Charlie Munger’s Guide to Making Better Decisions (Part One)

Most people know the name Warren Buffet.

He’s a down-to-earth old guy who’s amassed a truly mind-boggling amount of wealth through decades worth of solid investment decisions.

84 billion dollars worth of solid investment decisions, that is. That’s a sum of money the human mind can hardly fathom.

Lesser known than this titan of investing, however, is the man who’s been with Warren Buffet since the very beginning. A man who’s amassed his own sizable fortune of over $2 billion (though that seems a somehow inconsequential sum of money when viewed alongside that $84 billion).

That man’s name is Charlie Munger and in this 5 part series, we’re dissecting his approach to the 25 cognitive biases that, in his estimation, lead to poor judgment.

Why’re we talking about Charlie and not Warren?

Because Warren Buffet himself has referred to Charlie as:

“The finest analytical mind I’ve ever known.”

High praise from a guy who’s consistently stomped Wall Street for the better part of 50 years.

If you’re interested in checking out the source material for these 25 cognitive biases, then take a gander at this hour-long video of Charlie talking about The Psychology of Human Misjudgment.

If, however, you don’t have an hour to spare for ol’ Charlie, then read-on as we distill all the salient points of his speech so you can absorb this financial guru’s knowledge of what it takes to develop sound judgment and start making better decisions.

Reward and Punishment Super-Response Tendency

Have you ever tried to potty train a puppy? Or a small human for that matter?

You’ve got two avenues available:

Reward them when they perform the desired behavior, or punish them when they perform the undesired behavior.

That’s right. The infinite complexity of life, the universe, and going to the bathroom in the designated area can be distilled to simple reward or punishment.

And it makes sense. Incentives and Disincentives work.

The brain is running a simple algorithm: “Repeat behaviors that work.”

Work in this instance is synonymous with reward (or in the case of punishment, not getting swatted on the nose with a rolled-up newspaper).

This is a problematic system because poorly designed incentives lead to poorly designed behaviors. And poorly designed behaviors quickly become negative habits when they’re consistently rewarded.

The solution? Well, obviously you shouldn’t reward behaviors you don’t want to reinforce. So, to that end, don’t design bad incentive structures.

But what constitutes a bad incentive structure?

For that, I’d recommend Daniel Pink’s fantastic book, Drive, which dives into the world of intrinsic vs extrinsic motivators.

It’s beyond the purview of this article, but just know that intrinsic motivators are the things you do because you enjoy them or find them interesting.

By contrast, an extrinsic motivator is when you receive an external reward (ie: money, high fives, etc…)

I’ll distill Drive down to this single sentence:

Intrinsic motivators are inherently better than extrinsic.

There, I just saved you hours of reading.

Liking/Loving Tendency

Simply put:

We give preferential treatment to the things we like/love.

This isn’t surprising, but it is problematic, especially when we willingly overlook the very real faults of the object of our affection.

Think about people who stay in abusive relationships, convincing themselves that their partner will change, and that they didn’t mean to.

Marketers rely on this tendency when they use celebrity endorsements to sell random products.

You aren’t immune to this, though you likely think you are. (Such is the pervasiveness of this bias.)

As an additional little kick in the side, the second component of the Liking/Loving Tendency is that we like being liked.

Anybody who’s spent half a second in high school understands how powerful this desire is.

Our need to be liked is so strong that we often start doing things simply because it’s a behavior that earns us the liking or respect of others, even if that behavior is not in alignment with what is best for us personally.

Again, think back to high school to the daredevils who jump off buildings for the approval of their cohort.

Or going out and drinking to excess with friends because that’s the cool thing to do.

We’ve all fallen into this trap.

Disliking/Hating Tendency

The inverse of the previous tendency:

We hate things that we hate.

Okay, so that’s not the most provocative sentence ever written, but it’s true. And given the polarized, everybody-living-inside-an-echo-chamber, political environment of the past couple years, it’s never been more profoundly realized.

When you hate something, you tend to ignore it’s virtues. You distort facts that facilitate your initial disliking, which creates a cyclical feedback loop of ever intensifying hatred.

It should go without saying why this is a bad thing, but we’ll say it anyways:

Few things in life are truly worthy of unmitigated hatred.

If you truly want to understand your opponent standing across the aisle, accept that they are likely to be a highly competent person (much in the same way that you view yourself to be highly competent) and that their belief systems are founded on well-thought, internally consistent reasons.

I know, I know, that might be hard to believe given the political climate of the past two years, but it is.

Understanding, accepting, and working within the confines of this reality are necessary if we have any hope of bridging the gap between us and them (whoever that us and them might be in any given situation, that is).

Doubt-Avoidance Tendency

Humans don’t deal well with uncertainty. It stresses us out and causes sweaty palms, heart palpitations, and other unbecoming physical phenomena.

If you’ve ever been in a hospital’s waiting room awaiting the results of a potentially life-altering test, you know the infinite horrors that await the mind’s imagination in the land of the unknown.

As a result, to avoid this doubt-riddled abyss, we have a tendency to jump to decisions (even poorly formed ones).

If we were still waddling about the Savannah, this might not be the worst survival mechanism. After-all, doubting your actions could potentially get you eaten by a tiger.

But in today’s modern world where the majority of dangers are not immediately-pressing, but rather, long-term future-oriented dangers, this sort of snap-judgment simply to avoid the discomfort of the unknown can be quite detrimental.

This is why you should force a mandatory delay before making any significant decision.

Sleeping on it, as they say, is the best way to ensure this.

Inconsistency-Avoidance Tendency

I often talk about how lazy the brain is. It works hard to not work so hard.

Its primary goal is to conserve energy, you know, in case it needs it all later. The brain developed in a scarcity-rich environment and has never really broken out of that way of operating.

As a result, we are reluctant to change ourselves and our habits.

That’s because change is hard. It requires energy.

That’s why we humans have almost universally developed the tendency towards consistency in our psychology.

Put another way, we go to extraordinary measures to remain internally consistent with the self-image we hold for ourselves irrespective of whether that image is positive or negative.

When we talk about the brain’s reluctance to change on account of conserving energy, we’re talking about a biological process tied to the finite amounts of programmable space in our gray matter.

When we talk about our psyche’s reluctance to change personality traits, we’re talking about the maintenance of carefully constructed social roles and cultural dynamics.

These two factors (biology and sociology) combine to form an impressive resistance against change.

With this in mind, be aware that prevention is often the cure.

Avoid potential behaviors that could lead to negative habits (ie: smoking, gambling, Pokemon).

Short of that, the best advice is to simply fake it til you make it.

I know, that’s not terribly helpful, but truly, habit formation is difficult. That’s why I wrote an entire article on it (The 3 Part Process to Building Habits That Actually Last)

The 3 Part Process to Building Habits That Actually Last

Conclusion

Charlie Munger has accumulated decades worth of sage advice on the topic of human behavior and sound decision-making principles. Thus far, we’ve only scratched the surface.

There are another 4 parts to this series and, by the time we reach the finish line, we’ll have covered all 25 Cognitive Biases.

But in the meantime, I’ve got some homework for you.

Pick one of the above 5 mentioned biases and write down how you’ve embodied that bias in the past 24 hours. Then write out why.

Dig deep to understand the underlying rationale leading up to your behavior. Once you’ve grasped that, you can create a game-plan for how you’ll combat the arrival of that bias in the future.

Once you’ve got your plan of action, get down to the comments and let me know what you’ve got planned, I want to learn from you!