The Psychology of Misjudgment

(Zen Buddha Silence by Marilyn Barbone)

(Image:  Zen Buddha Silence by Marilyn Barbone.)

October 22, 2017

In order to reach our potential as human beings, we have to study our mistakes, including what causes or leads to those mistakes.

Psychologists have identified cognitive biases we all have (from evolution) that regularly lead to mistakes.  Here’s a short list:

Below is a longer, more comprehensive list of twenty-four psychological tendencies described by Charlie Munger in his talk, “The Psychology of Human Misjudgment.”  See:

Bear in mind this comment by Munger:

Psychological tendencies tend to be both numerous and inseparably intertwined, now and forever, as they interplay in life.

Here are the twenty-four psychological tendencies Munger discusses:

  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

(At the end, Munger gives his answers to a couple of excellent questions, plus a list of good examples to remember.)



Munger introduces his discussion:

Some psychology professors like to demonstrate the inadequacy of contrast-based perception by having students put one hand in a bucket of hot water and one hand in a bucket of cold water.  They are then suddenly asked to remove both hands and place them in a single bucket of room-temperature water.  Now, with both hands in the same water, one hand feels as if it has just been put in cold water and the other hand feels as if it has just been placed in hot water.  When one thus sees perception so easily fooled by mere contrast, where a simple temperature gauge would make no error, and realizes that cognition mimics perception in being misled by mere contrast, he is well on the way toward understanding, not only how magicians fool one, but also how life will fool one.  This can occur, through deliberate human manipulation or otherwise, if one doesn’t take certain precautions against often-wrong effects from generally useful tendencies in his perception and cognition.  (pg. 4)

Our psychological tendencies are generally useful, being the result of evolution.  But in some situations, these tendencies lead to errors.


(1)  Reward and Punishment Superresponse Tendency

Munger observes that hardly a year passes when he does not get some surprise from how powerful incentives are.

Never, ever think about something else when you should be thinking about incentives.


One of the most important consequences of incentive superpower is what I call ‘incentive caused bias.’  A man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior, like the salesmen at Xerox who harmed customers in order to maximize their sales commissions.  (pg. 6)

Munger gives an example of a surgeon who “over the years sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln, Nebraska.”  One of the doctors who participated in the removals was a family friend (of the Mungers), so Munger asked him if the surgeon in question thought, ‘Here’s a way for me to exercise my talents and make a high living by doing a few maimings and murders every year in the course of routine fraud.’  Munger’s friend answered: ‘Hell no, Charlie.  He thought that the gall bladder was the source of all medical evil, and, if you really loved your patients, you couldn’t get that organ out rapidly enough.’

Munger comments:

Now that’s an extreme case, but in lesser strength, the cognitive drift of that surgeon is present in every profession and in every human being.  And it causes perfectly terrible behavior.  Consider the presentations of brokers selling commercial real estate and businesses.  I’ve never seen one that I thought was even with hailing distance of objective truth….

On the other hand, you can use the power of incentives – even using as rewards things you already possess! – to manipulate your own behavior for the better.  The business version of ‘Granny’s Rule’ is to force yourself daily to do the unpleasant and necessary tasks first, before rewarding yourself by proceeding to the pleasant tasks.


(2)  Liking/Loving Tendency


One very practical consequence of Liking/Loving Tendency is that it acts as a conditioning device that makes the liker or lover tend (1) to ignore faults of, and comply with wishes of, the object of his affection, (2) to favor people, products, and actions merely associated with the object of his affection (as we shall see when we get to ‘Influence-from-Mere-Association Tendency,’) and (3) to distort other facts to facilitate love.  (pg. 9)

We’re naturally biased, so we have to be careful in some situations.

On the other hand, Munger points out that loving admirable persons and ideas can be very beneficial.

…a man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life.  This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas.  One common, beneficial example for us both was Warren’s uncle, Fred Buffett, who cheerfully did the endless grocery-store work that Warren and I ended up admiring from a safe distance.  Even now, after I have known so many other people, I doubt if it is possible to be a nicer man than Fred Buffett was, and he changed me for the better.

Warren Buffett:

If you tell me who your heroes are, I’ll tell you how you’re gonna turn out.  It’s really important in life to have the right heroes.  I’ve been very lucky in that I’ve probably had a dozen or so major heroes.  And none of them have ever let me down.  You want to hang around with people that are better than you are.  You will move in the direction of the crowd that you associate with.


(3)  Disliking/Hating Tendency

Munger notes that Switzerland and the United States have clever political arrangements to “channel” the hatreds and dislikings of individuals and groups into nonlethal patterns including elections.

But the dislikings and hatreds never go away completely…  And we also get the extreme popularity of very negative political advertising in the United States.

Munger explains:

Disliking/Hating Tendency also acts as a conditioning device that makes the disliker/hater tend to (1) ignore virtues in the object of dislike, (2) dislike people, products, and actions merely associated with the object of dislike, and (3) distort other facts to facilitate hatred.

Distortion of that kind is often so extreme that miscognition is shockingly large.  When the World Trade center was destroyed, many Muslims concluded that the Hindus did it, while many Arabs concluded that the Jews did it.  Such factual distortions often make mediation between opponents locked in hatred either difficult or impossible.  Mediations between Israelis and Palestinians are difficult because facts in one side’s history overlap very little with facts from the other side’s.


(4)  Doubt-Avoidance Tendency

Munger says:

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.  It is easy to see how evolution would make animals, over the course of eons, drift toward such quick elimination of doubt.  After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do.  And so man’s Doubt Avoidance Tendency is quite consistent with the history of his ancient, nonhuman ancestors.

Munger then observes:

What triggers Doubt-Avoidance Tendency?  Well, an unthreatened man, thinking of nothing in particular, is not being prompted to remove doubt through rushing to some decision.  As we shall see later when we get to Social-Proof Tendency and Stress-Influence Tendency, what usually triggers Doubt-Avoidance Tendency is some combination of puzzlement and stress.  Both of these factors naturally occur in facing religious issues.  (page 10)


(5)  Inconsistency-Avoidance Tendency

Munger explains:

The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance.  We see this in all human habits, constructive and destructive.  Few people can list a lot of bad habits that they have eliminated, and some people cannot identify even one of these.  Instead, practically everyone has a great many bad habits he has long maintained despite their being known as bad….  chains of habit that were too light to be felt before they became too heavy to be broken.

If you’re wise, self-improvement is lifelong:

The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured.


It is easy to see that a quickly reached conclusion, triggered by Doubt-Avoidance Tendency, when combined with a tendency to resist any change in that conclusion, will naturally cause a lot of errors in cognition for modern man.  And so it observably works out.  We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves.

So great is the bad-decision problem caused by Inconsistency-Avoidance Tendency that our courts have adopted important strategies against it.  For instance, before making decisions, judges and juries are required to hear long and skillful presentations of evidence and argument from the side they will not naturally favor, given their ideas in place.  And this helps prevent considerable bad thinking from ‘first conclusion bias.’  Similarly, other modern decision makers will often force groups to consider skillful counterarguments before making decisions. 

And proper education is one long exercise in high cognition so that our wisdom becomes strong enough to destroy wrong thinking, maintained by resistance to change.

Munger points out that, as humans, we collect many attitudes and conclusions that are wrong:

And so, people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.

But we can develop good mental habits by modeling people who excel at minimizing their biases.  Munger:

One of the most successful users of an antidote to first conclusion bias was Charles Darwin.  He trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one.  The opposite of what Darwin did is now called confirmation bias, a term of opprobrium.  Darwin’s practice came from his acute recognition of man’s natural cognitive faults arising from Inconsistency-Avoidance Tendency.  He provides a great example of psychological insight correctly used to advance some of the finest mental work ever done. 


(6)  Curiosity Tendency

There is a lot of innate curiosity in mammals, but its nonhuman version is highest among apes and monkeys.  Man’s curiosity, in turn, is much stronger than that of his simian relatives.  In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge…  Curiosity, enhanced by the best of modern education… much helps man to prevent or reduce bad consequences arising from other psychological tendencies.  The curious are also provided with much fun and wisdom long after formal education has ended.

Munger has long maintained that you should be a learning machine:

I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines.  They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.


(7)  Kantian Fairness Tendency

Kant’s ‘categorical imperative’ – a sort of ‘golden rule’ – “that required all humans to follow those behavior patterns that, if followed by all others, would make the surrounding human system work best for everybody.  And it is not too much to say that modern acculturated man displays, and expects from others, a lot of fairness as thus defined by Kant.”  (page 12)

Munger gives an example:

In a small community having a one-way bridge or tunnel for autos, it is the norm in the United States to see a lot of reciprocal courtesy, despite the absence of signs or signals.


(8)  Envy/Jealousy Tendency

Envy/jealousy is extreme in myth, religion, and literature wherein, in account after account, it triggers hatred and injury…

And envy/jealousy is also extreme in modern life… 

Munger has pointed out that envy is particularly stupid because there’s no upside.  Buffett has agreed with Munger on this, adding:

Gluttony is a lot of fun.  Lust has its place, too, but we won’t get into that.


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


(9)  Reciprocation Tendency


The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as it is in apes, monkeys, dogs, and many less cognitively gifted animals.  The tendency facilitates group cooperation for the benefit of members.

Unfortunately, hostility can get extreme.  But we have the ability to train ourselves.  Munger:

The standard antidote to one’s overactive hostility is to train oneself to defer reaction.  As my smart friend Tom Murphy so frequently says, ‘You can always tell the man off tomorrow, if it is such a good idea.’  (page 13)

Munger then notes that the tendency to reciprocate favor for favor is also very intense.  He mentions strange pauses in fighting during wars, caused by some minor courtesy or favor by one side which was then reciprocated by the other side.  Furthermore:

It is obvious that commercial trade, a fundamental cause of modern prosperity, is enormously facilitated by man’s innate tendency to reciprocate favors.  In trade, enlightened self-interest joining with Reciprocation Tendency results in constructive conduct.

Reciprocation Tendency operates largely subconsciously, like the other tendencies.

Munger mentions an experiment conducted by the psychology professor Robert Cialdini:

…Cialdini caused his ‘compliance practitioners’ to wander around his campus and ask strangers to supervise a bunch of juvenile delinquents on a trip to a zoo… one person in six out of a large sample actually agreed to do this… His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for two years to the supervision of juvenile delinquents.  This ridiculous request got him a one hundred percent rejection rate.  But the practitioner had a follow-up question:  ‘Will you at least spend one afternoon taking juvenile delinquents to a zoo?’  This raised Cialdini’s former acceptance rate of 1/6 to 1/2 – a tripling.

What Cialdini’s ‘compliance practitioners’ had done was make a small concession, which was reciprocated by a small concession from the other side.

Munger gives an important example from the real world:

The importance and power of reciprocate-favor tendency was also demonstrated in Cialdini’s explanation of the foolish decision of the attorney general of the United States to authorize the Watergate burglary.  There, an aggressive subordinate made some extreme proposal for advancing Republican interests… When this ridiculous request was rejected, the subordinate backed off, in gracious concession, to merely asking for consent to a burglary, and the attorney general went along.  Cialdini believes that subconscious Reciprocation Tendency thus became one important cause of the resignation of a United States president in the Watergate debacle, and so do I.  Reciprocation Tendency subtlely causes many extreme and dangerous consequences, not just on rare occasions but pretty much all the time.  (page 14)

But, while the Reciprocation Tendency is often dangerous, on the whole it causes more good than bad, says Munger:

Overall, both inside and outside religions, it seems clear to me that Reciprocation Tendency’s constructive contributions to man far outweigh its destructive effects.  In cases of psychological tendencies being used to counter or prevent bad results from one or more other psychological tendencies – for instance, in the case of interventions to end chemical dependency – you will usually find Reciprocation Tendency performing strongly on the constructive side.

And the very best part of human life probably lies in relationships of affection wherein parties are more interested in pleasing than being pleased – a not uncommon outcome in display of reciprocate-favor tendency.

Guilt is also rooted in evolution.  But Munger views it as a positive, on the whole:

…To the extent the feeling of guilt has an evolutionary base, I believe the most plausible cause is the mental conflict triggered in one direction by reciprocate-favor tendency and in the opposite direction by reward superresponse tendency pushing one to enjoy one hundred percent of some good thing.  Of course, human culture has often greatly boosted the genetic tendency to suffer from feeling of guilt.  Most especially, religious culture has imposed hard-to-follow ethical and devotional demands on people…  And if you, like me… believe that, averaged out, feelings of guilt do more good than harm, you may join in my special gratitude for reciprocate-favor tendency, no matter how unpleasant you find feelings of guilt.


(10)  Influence-from-Mere-Association Tendency

Munger observes that advertisers know the power of mere association.  For instance, Coca-Cola advertisements strive to associate Coke with happiness.

However, our minds can be misled by random association, as Munger explains:

Some of the most important miscalculations come from what is accidentally associated with one’s past success, or one’s liking and loving, or one’s disliking and hating, which includes a natural hatred for bad news.  (page 15)

Munger continues:

To avoid being misled by the mere association of some fact with past success, use this memory clue.  Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere.  And there are plenty of mundane examples of results like those of Napoleon and Hitler.  For instance, a man foolishly gambles in a casino and yet wins.  This unlikely correlation causes him to try the casino again, or again and again, to his horrid detriment.  Or a man gets lucky in an odds-against venture headed by an untalented friend.  So influenced, he tries again what worked before – with terrible results.

Munger advises:

The proper antidotes to being made such a patsy by past success are (1) to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises odds implicit in a proposed new undertaking and (2) to look for dangerous aspects of the new undertaking that were not present when past success occurred.

Hating and disliking also cause miscalculation triggered by mere association.  In business, I commonly see people underappraise both the competency and the morals of competitors they dislike.  This is a dangerous practice, usually disguised because it occurs on a subconscious basis. 

Munger later comments on “Persian Messenger Syndrome”:

…Persian Messenger Syndrome is alive and well in modern life, albeit in less lethal versions.  It is actually dangerous in many careers to be a carrier of unwelcome news.  Union negotiators and employer representatives often know this, and it leads to many tragedies in labor relations.  Sometimes lawyers, knowing their clients will hate them if they recommend an unwelcome but wise settlement, will carry on to disaster…

CBS, in its late heyday, was famous for occurrence of Persian Messenger Syndrome because Chairman Paley was hostile to people who brought him bad news.  The result was that Paley lived in a cocoon of unreality, from which he made one bad deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter.


(11)  Simple, Pain-Avoiding Psychological Denial

Munger says:

This phenomenon first hit me hard in World War II when the superathlete, superstudent son of a family friend flew off over the Atlantic Ocean and never came back.  His mother, who was a very sane woman, then refused to believe he was dead.  That’s Simple, Pain-Avoiding Psychological Denial.  The reality is too painful to bear, so one distorts the facts until they become bearable.  We all do that to some extent, often causing terrible problems.  The tendency’s most extreme outcomes are usually mixed up with love, death, and chemical dependency.


(12)  Excessive Self-Regard Tendency

Excessive self-regard is one of the more obvious tendencies.

We all commonly observe the excessive self-regard of man.  He mostly misappraises himself on the high side, like the ninety percent of Swedish drivers that judge themselves to be above average.  Such misappraisals also apply to a person’s major ‘possessions.’  One spouse usually overappraises the other spouse.  And a man’s children are likewise appraised to be higher by him than they are likely to be in a more objective view.  Even man’s minor possessions tend to be overappraised.  Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them.  There is a name in psychology for this overappraise-your-own-possessions phenomenon: the ‘endowment effect.’  And all man’s decisions are suddenly regarded by him as better than would have been the case just before he made them.

Man’s excess of self-regard typically makes him strongly prefer people like himself…  (page 16)

Munger continues:

Some of the worse consequences in modern life come when dysfunctional groups of cliquish persons, dominated by Excessive Self-Regard Tendency, select as new members of their organizations persons who are very much like themselves…

Well, naturally, all forms of excess of self-regard cause much error.  How could it be otherwise?

Moreover, says Munger:

Intensify man’s love of his own conclusions by adding the possessory wallop from the ‘endowment effect,’ and you will find that a man who has already bought a pork-belly future on a commodity exchange now foolishly believes, even more strongly than before, in the merits of his speculative bet.

And foolish sports betting, by people who love sports and think they know a lot about relative merits of teams, is a lot more addictive than race track betting – partly because of man’s automatic overappraisal of his own complicated conclusions.

Also extremely counterproductive is man’s tendency to be, time after time, in games of skill, like golf or poker, against people who are obviously much better players.  Excessive Self-Regard Tendency diminishes the foolish bettor’s accuracy in appraising his relative degree of talent.

Munger then adds:

More counterproductive yet are man’s appraisals, typically excessive, of the quality of the future service he is to provide to his business.  His overappraisal of these prospective contributions will frequently cause disaster.

There is a famous passage somewhere in Tolstoy that illuminates the power of Excessive Self-Regard Tendency.  According to Tolstoy, the worst criminals don’t appraise themselves as all that bad.  They come to believe either (1) that they didn’t commit their crimes or (2) that, considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and become what they became.  (pg. 17)

Munger comments:

The second half of the ‘Tolstoy effect’, where the man makes excuses for his fixable poor performance, instead of providing the fix, is enormously important.  Because a majority of mankind will try to get along by making way too many unreasonable excuses for fixable poor performance, it is very important to have personal and institutional antidotes limiting the ravages of such folly.  On the personal level a man should try to face the two simple facts:

  • fixable but unfixed bad performance is bad character and tends to create more of itself, causing more damage to the excuse giver with each tolerated instance, and
  • in demanding places, like athletic teams and General Electric, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.

The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity.  This isn’t easy to do well and won’t work perfectly, but it will work much better than simply letting psychological nature take its normal course.

Most of the time, excessive self-regard harms our ability to make a good decision.  If you have an important decision, you have to learn to slow yourself down and be humble.  Munger:

You’re less pleasing than you think you are.  You know less than you think you do.

It’s easy for us to see the shortcomings in others, but it’s much harder for us to see our own flaws clearly.  It’s good to be able to laugh at yourself.


(13)  Overoptimism Tendency


Nothing is easier than self-deceit.  For what a man wishes, that also he believes to be true.

Munger suggests:

One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal, taught in my youth to high school sophomores.  The mental rules of thumb that evolution gives you are not adequate.  They resemble the dysfunctional golf grip you would have if you relied on a grip driven by evolution instead of golf lessons.  (page 18)


(14)  Deprival-Superreaction Tendency

Munger states:

The quantity of man’s pleasure from a ten dollar gain does not exactly match the quantity of his displeasure from a ten dollar loss.  That is, the loss seems to hurt much more than the gain seems to help.  Moreover, if a man almost gets something he greatly wants and has it jerked away from him at the last moment, he will react much as if he had long owned the reward and had it jerked away.  I include the natural human reactions to both kinds of loss experience – the loss of the possessed reward and the loss of the almost possessed reward – under one description, Deprival Superreaction Tendency.

In displaying Deprival Superreaction Tendency, man frequently incurs disadvantage by misframing his problems.  He will often compare what is near instead of what truly matters.  For instance, a man with $10 million in his brokerage account will often be extremely irritated by the loss of $100 out of the $300 in his wallet.

Munger observes:

…A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing.  As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole.  This factor among others, accounts for much of the wisdom of Jack Welch’s long fight against bureaucratic ills at General Electric.  Few business leaders have ever conducted wiser campaigns.

Deprival-Superreaction Tendency often protects ideological or religious views by triggering dislike and hatred directed toward vocal nonbelievers.  This happens, in part, because the ideas of the nonbelievers, if they spread, will diminish the influence of views that are now supported by a comfortable environment including a strong belief-maintenance system.  University liberal arts departments, law schools, and business organizations all display plenty of such ideology-based groupthink that rejects almost all conflicting inputs…

It is almost everywhere the case that extremes of ideology are maintained with great intensity and with great antipathy to non-believers, causing extremes of cognitive dysfunction.  This happens, I believe, because two psychological tendencies are usually acting concurrently toward this same sad result: (1) Inconsistency-Avoidance Tendency, plus (2) Deprival-Superreaction Tendency.

One antidote to intense, deliberate maintenance of groupthink is an extreme culture of courtesy, kept in place despite ideological differences, like the behavior of the justices now serving on the U.S. Supreme Court.  Another antidote is to deliberately bring in able and articulate disbelievers of incumbent groupthink….

Even a one-degree loss from a 180-degree view will sometime create enough Deprival-Superreaction Tendency to turn a neighbor into an enemy, as I once observed when I bought a house from one of two neighbors locked into hatred by a tiny tree newly installed by one of them.

Moreoever, says Munger:

Deprival-Superreaction Tendency and Inconsistency-Avoidance Tendency often join to cause one form of business failure.  In this form of ruin, a man gradually uses up all his good assets in a fruitless attempt to rescue a big venture going bad.  One of the best antidotes to this folly is good poker skill learned young.  The teaching value of poker demonstrates that not all effective teaching occurs on a standard academic path.

Deprival-Superreaction Tendency is also a huge contributor to ruin from compulsion to gamble.  First, it causes the gambler to have a passion to get even once he has suffered loss, and the passion grows with each loss.  Second, the most addictive forms of gambling provide a lot of near misses and each one triggers Deprival-Superreaction Tendency.  Some slot machine creators are vicious in exploiting this weakness of man.  Electronic machines enable these creators to produce a lot of meaningless bar-bar-lemon results that greatly increase play by fools who think they have very nearly won large rewards.  (page 19)


(15)  Social-Proof Tendency

Munger notes:

The otherwise complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done around him.  And such followership often works fine…

Psychology professors love Social-Proof Tendency because in their experiments it causes ridiculous results.  For instance, if a professor arranges for some stranger to enter an elevator wherein ten ‘compliance practitioners’ are all standing so that they face the rear of the elevator, the stranger will often turn around and do the same.

Of course, like the other tendencies, Social-Proof has an evolutionary basis.  If the crowd was running in one direction, typically your best response was to follow.

But, in today’s world, simply copying others often doesn’t make sense.  Munger:

And in the highest reaches of business, it is not at all uncommon to find leaders who display followership akin to that of teenagers.  If one oil company foolishly buys a mine, other oil companies often quickly join in buying mines.  So also if the purchased company makes fertilizer.  Both of these oil company buying fads actually bloomed, with bad results.

Of course, it is difficult to identify and correctly weigh all the possible ways to deploy the cash flow of an oil company.  So oil company executives, like everyone else, have made many bad decisions that were triggered by discomfort from doubt.  Going along with social proof provided by the action of other oil companies ends this discomfort in a natural way.  (page 20)

Munger remarks:

When will Social-Proof Tendency be most easily triggered?  Here the answer is clear from many experiments:  Triggering most readily occurs in the presence of puzzlement or stress, and particularly when both exist. 

Because stress intensifies Social-Proof Tendency, disreputable sales organizations, engaged, for instance, in such action as selling swampland to schoolteachers, manipulate targets into situations combining isolation and stress.  The isolation strengthens the social proof provided by both the knaves and the people who buy first, and the stress, often increased by fatigue, augments the targets’ susceptibility to the social proof.  And, of course, the techniques of our worst ‘religious’ cults imitate those of the knavish salesmen.  One cult even used rattlesnakes to heighten the stress felt by conversion targets.

Munger points out that Social-Proof can sometimes be constructive:

Because both bad and good behavior are made contagious by Social-Proof Tendency, it is highly important that human societies (1) stop any bad behavior before it spreads and (2) foster and display all good behavior.

Often people find it difficult to resist the social contagion of bad behavior.  Munger:

…And, therefore, we get “Serpico Syndrome,” named to commemorate the state of a near-totally corrupt New York police division joined by Frank Serpico.  He was then nearly murdered by gunfire because of his resistance to going along with the corruption in the division.  Such corruption was being driven by social proof plus incentives, the combination that creates Serpico Syndrome.  The Serpico story should be taught more than it now is because the didactic power of its horror is aimed at a very important evil, driven substantially by a very important force:  social proof.

Munger gives another example:

In social proof, it is not only action by others that misleads but also their inaction.  In the presence of doubt, inaction by others becomes social proof that inaction is the right course.  Thus, the inaction of a great many bystanders led to the death of Kitty Genovese in a famous incident much discussed in introductory psychology courses.

In the ambit of social proof, the outside directors on a corporate board usually display the near ultimate form of inaction.  They fail to object to anything much short of an axe murder until some public embarrassment of the board finally causes their intervention…

Typically there are many psychological tendencies operating at the same time – such as Liking/Loving, Disliking/Hating, Doubt-Avoidance, Inconsistency-Avoidance, and Social-Proof.  Unchecked, a confluence of such tendencies can lead to extreme situations.  Munger gives an example:

…By now the resources spent by Jews, Arabs, and all others over a small amount of disputed land if divided arbitrarily among land claimants, would have made every one better off, even before taking into account any benefit from reduced threat of war, possibly nuclear.  (pg. 21)


(16)  Contrast-Misreaction Tendency

Munger asserts:

Because the nervous system of man does not naturally measure in absolute scientific units, it must rely instead on something simpler.  The eyes have a solution that limits their programming needs: the contrast in what is seen is registered.  And as in sight, so does it go, largely, in the other senses.  Moreover, as perception goes, so goes cognition.  The result is man’s Contrast-Misreaction Tendency.  Few psychological tendencies do more damage to correct thinking.  Small-scale damages involve instances such as man’s buying an overpriced $1,000 leather dashboard merely because the price is so low compared to this concurrent purchase of a $65,000 car.  Large-scale damages often ruin lives, as when a wonderful woman having terrible parents marries a man who would be judged satisfactory only in comparison to her parents.  Or as when a man takes wife number two who would be appraised all right only in comparison to wife number one.

A particularly reprehensible form of sales practice occurs in the offices of some real estate brokers.  A buyer from out of the city, perhaps needing to shift his family there, visits the office with little time available.  The salesman deliberately shows the customer three awful houses at ridiculously high prices.  Then he shows him a merely bad house at a price only moderately too high.  And, boom, the broker often makes an easy sale.

Munger continues:

Contrast-Misreaction Tendency is routinely used to cause disadvantage for customers buying merchandise and services.  To make an ordinary price seem low, the vendor will very frequently create a highly artificial price that is much higher than the price always sought, then advertise his standard price as a big reduction from his phony price.  Even when people know that this sort of customer manipulation is being attempted, it will often work to trigger buying… [It demonstrates that] being aware of psychological ploys is not a perfect defense.  When a man’s steps are consecutively taken toward disaster, with each step being very small, the brain’s Contrast-Misreaction Tendency will often let the man go too far toward disaster to be able to avoid it.  This happens because each step presents so small a contrast from his present position.


(17)  Stress-Influence Tendency

Munger reflects:

Everyone recognizes that sudden stress, for instance from a threat, will cause a rush of adrenaline in the human body, prompting faster and more extreme reaction.  And everyone who has taken Psych 101 knows that stress makes Social-Proof Tendency more powerful.


(18)  Availability-Misweighing Tendency

Munger observes:

Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available to it.  And the brain can’t use what it can’t remember or what it is blocked from recognizing because it is heavily influenced by one or more psychological tendencies bearing strongly on it, as the fellow is influenced by the nearby girl in the song.  And so the mind overweighs what is easily available and thus displays Availability-Misweighing Tendency.

Munger mentions antidotes:

The main antidote to miscues from Availability-Misweighing Tendency often involve procedures, including use of checklists, which are almost always helpful. 

Another antidote is to behave somewhat like Darwin did when he emphasized disconfirming evidence.  What should be done is to especially emphasize factors that don’t produce reams of easily available numbers, instead of drifting mostly or entirely into considering factors that do produce such numbers.  Still another antidote is to find and hire some skeptical, articulate people with far-reaching minds to act as advocates for notions that are opposite to the incumbent notions.

If some event is vivid or recent, it will generally be more available.  Munger:

One consequence of this tendency is that extra-vivid evidence, being so memorable and thus more available in cognition, should often consciously be underweighed while less vivid evidence should be overweighed.

Munger offers a suggestion:

The great algorithm to remember in dealing with this tendency is simple:  An idea or a fact is not worth more merely because it is easily available to you.


(19)  Use-It-or-Lose-It Tendency

Munger discusses the importance of practice:

All skills attenuate with disuse… The right antidote to such a loss is to make use of the functional equivalent of the aircraft simulator employed in pilot training.  This allows a pilot to continuously practice all of the rarely used skills that he can’t afford to lose.

Throughout his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline, as a sort of duty to his better self.  If he reduces the number of skills he practices and, therefore, the number of skills he retains, he will naturally drift into error from man with a hammer tendency.  His learning capacity will also shrink as he creates gaps in the latticework of theory he needs as a framework for understanding new experience.  It is also essential for a thinking man to assemble his skills into a checklist that he routinely uses.  Any other mode of operation will cause him to miss much that is important.  (page 23)

If the skill in question is important enough, gaining fluency is wise, says Munger:

The hard rule of Use-It-or-Lose-It Tendency tempers its harshness for the diligent.  If a skill is raised to fluency, rather than merely being crammed in briefly to enable one to pass some test, then the skill (1) will be lost more slowly and (2) will come back faster when refreshed with new learning.  These are not minor advantages, and a wise man engaged in learning some important skill will not stop until he is really fluent in it.


(20)  Drug-Misinfluence Tendency

“This tendency’s destructive power is so widely known to be intense, with frequent tragic consequences for cognition and the outcome of life, that it needs no discussion here to supplement that previously given under ‘Simple, Pain-Avoiding Psychological Denial’.”


(21)  Senescence-Misinfluence Tendency

All of us naturally decay over time.  Munger points out:

But some people remain pretty good in maintaining intensely practiced old skills until late in life, as one can notice in many a bridge tournament. 

Loving to learn can help:

Continuous thinking and learning, done with joy, can somewhat help delay what is inevitable.


(22)  Authority-Misinfluence Tendency

A disturbingly significant portion of copilots will not correct obvious errors made by the pilot during simulation exercises.  There are also real world examples of copilots crashing planes because they followed the pilot mindlessly.  Munger states:

…Such cases are also given attention in the simulator training of copilots who have to learn to ignore certain really foolish orders from boss pilots because boss pilots will sometimes err disastrously.  Even after going through such a training regime, however, copilots in simulator exercises will too often allow the simulated plane to crash because of some extreme and perfectly obvious simulated error of the chief pilot.

Psychologist Stanley Milgram wanted to understand why so many seemingly normal and decent people engaged in horrific, unspeakable acts during World War II.  Munger:

After Corporal Hitler had risen to dominate Germany, leading a bunch of believing Lutherans and Catholics into orgies of genocide and other mass destruction, one clever psychology professor, Stanley Milgram, decided to do an experiment to determine exactly how far authority figures could lead ordinary people into gross misbehavior.  In this experiment, a man posing as an authority figure, namely a professor governing a respectable experiment, was able to trick a great many ordinary people into giving what they had every reason to believe were massive electric shocks that inflicted heavy torture on innocent fellow citizens.  This experiment did demonstrate a terrible result contributed to by Authority-Misinfluence Tendency, but it also demonstrated extreme ignorance in the psychology professoriate right after World War II.

Almost any intelligent person with my checklist of psychological tendencies in his hand would, by simply going down the checklist, have seen that Milgram’s experiment involved about six powerful psychological tendencies acting in confluence to bring about his extreme experimental result.  For instance, the person pushing Milgram’s shock lever was given much social proof from presence of inactive bystanders whose silence communicated that his behavior was okay…


(23)  Twaddle Tendency

Munger mentions:

Man, as a social animal who has the gift of language, is born to prattle and to pour out twaddle that does much damage when serious work is being attempted.  Some people produce copious amounts of twaddle and others very little.  (page 24)


(24)  Reason-Respecting Tendency

People naturally love thinking, reasoning, and learning:

There is in man, particularly one in an advanced culture, a natural love of accurate cognition and a joy in its exercise.  This accounts for the widespread popularity of crossword puzzles, other puzzles, and bridge and chess columns, as well as all games requiring mental skill.

Always trying to understand WHY things happen is a central part of the learning process, says Munger:

In general, learning is most easily assimilated and used when, life long, people consistently hang their experience, actual and vicarious, on a latticework of theory answering the question: Why?  Indeed, the question ‘Why?’ is a sort of Rosetta stone opening up the major potentiality of mental life.

But often we don’t notice when meaningless or incorrect reasons are given:

Unfortunately, Reason-Respecting Tendency is so strong that even a person’s giving of meaningless or incorrect reasons will increase compliance with his orders and requests.  This has been demonstrated in psychology experiments wherein ‘compliance practitioners’ successfully jump to the head of the lines in front of copying machines by explaining their reason: ‘I have to make some copies.’  This sort of unfortunate byproduct of Reason-Respecting Tendency is a conditioned reflex, based on a widespread appreciation of the importance of reasons.  And, naturally, the practice of laying out various claptrap reasons is much used by commercial and cult ‘compliance practitioners’ to help them get what they don’t deserve.


Can you supply a real world model, instead of a Milgram-type controlled psychology experiment, that uses your system to illustrate multiple psychological tendencies interacting in a plausibly diagnosable way?

The answer is yes.  One of my favorite cases involves the McDonnell Douglas airliner evacuation test.  Before a new airliner can be sold, the government requires that it pass an evacuation test, during which a full load of passengers must get out in some short period of time.  The government directs that the test be realistic.  So you can’t pass by evacuating only twenty-year-old athletes.  So McDonnell Douglas scheduled such a test in a darkened hangar using a lot of old people as evacuees.  The passenger cabin was, say, twenty feet above the concrete floor of the hangar and was to be evacuated through moderately flimsy rubber chutes.  The first test was made in the morning.  There were about twenty very serious injuries, and the evacuation took so long it flunked the time test.  So what did McDonnell Douglas next do?  It repeated the test in the afternoon, and this time there was another failure, with about twenty more serious injuries, including one case of permanent paralysis.

What psychological tendencies contributed to this terrible result?  Well, using my tendency list as a checklist, I come up with the following explanation.  Reward-Superresponse Tendency drove McDonnell Douglas to act fast.  It couldn’t sell its airliner until it passed the test.  Also pushing the company was Doubt-Avoidance Tendency with its natural drive to arrive at a decision and run with it.  Then the government’s direction that the test be realistic drove Authority-Misinfluence Tendency into the mischief of causing McDonnell Douglas to overreact by using what was obviously too dangerous a test method.  By now the course of action had been decided, so Inconsistency Avoidance Tendency helped preserve the near idiotic plan.  When all the old people got to the dark hangar, with its high airline cabin and concrete floor, the situation must have made McDonnell Douglas employees very queasy, but they saw other employees and supervisors not objecting.  Social Proof Tendency, therefore, swamped the queasiness.  And this allowed continued action as planned, a continuation that was aided by more Authority-Misinfluence Tendency.  Then came the disaster of the morning test with its failure, plus serious injuries.  McDonnell Douglas ignored the strong disconfirming evidence from the failure of the first test because confirmation bias, aided by the triggering of strong Deprival Superreaction Tendency favored maintaining the original plan.  McDonnell Douglas’ Deprival Superreaction Tendency was now like that which causes a gambler, bent on getting even after a huge loss, to make his final big bet.  After all, McDonnell Douglas was going to lose a lot if it didn’t pass its test as scheduled.  More psychology-based explanation can probably be made, but the foregoing discussion is complete enough to demonstrate the utility of my system when used in checklist mode.  (page 26)


In the practical world, what good is the thought system laid out in this list of tendencies?  Isn’t practical benefit prevented because these psychological tendencies are so thoroughly programmed into the human mind by broad evolution [the combination of genetic and cultural evolution] that we can’t get rid of them?

Well, the answer is that the tendencies are probably more good than bad.  Otherwise, they wouldn’t be there, working pretty well for man, given his condition and his limited brain capacity.  So the tendencies can’t be simply washed out automatically, and they shouldn’t be.  Nevertheless, the psychological thought system described, when properly understood and used, enables the spread of wisdom and good conduct and facilitates the avoidance of disaster.  Tendency is not always destiny, and knowing the tendencies and their antidotes can often help prevent trouble that would otherwise occur.


Here is a short list of examples reminding us of the great utility of elementary psychological knowledge.

  • Carl Braun’s communication practices.
  • The use of simulators in pilot training.
  • The system of Alcoholics Anonymous.
  • Clinical training methods in medical schools.
  • The rules of the U.S. Constitutional Convention:  totally secret meetings, no recorded vote by name until the final vote, votes reversible at any time before the end of the convention, then just one vote on the whole Constitution.  These are very clever psychology-respecting rules.  If the founders had used a different procedure, many people would have been pushed by various psychological tendencies into inconsistent, hardened positions.  The elite founders got our Constitution through by a whisker only because they were psychologically acute.
  • The use of Granny’s incentive-driven rule to manipulate oneself toward better performance of one’s duties.
  • 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 twenty-eight year-old people that high school algebra works in real life?’  But later, I wised up and realized that it was very important that they do that to counter some bad effects from psychological tendencies.  Better late than never.
  • The use of autopsy equivalents at Johnson & Johnson.  At most corporations, if you make an acquisition and it turns out to be a disaster, all the people, paperwork, and presentations that caused the foolish acquisition are quickly forgotten.  Nobody wants to be associated with the poor outcome by mentioning it.  But at Johnson & Johnson, the rules make everybody revisit old acquisitions, comparing predictions with outcomes.  That is a very smart thing to do.
  • The great example of Charles Darwin as he avoided confirmation bias, which has morphed into the extreme anti-confirmation-bias method of the “double blind” studies wisely required in drug research by the FDA.
  • The Warren Buffett rule for open-outcry auctions:  Don’t go.


Aren’t there factual and reasoning errors in this talk?

The answer is yes, almost surely yes.  The final revision was made from memory over about fifty hours by a man eighty-one years old, who never took a course in psychology and has read none of it, except one book on developmental psychology, for nearly fifteen years.  Even so.  I think the totality of my talk will stand up very well, and I hope all my descendants and friends will carefully consider what I have said.  I even hope that more psychology professors will join me in:

  • making heavy use of inversion;
  • driving for a complete description of the psychological system so that it works better as a checklist;  and
  • especially emphasizing effects from combinations of psychological tendencies.



An equal weighted group of micro caps generally far outperforms an equal weighted (or cap-weighted) group of larger stocks over time.  See the historical chart here:

This outperformance increases significantly by focusing on cheap micro caps.  Performance can be further boosted by isolating cheap microcap companies that show improving fundamentals.  We rank microcap stocks based on these and similar criteria.

There are roughly 10-20 positions in the portfolio.  The size of each position is determined by its rank.  Typically the largest position is 15-20% (at cost), while the average position is 8-10% (at cost).  Positions are held for 3 to 5 years unless a stock approaches intrinsic value sooner or an error has been discovered.

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