A Billionaire’s Bad Thinking – Charlie Munger’s Approach to Psychology

Both ants and humans are made up of nerve cells. Engraved in these cells are behavioural algorithms. Many of these are useful. For example, ants will follow the lead ant back to the hive. However, the algorithms can malfunction. Sometimes the head ant is led astray and starts walking in a big circle; because of their genetic programming, all the other ants will follow the lead ant round and round until they perish.

Just as an ant’s behavioural algorithms can be misled by circumstances or manipulated by other creatures; so too are humans misled by our behavioural algorithms.

In this article, ways in which human behavioural algorithms can lead to bad thinking are highlighted. This follows Charlie Munger’s perennial advice of “invert, always invert”: focussing on avoiding the bad is usually a superior method of getting to the good: Just tell me where I am going to die and I’ll never go there.

The superpower of incentives

“Whose bread I eat, his song I sing”.

Human thinking is utterly under the control of incentives. Often, the influence incentives play on our thinking is subconscious.

Incentive caused bias is a widespread form of bad thinking. Driven by incentives, men with decent natures subconsciously drift into immoral behaviour.

For example, there was once a doctor from Munger’s home-town who was offered decent money for gall bladders. As he performed legitimate gall bladder removals, and saw increased profits selling them, the doctor slowly came to believe the gallbladder was the source of all medical evil. Thus, he saw it as his medical duty to rapidly and repeatedly find reasons to remove gallbladders. If accused, the doctor would swear to high heaven that the profits from selling gallbladders had nothing to do with his medical diagnosis.

The cognitive drift of this doctor is present in every profession. This often happens subconsciously, where professional incentives cloud judgement. As Munger says, in his long life he never saw a management consultant report that didn’t end with “this problem needs more management consulting”.

Thinking from love / hate

Just as a newly hatched baby goose is programmed to love the first creature that is nice to it; so too do humans have a strong inborn tendency to love those nice to them early on. Equally, humans are also born to dislike and hate, thus the history of man contains almost continuous war.

Both loving & hating acts as a conditioning device that distorts our thinking.

Once we like / love someone, humans reflexively tend to:

1) ignore faults of and comply with wishes of the object of our affection

2) favour people, products and actions merely associated with the object of affection

3) distort facts to further facilitate affection

Once we dislike / hate someone, we are reflexively conditioned to:

1) ignore virtues in the object of dislike

2) dislike people, products and actions merely associated with the object of dislike,

3) distort other facts to further facilitate hatred.

Whilst the phenomena of thinking from love might be useful in maintaining social institutions such as marriage; the cognitive distortions that occur from loving / hating can be huge. This is seen in many abusive relationships where love makes one ignore the other’s faults. And on the hating side, factual distortions can make mediation between opponents nearly impossible. Writing in 2005, Munger explains how “mediations between Israelis and Palestinians are difficult because facts in one side’s history overlap very little with facts from the other sides”.

Inconsistency-Avoidance Tendency

“I wear the chains I forged in life”

Here, Munger is referring to the chains of habit that were too light to be felt before they became too strong to be broken. Because they are so hard to change, habits are akin to cognitive chains.

Our brains conserve programming space by being reluctant to change. The human mind works a lot like the human egg: when one sperm gets in, there is an automatic shut-off device that bars any other sperm from getting in. This anti-change tendency is likely rooted in the fact that our ancestors gained a survival advantage by cooperating in groups, which would have been difficult if everyone was always changing responses.

Inconsistency avoidance tendency contributes to the maintenance of bad habits - few can list a lot of bad habits they have changed. Beyond physical action habits, we also tend to hold onto mental habits. Thus, people tend to accumulate large mental holdings of fixed conclusions that do not change even when there is evidence they are wrong. Accordingly, many are imprisoned in poor conclusions they formed early and will carry to their graves.

Holding onto old mental errors even happens in hard science departments. As Max Planck, Nobel laureate explains: “science advances one funeral at a time”. Planck was observing how radically new ideas are seldom accepted by the old guard; instead, progress is made by a new generation that comes along, less brain blocked by its own previous conclusions. Munger provides the example of Einstein who was a great destroyer of his own old ideas when young, but could never accept the full implications of quantum mechanics as he got older.

Inconsistency avoidance tendency interplays with thinking from love / hate.

When Benjamin Franklin wanted the approval of an important man, he would manoeuvre the man into doing some trivial favour like lending Franklin a book; then, the man would admire and trust Franklin more because a non-trusted Franklin would be inconsistent with the appraisal implicit in lending the book. Now that the important man likes Franklin, he would benefit from the advantages of liking discussed above.

The infamous Stanford Prison Experiments demonstrate how inconsistency avoidance tendency interplays with thinking from hate. The hate is automatically reinforced and compounded when guards are initially cruel to inmates. Munger explains this phenomenon as a result of Inconsistency avoidance tendency: we justify our bad treatment with even worse treatment to avoid being inconsistent.

Envy & Jealousy tendency

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

Because our ancestors suffered scarcity in food, humans have an evolutionary bias towards envy & jealousy.

Munger laments the absence of envy from psychology textbooks. Munger argues that many arguments are simply rooted in envy. However, there is a strong taboo against pointing this out. The taboo of recognising the effects of envy further amplify the clouding effect envy has on our cognition.

Insidiously, this occurs constantly through social media: we don’t recognise that we are comparing and falling into envy – but it is an inevitable and inescapable component of human nature. This innate tendency towards envy / jealous, combined with a taboo against recognising its presence, likely lies at the root of much distress caused by social media. As many studies have demonstrated, there is a strong correlation between social media use and mental health issues.

Reciprocation tendency

“You can always tell the man off tomorrow if it is such a good idea”

The automatic tendency of humans to reciprocate both favours and disfavours is extreme. All great wars are rooted in reciprocation of disfavours. The tendency to reciprocate favour for favour is also very intense.

Psychologist Robert Cialdini demonstrated how readily people can be manipulated by triggering reciprocation. In an experiment, university students were asked to supervise a group of children visiting the zoo. Surprisingly, around 10% agreed. Cialdini then took advantage of reciprocation tendency. He first asked the students to supervise the children once a week for a year – which had no takers. This 100% rejected request was followed with “will you at least spend one afternoon taking them to the zoo” – which around 50% of the university students then agreed to.

In the experiment above, the psychologist made a concession by reducing the request from a weekly commitment to a one-off trip. The students then reciprocated this concession with a concession of their own: agreeing to at least one trip. The power reciprocation tendency has on our cognition is often exploited by salespeople dispensing minor favours. Thus we often find ourselves buying, not because we think the purchase is a good idea, but because we are reciprocating felicitous favours.

Influence from mere association

“There’s no smoke without fire … but there is dry ice”

Humans have a tendency to draw generalized associations. These associations heavily distort our thinking. One example of this is linked to thinking from love / hate. However, the associations apply more generally too.

Humans make rough associations and then clump traits together; identifying shared traits based on mere association. This is commonly understood as stereotypes. Munger provides the following example: Peter knows Joe is 90, and since most 90 year olds don’t think very well he appraises Joe as a klutz even if Joe thinks very well. This goes to demonstrate that the trend does not always predict destiny – bearing this in mind helps us avoid bad thinking from stereotypes, and it might also have saved the life of the fellow who drowned in a river that averaged out at 18 inches deep.

Pain-avoiding tendency

“One does not need to hope, to persevere”

Humans will distort cognition to avoid pain.

For example, an addicted person tends to believe they remain in a respectable condition, with reasonable prospects even as their condition worsens. Here, the addicted person is avoiding the psychological pain of putting up with the effects of their addiction.

Similarly, years after he went missing – a mother still refused to accept her son won’t be coming back from a trip over the Atlantic. The pain of accepting his loss is too high and thus her psychology makes her deny reality.

Excessive Self-regard tendency

“What a man wishes, that also will he believe”

90% of Swedish drivers appraise themselves as being above average drivers. Such misappraisals are a constant in human cognition and apply not just to our skills, but also our possessions. For example, once we own an item of clothing it becomes worth much more to us then what we initially paid for it. In psychology, this is called the endowment effect. And it applies to our clothes, our children and even our colleagues/employees: we hold them in higher esteem because of mere association to ourselves.

The mis-cognition effect of excessive self-regard tendency also applies to our decisions. All of man’s decisions are suddenly regarded better then they would have been before he made the decision. Thus, humans have constantly to be reminded that we should “cut our losses”; because our excessive self-regard tendency makes this something hard to do.

Further examples of bad thinking occurring because of excessive self-regard tendency can be found in gambling. State lotteries take advantage of man’s irrational love of self-picked numbers: people play much less when numbers are distributed randomly then when players are able to pick their own numbers. Similarly, sports betting is likely so addictive because of man’s automatic over appraisal of our own analysis.

Whilst excessive self-regard generally leads to bad thinking; Munger takes pains to point out that the human tendency for overoptimism can sometimes be useful because of how success can come as a result of overconfidence: “Never underestimate the man who overestimates himself”.

Availability miswieghting / Loss Aversion

“When I’m not near the girl I love, I love the girl I’m near”

Man’s imperfect, limited-capacity brain drifts to working with what is easily available to it. One explication of this is loss aversion tendency; where we place far greater weight on some immediate loss than is rationally warranted.

For humans, loss hurts more than gain. The amount of pleasure we experience from a £10 gain does not match the amount of pain we experience from £10 loss.

The Munger family dog demonstrates poor thinking from loss aversion. The usually very friendly dog will bite if you take away food it was already given. There is nothing more foolish than biting the hand that feeds you, but the dog cannot help it when something he already owned is taken away.

Humans are much like the Munger dog. Our deep dislike for losses leads to inappropriate reactions to problems. For example, a man with 10 million pounds will be extremely irritated by an accidental loss of £100 from his wallet. Loss aversion makes us focus on what is near instead of what matters.

Human’s loss aversion leads to ideological views being entrenched. Since ideas of dissenters would diminish the influence of views people already own, strong hatred is triggered towards vocal non-believers. University Liberal Arts departments, law schools, and business organisations all display such ideology-based groupthink that rejects conflicting inputs.

Authority / social proof

“Monkey See, Monkey Do”

Human society has always been formally organized into dominance hierarchies. Thus, humans have a powerful tendency to follow an authority figure. This tendency can turn one’s brain into mush.

For example, a WW2 pilot, eager to please his boss, misinterpreted a minor shift in the General’s position as a direction to veer the plane into a crash. Such an occurrence is so common that junior pilots are specifically trained to ignore foolish orders – yet still, copilots in simulator exercises will allow the plane to crash because of some extreme and obvious simulated error of a chief pilot.

Humans are also strongly influenced by the authority of the group. Humans have a strong tendency to follow the group, even when the group’s actions are irrational. Psychology experiments have shown that if ten stooges all face the rear of the elevator, a stranger will enter and do the same – even though facing the back of an elevator makes no logical sense.

Social proof / authority tendency often leads to poor thinking. Advertisers are well-aware of the adage “monkey see, monkey do”, and therefore, they will pay huge sums to demonstrate social proof of their product being used. Much commercial activity is generated not by quality, but as a product of such marketing techniques.

As Munger lectures, few skills are more worth having then the ability to ignore examples / orders when they are wrong.

Contrast Miserection

“A small leak can sink a great ship”

The only way that humans are able to see is because our eyes register contrast. The same applies to perception and cognition.

What is registered in our perception is based on the apparentness of contrast, not any standard scientific units. If you place your hand in hot water, a bucket of water at room temperature will suddenly feel very very cold; if you then place your hands in iced water, the bucket of water at room temperature will feel very very hot. This experiment demonstrates how we do not register absolute scientific units like Celsius or Fahrenheit, we are only able to register contrast.

This reliance on contrast leads to many instances of bad thinking. For example, con artists will manipulate our contrast-dependent cognition to misfocus our attention and allow us to be stolen from. Con artists create high contrast touch pressure elsewhere which takes wrist pressure below perception, allowing our watches to be swindled. Similarly, modern day cyber security breaches, such as social engineering, rely on creating contrasts which distract us from the real threat.

Contrast is also a powerful sales technique. Many are persuaded to buy an overpriced and unnecessary $1,000 dashboard trim merely because the price appears low compared to a $65,000 car. And salesman have been known to show three awful houses before taking you to a merely bad house.

The reason a small leak will sink a great ship is because the brain misses slight changes. Just as a frog would jump out of hot water but boil to death in a pot that is slowly warmed up; human cognition, misled by tiny changes of low contrast, will often miss a trend that is a terrible destiny. That is, many will walk straight into disaster, but fail to recognise they are doing so because each step is small. Many businesses die in such a manner.

Twaddle Tendency

“Two ears, one mouth”

A honeybee normally finds nectar and does a dance communicating to other bees where the nectar is. A scientist once placed nectar straight up, a direction the honeybee doesn’t have a programmed dance by which to communicate. Instead of hiding away silently, the honeybee did an incoherent dance that wasted much of the hive’s worker energy.

According to Munger, all of life is filled with the human equivalent of that honeybee. The majority of meetings in heavily bureaucratic organisations is often just twaddle. Munger atones that keeping prattling people away from serious work is a very important part of wise administration / management.

Reason-Respecting Tendency

“Who, what, when, where and why”

Reason respecting is a conditioned reflex. There is a widespread appreciation of the importance of reasons for doing something. However, this can often be manipulated.

For example, psychology experiments show that even meaningless or incorrect reasons will drastically increase compliance. Saying “I have to make some copies” as a reason for pushing in-line leads to far less dissent from those in the queue. In wider society, it is a widespread practise by commercial / cult members to lay out many “claptrap reasons” to help them get what they don’t deserve.

Carl Braun, who built many successful oil refineries, applied the inverse: he made sure every order ever given in his company included Who was to do What, When, Where and Why. Braun would fire anyone who left out reasons for giving an order and built a very successful company.

Lollapalooza Tendency

“To the man with a hammer, everything looks like a nail”

When a series of psychological tendencies all work together to give rise to a particular outcome; we have what Munger calls a “lollapalooza” effect.

Such a psychological “lollapalooza” is responsible for extreme instances of bad thinking such as when a young mind is inculcated into a cult. Under multiple psychological biases, the mind snaps into zombiedom and often cannot be retrieved.

Charlie Munger read three psychology textbooks but could not find a single reference to the effects of confluence or anything approximating the “lollapalooza” effect. Munger explains that this is because many psychologists are like a truffle hound: so trained and bred for one narrow purpose that they are no good at anything else. Munger puts forth that a lot of the most extreme consequences of bad thinking come because of the lollapalooza effect, and therefore, it is important to not be like a truffle hound.

Munger, one of the greatest investors of all time, always looked for lollapalooza effects in his investments. Thus, by avoiding being like the truffle hound, we might get better not just at thinking but in investing too.

In this article, we have focussed mainly on instances of bad thinking inspired by Chapter 11 of Poor Charlie’s Almanack. In that chapter, Munger spends over a hundred pages on these biases of human thinking; giving many more examples, analogies, synergies and, most importantly, techniques to apply to avoid falling into such poor thinking.

Whilst he was never told where he’d die, at least he can help us avoid bad thinking.

Invert, always invert.