO of a company may be an awful bridge player, but that may not be a trait that matters much to whether they can run a company.

❖ Example: Max Levchin said that early PayPal candidates were not given offers if they said they like sports, because that was an interest the other employees didn’t understand and thought that liking sports was indicative of lacking intelligence or misallocating time.


19. Not Having a Good Global Framework❖ Mental confusion caused by information not arrayed in the mind in theory structures

creating sound generalizations developed in response to the question: why?

❖ You can’t memorize facts, you have to have an understanding of why in order to be able to handle the world well.

❖ Similar: Mis-influence from information that appears to answer why, but doesn’t.

❖ Failure to obtain deserved influence by not properly explaining why.

❖ If you don’t explain why and consistently push the right decisions, you won’t be able to persuade them. Not persuading them might affect you negatively.

❖ The why matters, constantly refocus in on the why. Constantly ask why. 5 Why’s


https://en.wikipedia.org/wiki/5_Whys

20. Other Normal Limitations of the Brain

❖ Our brains don’t naturally deal with probability well. We need to train ourselves to improve our understanding and ability. We need to do the same with other areas where we are naturally limited: Sensation, Memory, Cognition, and Knowledge.

❖ Doing this training work can teach us new heuristics or modes of thinking. If your box of mental tools is bigger than others (or different than others) you can be a genius. Smart training creates brilliance.

❖ Read widely, practice new things, learn new methods, eetc.


21. Stress-induced Mental Changes

❖ When Pavlov’s dogs were trapped in a flood and almost died, many of them had a total reversal of their earlier conditioning. Stress events can change the way we think.

❖ This applies to humans — look at cult programming and deprogramming.


22. Other Common Mental Illnesses or Decline

❖ While it’s hard to protect against mental illness, things like exercise, the science of happiness, diet, sleep and others can have huge effects here. Understanding wellness can be a great hedge against this issue.

❖ Mental decline through disuse is real — if you’re not exercising your decision-making, your facilities are declining, not staying in stasis.


23. Feeling Obligated to “Say Something”❖ This causes organizational confusion and leads you down bad cognitive paths. You

don’t need to have an opinion.

❖ Example: If you give a honeybee nectar in a location that would never happen in nature, they don’t have the language to communicate that location to their hive. They feel obligated to communicate this fact, but this only leads to confusion for other bees — it has no effect other than confusion and waste.

❖ This implies that you have to get good at communication, and that your organization has to have tools for learning to hear new things. But it also implies Munger’s point: if you can’t communicate it, sometimes it’s more efficient or effective not to say anything.


What Munger Thinks You Should Reflect On:


24. The Lollapalooza Effect

❖ What happens when these tendencies combine — working on you towards the same ends at the same time.

❖ Clearly, it dramatically increases the effect.

❖ Examples: Tupperware parties. Alcoholics Anonymous. Milgrim Experiment. Most of the examples in the slides above.

❖ The “Lollapalooza Effect” is where you get combinations of these and that’s where you get the biggest outcomes.


Auctions are Designed to Manipulate You

❖ Berkshire Hathaway doesn’t participate in open outcry markets, they are a lollapalooza effect of social proof, reciprocation, deprival, etc.

❖ Avoid situations that are designed to put you in a situation where these tendencies are working against you instead of for you.


Key Point

Avoid situations that are designed to put you in a situation where these tendencies are working

against you instead of for you.


Question: Isn’t this Improperly Tautological?

❖ Munger lists out the biggest questions he thinks you should have before going to Q&A. Reminds me of Khosla’s suggested pitch deck: tell them the cons too, not just the pros. Teach truth rather than pitching your book.

❖ This question is one of those — this system doesn’t seem that well thought out or presented. It’s not a perfect system. Is that accurate? And Munger’s answer to that is Yes, it’s imperfect, but it’s useful.


Can we change these? Are they hardwired?❖ How practical is the study of these if they are hardwired.

❖ Generally, these tendencies are good. We learned them through evolution because they help us apply limited mental capacity to a very complex world. We shouldn’t want to remove them.

❖ Nonetheless, learning this system is good at increasing wisdom and good conduct, so it is valuable if you understand it and use it constructively.

❖ You can do this for yourself or your organization (set principles and mental models that give your team the tricks they need to make better decisions).


Why teach this?

❖ Theres a difference between information and entertainment — information gets less valuable or personally useful the more people know it. Sharing this information if you know it is valuable because it increases societal value, not personal.

❖ It does seem that these tendencies still work even when you know about them — tricking yourself into doing hard work first still works on you.

❖ Open question: Can this be formally taught in the education system to improve society?


Differing Lists of Standard Causes (mental models)

❖ Farnam Street has an on-going effort to define and explore mental models: https://fs.blog/mental-models/

❖ Rob Kelly has a similar on-going effort: http://robdkelly.com/blog/mental-models/a-list-of-top-100-mental-models-for-business/

❖ Munger’s talk was given from him attempting to work from a transcript — so the video doesn’t perfectly match what he’s reading from. He published a revised written version of the talk in Poor Charlie’s Almanack, which includes the following revised list (next slide)


https://fs.blog/mental-models/

http://robdkelly.com/blog/mental-models/a-list-of-top-100-mental-models-for-business/

http://robdkelly.com/blog/mental-models/a-list-of-top-100-mental-models-for-business/

Munger’s Revised List

1. Reward and Punishment Superresponse Tendency

2. Liking/Loving Tendency

3. Disliking/Hating Tendency

4. Doubt-Avoidance Tendency

5. Inconsistency-Avoidance Tendency

6. Curiosity Tendency

7. Kantian Fairness Tendency

8. Envy/Jealousy Tendency

9. Reciprocation Tendency

10. Influence-from-Mere Association Tendency

11. Simple, Pain-Avoiding Psychological Denial

12.Excessive Self-Regard Tendency

13. Overoptimism Tendency

14. Deprival Superreaction Tendency

15. Social-Proof Tendency

16. Contrast-Misreaction Tendency

17. Stress-Influence Tendency

18. Availability-Misweighing Tendency

19. Use-It-or-Lose-It Tendency

20. Drug-Misinfluence Tendency

21. Senescence-Misinfluence Tendency

22. Authority-Misinfluence Tendency

23. Twaddle Tendency

24. Reason-Respecting Tendency

25. Lollapalooza Tendency — Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome

Munger has published a revised version of the talk in his book “Poor Charlie’s Almanack,” which includes the following list of models:


Random Thoughts❖ “Think the way Zeckhauser Plays Bridge”

❖ “A list of things that cause you to be less like Zeckhauser”

❖ The Granny Rule: Motivate doing hard things by doing them first and using fun things as a reward after

❖ HBS taught “28 year olds that elementary algebra works in the real-world” and thank god they do, better late than never.

❖ Darwin wasn’t that smart, but obsessed about disconfirming evidence and used a number of psychological tricks. That shows the power of this.


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