To read it – click here.
“The elementary part of psychology ‑ the psychology of misjudgment, as I call it ‑ is a terribly important thing to learn. There are about 20 little principles. And they interact, so it gets slightly complicated. But the guts of it is unbelievably important. Terribly smart people make totally bonkers mistakes by failing to pay heed to it. In fact, I’ve done it several times during the last two or three years in a very important way. You never get totally over making silly mistakes. There’s another saying that comes from Pascal which I’ve always considered one of the really accurate observations in the history of thought. Pascal said in essence, ‘The mind of man at one and the same time is both the glory and the shame of the universe.'” — Charlie Munger
Charlie Munger’s standard causes of Human Misjudgement is truly great stuff, and something I wish everyone had the privilege to get in touch with.
The audio file below contains the often referred to speech by Charlie Munger on the psychology of human misjudgment given to an audience at Harvard University back in 1995. In his speech, Charlie talks about some of the different kinds of human misjudgments that he has encountered through his life.
The following is a summary of Charlie’s 25 standard causes of human misjudgments (see link in the end of this post), revised by himself in 2005 and included in Poor Charlie’s Almanack – The Wit and Wisdom of Charles T. Munger:
- Reward and Punishment Superresponse Tendency
- Liking/Loving Tendency
- Disliking/Hating Tendency
- Doubt-Avoidance Tendency
- Inconsistency-Avoidance Tendency
- Curiosity Tendency
- Kantian Fairness Tendency
- Envy/Jealousy Tendency
- Reciprocation Tendency
- Influence-from-Mere Association Tendency
- Simple, Pain-Avoiding Psychological Denial
- Excessive Self-Regard Tendency
- Overoptimism Tendency
- Deprival Superreaction Tendency
- Social-Proof Tendency
- Contrast-Misreaction Tendency
- Stress-Influence Tendency
- Availability-Misweighing Tendency
- Use-It-or-Lose-It Tendency
- Drug-Misinfluence Tendency
- Senescence-Misinfluence Tendency
- Authority-Misinfluence Tendency
- Twaddle Tendency
- Reason-Respecting Tendency
- Lollapalooza Tendency – The Tendency to Get Extreme Confluences of Psychological Tendencies Acting in Favor of a Particular Outcome
See here for full text in PDF.
See here for audio file.
When analyzing a business as a possible future investment an investor needs to form an opinion about corporate governance, i.e. whether the business is run in the interest of shareholders or not.
In his shareholder letter for fiscal year 2007 Warren Buffett wrote about what kind of businesses that turn him and Charlie, and summarized it as follows.
“Charlie and I look for companies that have a) a business we understand; b) favorable long-term economics; c) able and trustworthy management; and d) a sensible price tag.”
Today I read a paper titled Corporate Governance According to Charles T. Munger. The paper discusses corporate governance and “How […] an organization [should] be structured to encourage ethical behavior among organizational participants and motivate decision-making in the best interest of shareholders?”
A good start to widen your circle of competence in getting a better understanding about the area of corporate governance, is to read the paper and listen carefully to what Charlie has to say.
The paper can be found here.