1.
Reward and Punishment Superresponse Tendency
We are driven by rewards and deterred by punishments far more than we realize.
“Show me the incentive and I will show you the outcome.”
Psychology
From “The Psychology of Human Misjudgment” — Munger’s magnum opus cataloging the 25 standard causes of human misjudgment. He first delivered this as a talk at Harvard in 1995, then extensively revised it for Poor Charlie’s Almanack. These are the tendencies that mislead us all.
We are driven by rewards and deterred by punishments far more than we realize.
“Show me the incentive and I will show you the outcome.”
We ignore faults in people and things we love. Affection distorts our judgment.
We ignore virtues in people and things we dislike, and distort facts to justify our hatred.
Uncertainty is uncomfortable, so we rush to make decisions to eliminate doubt, often with insufficient information.
We resist changing our habits, beliefs, and conclusions, even when presented with new evidence. The human mind is like the human egg — once a conclusion gets in, it shuts everything else out.
Our natural curiosity drives learning and discovery.
“The curious are provided with much fun and wisdom once formal education has ended.”
We expect fairness and are deeply disturbed when we don't get it. Tolerating a little unfairness can lead to greater fairness overall.
Surprisingly absent from most psychology textbooks.
“It's not greed that drives the world, but envy.”
We feel compelled to return favors and slights alike. This can lead to poor decisions based on minor gestures.
We are manipulated by associations — products linked to celebrities, bad news linked to messengers. Known as 'Persian Messenger Syndrome.'
We deny reality when it's too painful to accept.
“The reality is too painful to bear, so one distorts the facts until they become bearable.”
We overestimate our abilities. This is where overconfidence comes from.
We tend to be unrealistically optimistic, underestimating risks and challenges.
Loss aversion. Losing something provokes a far stronger reaction than gaining something of equal value.
“Losses are twice as powerful as gains.”
We look to others for cues on how to think and act, especially under uncertainty.
“It is not only action by others that misleads but also their inaction.”
Our perceptions are skewed by comparisons rather than absolute values. A $100 price seems cheap after seeing a $1,000 option.
Excessive stress leads to extreme reactions and impaired decision-making. Some stress improves performance; heavy stress causes dysfunction.
We overweight information that is recent, vivid, or easy to recall.
“Ask the Coca-Cola company if availability changes behavior.”
Skills atrophy without practice. A skill you don't use regularly will fade.
Chemical dependency always causes moral breakdown and involves massive denial.
Aging causes cognitive decline, though continuous learning can slow it significantly.
We follow authority figures too readily, even when they're wrong. Think Milgram's experiments.
People often produce meaningless talk that wastes time and confuses issues.
People comply more readily when given a reason, even a nonsensical one.
“Tell people why and they'll be far more likely to comply.”
When multiple biases combine in the same direction, the result is extreme — far more powerful than any single bias. This explains cults, bubbles, and manias.