Charlie's speech at Harvard Law School

Boston, September 9, 1995

I'm on human misjudgment of great interest in this topic -- God knows, I have created false positives has been small -- but I don't think I ever had the misjudgment "creation". I think, on this one of the reasons is, I tried to solve this I graduated from Harvard law school did not solve the problem.

I am aware of irrational mankind has established pattern, but the irrational so extreme, I have no any theory can explain and solve, but I see how it is extreme, but also see it has a certain pattern. I just started to create my own system of psychology, with a small part by reading, the majority from personal experience, I used this model to help you get through life. Later, I happened to read a book "influence", the author is a man named Bob · Cialdini psychologist. This book has sold 30 copies, really be not of the common sort. This is a book for ordinary readers of the theory, it fills many of my rough system of loopholes. Was it to fill in these gaps, I think I have built up a system of our own, the system is a very good tool to use, I would like to share with you.

　　　　1 underestimate what psychologists call "enhanced" or what economists call "incentive" power

You can say this thing, "known", but I also think people my age in , I have this life in the best understanding of "incentive" the power of the top 5% list. Every year, I will be surprised to find, I have the cognitive are increasing.

FedEx is one of the examples of the "incentive" effect I appreciate most cases. The core of effective operation of internal system of the company is: every night, all the packages must be shipped out, quickly from one central location and, if the entire transportation process was not quick enough, the system also has problems. But before the normal operation, FedEx has gone through a bad period, they try to moral persuasion, try all means to the world. Finally, some people come up with a coup: they give the night shift workers paid by the hour. If paid by the shift, the system would work better. You see, this approach has become effective.

At Harvard, B F Skinner is a real will "strengthen" as a powerful tool for people. His experiment is very creative, experimental result is "counterintuitive", but these conclusions are important. Skinner's reputation is ruined what I call a "take hammer syndrome" things: for a people who hold a hammer, everything looks like a nail. Skinner is an extremely academic history. Some smart people also suffer from this syndrome. We will explore why people suffer from this syndrome.

　　　　2 simple psychological denial　　

Give me a great touch things right the first time, is one of my friends, she has a super athlete, the son of super good grades, from the North Atlantic a flying aircraft carrier after take-off, never came back. His mother, a woman of sound mind, never believe that he's dead. Of course, if you turn on the TV, you will find, mothers who obviously offenders of, also have always believed that his son was innocent. This is the psychological denial. Sometimes, the truth is too cruel, make people unbearable. So, you twist it, will become can bear. We will do so in a way. This is a terrible problem of common psychological misjudgment.

　　　　3 by the incentive caused bias, both to himself and his trusted adviser of mind, it creates what economists call "agency cost"　　

"Prejudice" exists in any field and any one person, and will lead to terrible acts. I am 70 years old, but also never seen what things away from objective truth, only one step away. To experience the power of incentives, and rational but terrible power of action, the following examples may permit: in the Department of defense and the additional contract costs in the cost of practice has hundreds of times, our response is found in federal law in this kind of behavior is a crime, and is a felony.

　　

Incidentally, the government is right, but the world -- including many Law Corporation and other places -- one of the many ways of operation, is the additional cost in the cost system. And human nature, which I call "incentive caused bias", has greatly contributed to the spread of this approach.

　　

The human mind is this way, a great demonstration of the fact, the invention of the cash register is a very fruitful saints of our civilization is the most -- register makes it difficult to implement immoral behavior, each register is a great moral tool. NCR founder Paterson (John Patterson) know that. He had a small shop, people steal from him, and he always not to earn money. Later, he was sold to two cash registers, shop immediately profit. Of course, he closed the store, began trading in the cash register......

　　　　Super power psychological tendency in 4 caused by errors includes: prejudice from the people and our commitment to the consistent tendency, including rapid cognitive tendency to avoid or not harmonious, and for all the conclusion -- especially the tendency to have publicly expressed or be not easily won the conclusion -- self confirmation.　　

The human mind is very similar to human eggs. The egg has a "closed" system. When a sperm into the post, it "closed", the rest of the sperm will not come into. Human thought in general have such characteristics. Not only ordinary people have this tendency, Dean of the school of physics also have this tendency. According to Max Planck (Max Planck, the famous physicist) view, the real innovation, important new physics theories have never really been a defender of the old theories are acceptable. But the new theory, the theory of the past rarely refused. Planck described the crowd if there is this consistency and commitment tendency, makes them tightly grasp the natural conclusion, even if there is already evidence that it does not set up, you can imagine that you and I are one of them how would this crowd behavior.

　　

Of course, if you open your conclusion, it means you put the results into his brain heavy. There are many students rushed we shout, but they are not convincing us, it is in strengthening their own new ideas are, because they shout is into their own brain. I think it is educational institutions to create a kind of atmosphere, in which this popular...... Fundamentally speaking, they are not the responsible agency. When you are young, not by what you shout out confined living brain, this is a very important point.

　　　　5 I have never been to psychology or economics courses, but I was in the middle school biological course of Pavlov.

How they teach you know, such as the dog heard the bell began to flow of saliva. So what? No one (even with minimal effort) put it with the wide world together.

　　

The fact is, in all our daily lives, "Pavlov legend" is a huge, powerful psychological forces. I think 3/4 of commercial advertising is entirely dependent on the Pavlov theory in action. Lenovo is how pure role? You can think of the Coca Cola Co, they want the company to connect with all the pleasant scene: Olympic sports heroes, beautiful music, all these. They don't want associated with the president's funeral. When you see a Coca-Cola ad...... The association really works.

　　

All these psychological tendencies, most or all are completed in the lower state of consciousness, which makes them very insidious. Now, you are suffering from "hualazaimo messenger syndrome". The Persians really king, will bring bad news to kill the messenger. Do you think this situation has disappeared? You should have a look Bill Pelli (former chairman of CBS, and CEO) the last 20 years of life -- he does not listen to any one he did not want to hear the news. People know that, if the messenger to bring Bill Pelli is that he didn't want to hear, the messenger will be in trouble. This means that leaders put ourselves in a non reality, this is a great giant company, but he did in the past 20 years, made a fool to the third degree decision.

　　

Now, "hualazaimo messenger syndrome" is still full of vigour. I think, no one is willing to put bad news executives. So the best way is to do as hualazimo Messenger, leave and go into hiding, not bring home the news of the defeat.

　　

When it comes to economics, in my long lifetime, again and again to see a very interesting phenomenon it happened. You have two products, which are assumed to be very complex technology products. Now you might think, according to the theory of economics, if the cost of the product A is X yuan, Y products cost less than $X, then Y, if the product pricing will sell more difference than X. In fact it is not true. In many cases, raise the price of the alternative products, the market share, than get the price lower than competing products market share. But in fact, economists have only recently discovered this obvious truth.

　　　　6 from the "returns tend to" prejudice. Including one would expect to act on his tendency to follow other people　　

In this regard, Charles Tiny did a pretty good job. Charles Tiny called it "the kind of people obey the participants", very gullible. In any case, "tend to return" is a very, very powerful phenomenon. Charles Tiny experiment to demonstrate it through a power: he went to a campus, please people with juvenile offenders to the zoo, an average of every six people in a promised his request. After he has accumulated some data. In the same campus, he asked other people: "Hey, are you willing to sacrifice in the week two afternoon with a juvenile to what place?" The results, 100% of the respondents rejected him. But in asking this question, he took a step back and asked: "then you can at least take an afternoon to accompany juveniles to the zoo?" At least half the people agreed. The "first and then give a lot of" strategy, his success rate was three times larger than before.

　　

Now, if the people will subconsciously be manipulated in this way after they are unaware, I often say that the sentence is: "do you like only one leg to kick ass game." I mean, you really put a lot of time in your external world can not afford. In this so-called "role theory", others what you expect, you tend to act in the way, if you think about how society is organized, you will understand, this is the reward.

　　

A man named Chenbado (Zimbardo) psychologist once in Standford to do a test, he put the subjects were divided into two groups, one group plays a policeman, a group of prisoners to play. Two groups of people to the way people look to their role into action. Five days later, Zimbardo had to stop the experiment, because the guards a sadist, and prisoners became very depressed. In the beginning, the experimenter is normal and friendly students. This study into so-called devil's classic tutorial situation, even a good man to be put to the worse environment, may also become a wild beast. What I mean is this... This experiment is too vast. But Zimbardo is heavily distorted. Cause the results of this experiment, not only tend to return and role theory, and the consistency and commitment also played a role in the tendency. Every person, no matter he is playing a policeman or a prisoner, will perform into the brain.

　　

No matter where you are, this consistency and commitment tendency in your. In other words, you may change your approach, but perhaps more important is, you would change your mind. You can say, everyone know this. I want to tell you is, I am not as early as possible, as much as possible to understand this truth.

　　　　7 is social proof (that is, the results of other people, especially under the natural uncertainty and stress conditions of the conclusion) over the impact of prejudice　　

On this point, psychologists have used a case was Miss Kitty Janovice's example. In 1964, she was assassinated by criminals Adam street. There were 50 or 60, 70 people present, I don't know how many people saw she was gang chased the process lasted more than half an hour, but no one witness to help, no one even called the police. One explanation is, everyone else can see no action, so come very naturally produced such social proof: what is not the right thing to do is. In my judgment, with reasons to explain this example of Jane Nuowei Si is not enough, it is only part of the reason. Micro economic thinking and gain / loss ratio which also played a role. I repeatedly thought, in reality, the concept of psychological concepts and economic influence each other. Neither understand this person is simply a damn idiot.

　　

Some business people are involved in these waves of social proof. Remember a few years ago? An oil company bought a fertilizer company, then, every major oil companies have ran out and bought a fertilizer company. In fact, these oil companies is no more reason to buy fertilizer companies, but they don't know what to do. If the Exxon Corporation do, Mobil Oil Corp have enough reason to do so, and vice versa. It was a complete disaster.

　　

Previously I talked about strengthening the power -- you do something, then a rising market, you get paid, awards and acclaim and so on, this way of doing things then you will be greatly enhanced. But here too there is social proof in action, the stock market is the society that the ultimate form of expression, it is the reflection of other people's minds. These two effects with tremendous power together, how do you think the level of the whole stock market is effective? Even in 1973-74 the overall market downturn, or in 1972 50 the heyday of large companies? If these psychological theory is correct, you should think, is irrational tide wave leading the market trend changes.

　　　　8 economists love the efficient market theory, because the math is too beautiful　　

After all, mathematics is something they learn and master. The man with a hammer, every problem is very like a nail. In addition to the truth a little and let them be at a loss what to do, and they have forgotten the great economist Keynes once said: "rough right than precisely wrong."

　　　　Result 9 contrast resulting feeling, feelings and perceptions are distorted bias　　

Charles Tiny made a great experiment: he took three buckets of water, a bucket of water, a bucket of cold water, a bucket of warm water. He asked a student to his left hand into the water, the right hand into the cold water, then put both hands simultaneously into the water at room temperature. Of course, the hand feeling is very hot, the other one feels very cold. This is because the human sense organs in sharp contrast to the over under the influence. No absolute scale, only the relative temperature, but also in which quantum effects.

　　

Charles Tiny cited examples of the real estate broker. If a country people to the city to find you buy a house, the first thing you should do is to take him to the two you have seen the most expensive house, then, take him to see some middle expensive house, finally you will be able to get him. This approach is very effective, which is why the salesman to do so, it always works.

　　

I have a friend, by the heritage of the students. He once told me that if I am good enough. He said: "Charlie, if you put a frog into boiling water, it will jump out. But if you put it in warm water, then water and slowly heated, eventually, it will be boiling water boiled to death." I don't know the frog will really like what he says is so. But I know a lot of business is indeed. This is the phenomenon of contrast (contrast phenomenon). But they are more powerful body of the great. I mean, they're not dumbass. When you change a little bit closer, you might not be able to find. So, if you want to become a person of good judgment, you must for these because of the contrast in your brain twisting response.

　　　　Over 10 authority figures caused by prejudice　　

Psychology Thesis about Mir Glen experiments about 1600 articles. In this experiment, the authority of a play, he told his subjects, they must be completely innocent people given electric shocks. Surprisingly, even by the experimenter became nervous and shaken, when they are ordered to lend the maximum electric shock, with more than 2/3 people will do it. Mir Glen experiment show that Hitler wanted to how successful, this experiment is really captured the imagination of the world. Mir Glen from the experimental point of view, the Nazi crimes and the success of Hitler it is not difficult to understand. Part of the reason is the excessive political correctness and authority influence. Humans are born with a tendency to obey authority, even if the subject is wrong.

　　

You may like the following example: two pilots, one is a, is the driver is an authority figure. They are not in the plane, but finished the experiment in the simulated condition. The co pilot to be trained in the simulation state for a long time, he knows his job is to prevent the crash. In the course of the experiment, that is the driver to do some even a fool can see enough to cause the operation. But the vice driver sat quietly, because driving his authoritative role. 25%, the plane will crash.

　　　　11 "deprival super reaction syndrome" (deprival super-reaction syndrome) leads to a bias. Including the caused by the lack of immediate or potential bias, including possible for almost have or have never have been deprived of something　　

I have a neighbor, a piece of the island around the old man's house, and his next door neighbor a little pine tree on the island, about three feet high. Previously, the old man could see his 180 degree view of the front port, with the trees, his perspective into 179 and 3/4 degrees. Since then, two people have forged feud, this hatred continues.

　　

I mean, people are really crazy about those not worth mentioning "reduction". If you have some action, you tend to fall back into the exchange. Because you not only exchange and friendly, you will exchange of hate, and everything will be upgraded. So much from the crazy people are subconsciously take what they have lost, or almost have no to get something too heavy.

　　

In this regard, the New Cola (New Coke) is an extreme business case. Coca-Cola is the world's most valuable brand. Coca-Cola has a lot of smart engineers, lawyers, psychologists and advertising executive and so on. In the past 100 years, they spent a lot of time for people to believe that the intangible value of trademarks tremendous. It will mark with a taste of this together.

　　

But when they said "improved the taste" on the outside, it is difficult for consumers to accept. Taste is related to experience. I mean you can improve a detergent or what, but I don't think you can get a taste of what a big change. So, they got this huge "deprival super reaction syndrome". Results of defeat!

　　

By the way, Guo Sida (Goizuetta, coke was the CEO) and Keogh (Keough, Coca Cola Chief Executive) are intelligent and interesting people, but it is wise to make these terrible, stupid mistakes. Now you understand "deprival super reaction syndrome" power? But people make a balanced response to loss and gain cannot.

　　　　12 envy / jealousy lead to bias　　

Brothers and sisters have been raising, or management of Law Corporation, investment banks and even the experience of people who run the factory, will understand the word envy. I have heard more than once Buffett said: "not greedy, but jealousy pushing the world forward."

　　

You went to visit a psychology survey courses, find tomes about "envy / jealousy" in the index, but you can't find. On this aspect, there are some blind spots in academia, but it really is a powerful force. Envy and jealousy are largely operate in the subconscious. Every person who does not understand it appears they should not have a number of shortcomings.

　　　　The 13 bias caused by drug dependence　　

We do not have to discuss this topic. We have seen too much. Interestingly, drug dependence will always lead to moral collapse, so it does not always recognize the impact. That in a previous pilot missing son we talk about the case, it will be distorted reality in order to make himself acceptable.

　　　　14 "MIS gambling compulsion" leads to a bias　　

About this, you can find Skinner in the standard psychology survey course made his only explanation. Of course, he created the reinforcement ratio of a variable for his dove and mouse. He found that, this model than any other force can better influence behavior. He said: "well, I have to explain why gambling in the civilized society is so powerful, addictive." I think that, in a large extent, what he said is true. But Skinner seems to think that this is the only explanation, but the fact is, those who devise modern machinery and technology to know a lot of things that Skinner didn't know.

　　

If you go to play the slot machines, you will get the fence, fence, walnut. It happened again and again. All these make you feel you will soon win, this is "the deprival super reaction syndrome". Jesus Christ, who invented this machine to understand human psychology? For the high IQ, they can with the poker machine to play the game need to make their own choices, such as "21 points". We use computer to destroy civilization is so magical.

　　

In any case, "MIS gambling compulsion" is a very powerful and important things. Have a look of our country is happening: every Indian has a private plots, each town, and then have a look those stockbrokers and what other people destroy people. If you look in the standard psychology textbook, introduced in this regard, you almost can not find what.

　　　　15 preference bias that distorts the cause, including especially like oneself, these people, their knowledge structure, and extremely easy to be the also people like themselves misleading, and not from your didn't like people to learn　　

Now let's review the "take hammer syndrome". Why "take hammer syndrome" has always existed? If you stop to think about it, this is the incentive caused bias. His occupation reputation and his knowledge of theory completely tied together. He likes himself, he likes his own ideas, he expressed these thoughts to others, this consistency and commitment tendency. I mean, four or five basic psychological tendencies together, created the "take hammer syndrome".

　　

Once you realize that you can't really accept some of the ideas -- you can accept a small part, but a large part of the world you are difficult to accept -- that you learn useful lesson in living. Bernard Shaw's novel "the doctor's dilemma" has a role, said: "after all, every profession is a conspiracy against the layman." But it is not very accurate, and it is common, but it is not a subconscious mental tendencies more appropriate.

　　

The book that the doctor tell you what is good for him, he thinks that his own approach to the treatment of cancer. He thinks he is against the devil is the biggest, most important of the devil, but in fact, he has to contend with the devil compared with your own face, may be not worth mentioning. Therefore, in this world you get from paid consultants proposal is full of terrible prejudice. It is sad for you!

　　

There are two solutions: you can hire your advisor, but to be correct, and you shooting on target to take into account the impact of wind direction is a reason. Or you can learn the basic elements of your adviser to the industry, and you do not learn too much, because you only learn that, you can let him explain why he is right.

　　

In my long life, I have never seen a management consultant's report which are not in the case at the end: "the current situation really needs is more, management consulting." Every time it ends. I always like to turn to the last page. Of course, the Berkhire Hathaway Inc did not hire the consultant. But sometimes I will participate in the management of some non-profit institutions, where some fool would hire consultants.

　　　　16 from the human mind non mathematical nature of prejudice　　

The availability of Coca-Cola (availability) to upgrade to a secular religion. If the available properties to change behavior, you will drink a lot of cola -- if coke can always get it. I mean, availability does change behavior and cognition. In a sense, the various psychological tendencies mentioned earlier, will reduce the availability of things. Because if you quickly toward a thing, then the tendency of consistency and commitment will be to lock this thing on you.

　　

I think we should discuss Salomon brothers securities before John Gottflorent (CEO John Gutfreund,: under him, Solomon brother once financial institutions are the most fashionable Wall Street. But in 1991, the company was Salomon CEO Gut Florent learned that Paul Mose illegal bid bonds responsible for his government bond department, but not to the treatment, after the matter was exposed, Gut Flohr Ant was no life can not serve as a securities company positions), he is a very interesting human case. At least a generation's time, each of the orthodox teaching of the professional schools are examples.

　　

Gut Flo Don has a trust he clerk, but the clerk was once accidentally found (not to) to the government to lie, and do false account, this is equivalent to a forgery. The man immediately said: "I haven't had not done so. I will never do. This is a unique."

　　

There are a lot of psychological forces at work. Do you know this guy's wife, while he was standing in front of you, you will generate sympathy. He asked you for help, which inspired the exchange effect. Effect occurred in a number of psychological tendency, coupled with the fact: he is to help you make a lot of money part of the team.

　　

In any case, Gut Florent did not take his removal from office, of course, that guy had done so, he will do so in the future. Gut Flohr Ant now looks like is to let him do it again. The simple decided to destroy Gut Florent, and made that decision very easily.

　　

Social proof, incentive caused bias, etc. psychological tendency caused the terrible behavior spread...... Your company will rot, civilization will be ruined. I travel abroad because someone used the opportunity to travel with his mistress and his dismissal, I know his wife and children, so I paid him severance pay. I do not commit adultery, but the private use of public funds.

　　　　The 17 was fresh evidence of the additional impact caused by excessive bias　　

My wealth should have been $30000000 more than today. I have bought 300 shares of a stock, that guy called me back, said: "I have 1500 shares." I said: "you keep me for 15 minutes, I think again." In my life I have seen many real live special case, but the man (he is the CEO company) is a world record. But I misjudged the situation. In fact it is very safe -- he was going to die, but I refuse to buy an additional 1500 shares. Results, it cost me $30000000. Therefore, it is easy to misjudge the vivid evidence. Gut Flohr Ant is so , he looked into the man's eyes, and then forgive his colleague.

　　　　18 because of the theoretical framework of knowledge and information can not handle the current confusion caused by thinking.　　

We all know some people who failed the exam, they put the item back down, re test once, but then failed again...... There is no use, not by the brain to work that way. You must take the fact into the theoretical framework of your own, you have to ask yourself "why". If not, you can't deal with this world.

　　

Now we come to Phu Jerzy Stan (Feuerstein), he is Solomon's former legal officer, when the ancient Te Florent made a big mistake, Fu Jess Tan more clear on that point. He said to Gut Florent: "you have to make moral judgments and prudent business judgment on the matter, and then report." He also said: "this may not be illegal, may have no legal obligation to do so, but you have to remind customers, this kind of practice is prudent and appropriate." He two to three different occasions said to Gut Florent with the above words at least. Finally, he said no more. Of course, the persuasion failed. When Gut Florent left office, Phu Jerzy Stan also with him down. This blessing Jess Tan life basically ruined.

　　

"Phu Jerzy Stan is editor of the Harvard Law Review", but he made a basic psychological error. You want to persuade someone, you have to really tell them why. What we learn in the lesson? Incentive really so important? Vivid evidence really works? He should have told Gut Florent: "you may ruin your life, shamed your family, and lose your money." He should ask him: Mose is worth the risk? That will play a role. So fu Jess Tan this smart, sophisticated lawyer, in flunked elementary psychology. It's not very hard to do, just remember that "why".

　　　　19 sense, memory, perception and knowledge of the limitations, caused by prejudice

　　　　Mental changes of 20 stress-related (big and small, temporary permanent)　　

I most like the example is the great Pavlov. He put the dog in the cage, these dogs are changed after training behavior. Once Lenin Ziegler flooding, water has been rising, and these dogs are still in the cage, they suffered tremendous pressure. After the waters receded, Pavlov noticed that these dogs have been changed completely reversal training, personality. As a great scientist, Pavlov spent the rest of her life to let the dog insane, he learned a lot and I think that is very interesting.

　　

I've never seen a Freud School of the analyst to understand the late work of Pavlov, I haven't seen a lawyer can understand Pavlov from these dogs found to instill (programming), anti indoctrination (deprogramming), what is the connection between Chong Baiyi and so on. I mean, among those at the high level, of ignorance of basic psychology is quite significant.

　　　　21 other common temporary or permanent mental illness

　　　　22 "position syndrome" (say-something syndrome) development and organizational confusion　　

In this regard, the things I like the most is the bee. A bee flew out, and then fly back to find nectar. It uses dance to tell other Bees Honey place, then the collective set out to gather honey. Some of the brightest scientists, such as Skinner decided to do an experiment. He put the nectar is placed vertically on the honeycomb. In a natural state, there is no nectar like that in the vertical. Now, the poor has not bee genetic program enough to convey a message to the other bees. You may think, the bees will fly back to the hive, and then quietly hid in a corner. But it is not. It flew into the nest, "ramble in one's statement" dance. All my life I have been like the bee like dealing with people. This is a very important part in human tissue, therefore, on human tissue, the important point is, don't let this get "position syndrome" people involved in decision making.

　　

　　

THE PSYCHOLOGY OF HUMAN MISJUDGMENT

By Charlie Munger (Warren Buffett's partner at Berkshire Hathaway)

Speech at Harvard Law School (1995)

Transcription, comments [in brackets] by Whitney Tilson (feedback@Tilsonfunds.com)

Moderator:... And they discovered extreme, obvious irrationality in many areas of the economy that they looked at. And they were a little bit troubled because nothing that they had learned in Graduate School explained these patterns. Now I would hope that Mr. Munger spends a little bit more time around graduate schools today, because we've gotten now where he was 30 years ago, and we are trying to explain those
Patterns, and some of the people who are doing that will be speaking with you today

So I think he thinks of his specialty as the Psychology of Human Misjudgment, and part of this human misjudgment, of course, comes from worrying about the types of fads and social pressures that Henry Kaufman talked to us about. I think it's significant that Berkshire Hathaway is not headquartered in New York, or even in Los Angeles or San Francisco, but rather in the heart of the country in Nebraska

When he referred to this problem of human misjudgment, he identified two significant problems, and I'm sure that there are many more, but when he said, "By not relying o ­ n this, and not understanding this, it was costing me a lot of money," and I presume that some of you are here in the theory that maybe it's costing you even a somewhat lesser amount of money. And the second point that Mr. Munger made was it was
Reducing... Not understanding human misjudgment was reducing my ability to help everything I loved. Well I hope he loves you, and I'm sure he'll help you. Thank you. [Applause]

Munger: Although I am very interested in the subject of human misjudgment -- and Lord knows I've created a good bit of it -- I don't think I've created my full statistical share, and I think that o ne of the reasons was I - tried to do something about this terrible ignorance I left the Harvard Law School with

When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life. Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob Cialdini, who became a super-tenured hotshot o n a 2000-person faculty at a very - young age. And he wrote this book, which has now sold 300-odd thousand copies, which is remarkable for somebody. Well, it's an academic book aimed at a popular audience that filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a system that was a good-working tool, and I'd like to share that o ne with you.

And I came here because behavioral economics. How could economics not be behavioral? If it isn't behavioral, what the hell is it? And I think it's fairly clear that all reality has to respect all other reality. If you come to inconsistencies, they have to be resolved, and so if there's anything valid in psychology, economics has to recognize it, and vice versa. So I think the people that are working o n this fringe between economics and psychology - are absolutely right to be there, and I think there's been plenty wrong over the years. Well let me romp through as much of this list as I have time to get through

24 Standard Causes of Human Misjudgment

1 Under-recognition of the power of what psychologists call 'reinforcement'and economists call'incentives.'

Well you can say, "Everybody knows that." Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther

One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in o ne central location each night. And - the system has no integrity if the whole shift can't be done fast. And Federal Express had o ne hell of a time getting. The thing to work. And they tried moral suasion, they tried everything in the world,
And finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked

Early in the history of Xerox, Joe Wilson, who was then in the government, had to go back to Xerox because he couldn't understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course when he got there he found out that the Commission arrangement with the salesmen gave a tremendous incentive to the inferior machine

And here at Harvard, in the shadow of B.F. Skinner -- there was a man who really was into reinforcement as a powerful thought, and, you know, Skinner's lost his reputation in a lot of places, but if you were to analyze the entire history of experimental science at Harvard, he'd be in the top handful. His experiments were very ingenious, the results were counter-intuitive, and they were important. It is not given to experimental science to do better. What gummed up Skinner's reputation is that he developed a case of what I always call man-with-a-hammer syndrome: to the man with a hammer, every problem tends to look pretty much like a nail. And Skinner had o ne of the more extreme cases - in the history of Academia and this, syndrome doesn't exempt bright people. It's just a man with a hammer... And Skinner is an extreme example of that. And later, as I go down my list, let's go back and try and figure out why people, like Skinner, get man-with-a-hammer syndrome

Incidentally, when I was at the Harvard Law School there was a professor, naturally at Yale, who was derisively discussed at Harvard, and they used to say, "Poor old Blanchard. He thinks declaratory judgments will cure cancer"And that's the way Skinner got. And not only that, he was literary, and he scorned opponents who had any different way of thinking or thought anything else was important. This is not a way to make a lasting reputation if the other people turn out to also be doing something important

2 My second factor is simple psychological denial

This first really hit me between the eyes when a friend of our family had a super-athlete, super-student son who flew off a carrier in the North Atlantic and never came back, and his mother, who was a very sane woman, just never believed that he was dead. And, of course, if you turn on the television, you'll find the mothers of the most obvious criminals that man could ever diagnose, and they all think their sons are innocent. That's simple psychological denial. The reality is too painful to bear, so you just distort it until it's bearable. We all do that to some extent, and it's a common psychological misjudgment that causes terrible problems

3Incentive-cause bias, both in o own mind and that of ­ ne's o ­ nes trusted advisor, where it creates what economists call'agency costs.'

Here, my early experience was a doctor who sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln, Nebraska. And with that quality control for which community hospitals are famous, about five years after he should've been removed from the staff, he was. And o ne of the old doctors who - participated in the removal was also a family friend, and I asked him: I said, "Tell me, did he think,'Here's a way for me to exercise my talents'" -- this guy was very skilled technically-- "'and make a high living by doing a few maimings and murders every year, along with some frauds?'" And he said, "Hell no, Charlie. He thought that the gall bladder was the source of all medical evil, and if you really love your patients, you couldn't get that organ out rapidly enough"

Now that's an extreme case, but in lesser strength, it's present in every profession and in every human being. And it causes perfectly terrible behavior. If you take sales presentations and brokers of commercial real estate and businesses... I'm years old 70, I've never seen o ne I thought was even within - hailing distance of objective truth. If you want to talk about the power of incentives and the power of rationalized, terrible behavior: after the Defense Department had had enough experience with cost-plus percentage of cost contracts, the reaction of our republic was to make it a crime for the Federal
Government to write o ­ ne, and not o ­ nly a crime, but a felony

And by the way, the government's right, but a lot of the way the world is run, including most law firms and a lot of other places, they've still got a cost-plus percentage of cost system. And human nature, with its version of what I call'incentive-caused bias,' causes this terrible abuse. And many of the people who are doing it you would be glad to have married into your family compared to what you're otherwise going to get. [Laughter]

Now there are huge implications from the fact that the human mind is put together this way, and that is that people who create things like cash registers, which make most [dishonest] behavior hard, are some of the effective saints of our civilization. And the cash register was a great moral instrument when it was created. And Patterson knew that, by the way. He had a little store, and the people were stealing him blind and never made any money, and people sold him a couple of cash registers and it went to profit immediately. And, of course, he closed the store and went into the cash register business...

And so this is a huge, important thing. If you read the psychology texts, you will find that if they're 1000 pages long, there's o ne sentence. Somehow incentive-caused bias has escaped - the standard survey course in Psychology

4 Fourth, and this is a superpower in error-causing psychological tendency: bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance. Includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won

Well what I'm saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When o sperm gets in ­ ne, it shuts down so the next o ne can't get in. The human - mind has a big tendency of the same sort. And here again, it doesn't just catch ordinary mortals; it catches the deans of physics. According to Max Planck, the really innovative, important new physics was never really accepted by the old guard. Instead a new guard came along that was less brain-blocked by its previous conclusions. And if Max Planck's crowd had this consistency and commitment tendency that kept their old inclusions intact in spite of disconfirming evidence, you can imagine what the crowd that you and I are part of behaves like

And of course, if you make a public disclosure of your conclusion, you're pounding it into your own head. Many of these students that are screaming at us, you know, they aren't convincing us, but they're forming mental change for themselves, because what they're shouting out [is] what they're pounding in. And I think educational institutions that create a climate where too much of that goes o are in a ­ n... Fundamental sense, they're irresponsible institutions. It's very important to not put your brain in chains too young by what you shout out

And all these things like painful qualifying and initiation rituals pound in your commitments and your ideas. The Chinese brainwashing system, which was for war prisoners, was way better than anybody else's. They maneuvered people into making tiny little commitments and declarations, and then they'd slowly build. That worked way better than torture

5 Fifth: bias from Pavlovian Association, misconstruing past correlation as a reliable basis for decision-making

I never took a course in psychology, or economics either for that matter, but I did learn about Pavlov in high school biology. And the way they taught it, you know, so the dog salivated when the bell rang. So what? Nobody made the least effort to tie that to the wide world. Well the truth of the matter is that Pavlovian association is an enormously powerful psychological force in the daily life of all of us. And, indeed, in economics we wouldn't have money without the role of so-called secondary reinforcement, which is a pure psychological phenomenon demonstrated in the laboratory

Practically... I'd say 3/4 of advertising works o Pavlov. Think how Association ­ n pure, pure Association, works. Take Coca-Cola company (we're the biggest share-holder They want to be associated). With every wonderful image: heroics in the Olympics, wonderful music, you name it. They don't want to be associated with presidents'funerals and so-forth. When have you seen a Coca-Cola ad and the association really works...

And all these psychological tendencies work largely or entirely o a subconscious level ­ n, which makes them very insidious. Now you've got Persian messenger syndrome. The Persians really did kill the messenger who brought the bad news. You think that is dead? I mean you should've seen Bill Paley in his last 20 years. [Paley was the former owner, chairman and CEO of CBS; see Http://www.kcmetro.cc.mo.us/pennvalley/biology/lewis/crosby/paley.htm For his bio.] He didn't hear o ne damn thing he didn't want - to hear. People knew that it was bad for the messenger to bring Bill Paley things he didn't want to hear. Well that means that the leader gets in a cocoon of unreality, and this is a great big enterprise, and boy, did he make some dumb decisions in the last 20 years

And now the Persian messenger syndrome is alive and well. I saw, some years ago, Arco and Exxon arguing over a few hundred millions of ambiguity in their North Slope treaties before a superior court judge in Texas, with armies of lawyers and experts o n each side. Now this is - a Mad Hatter's tea party: two engineering-style companies can't resolve some ambiguity without spending tens of millions of dollars in some Texas superior court? In my opinion what happens is that nobody wants to bring the bad news to the executives up the line. But here's a few hundred million dollars you thought you had that you don't. And it's much safer to act like the Persian messenger who goes away to hide rather than bring home the news of the battle lost

Talking about economics, you get a very interesting phenomenon that I've seen over and over again in a long life. You've got two products; suppose they're complex, technical products. Now you'd think, under the laws of economics, that if product A costs X, if product Y costs X minus something, it will sell better than if it sells at X plus something but that's, not so. In many cases when you raise the price of the alternative products, it'll get a larger market share than it would when you make it lower than your competitor's product. That's because the bell, a Pavlovian bell -- I mean ordinarily there's a correlation between price and value -- then you have an information inefficiency. And so when you raise the price, the sales go up relative to your competitor. That happens again and again and again. It's a pure Pavlovian phenomenon. You can say, "Well, the economists have figured this sort of thing out when they started talking about information inefficiencies," but that was fairly late in economics that They found such an obvious thing. And, of course, most of them don't ask what causes the information inefficiencies

Well o ne of the things that causes - it is pure old Pavlov and his dog. Now you've got BIOS from Skinnerian association: operant conditioning, you know, where you give the dog a reward and pound in the behavior that preceded the dog's getting the award. And, of course, Skinner was able to create superstitious pigeons by having the rewards come by accident with certain occurrences, and, of course, we all know people who are the human equivalents of superstitious pigeons. That's a very powerful phenomenon. And, of course, operant conditioning really works. I mean the people in the center who think that operant conditioning is important are very much right, it's just that Skinner overdid it a little

Where you see in business just perfectly horrible results from psychologically-rooted tendencies is in accounting. If you take Westinghouse, which blew, what, two or three billion dollars pre-tax at least loaning developers to build hotels, and virtually 100% loans? Now you say any idiot knows that if there's o ne thing you don't like it's - a developer, and another you don't like it's a hotel. And to make a 100% loan to a developer who's going to build a hotel... [Laughter] But this guy he probably was an engineer , or something, and he didn't take psychology any more than I did, and he got out there in the hands of these salesmen operating under their version of incentive-caused bias, where any damned way of getting Westinghouse to do it was considered normal business, and they just blew

That would never have been possible if the accounting system hadn't been such but for the initial phase of every transaction it showed wonderful financial results. So people who have loose accounting standards are just inviting perfectly horrible behavior in other people. And it's a sin, it's an absolute sin. If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you'd be causing a lot of bad behavior, and the bad behavior would spread. Similarly an institution that gets sloppy accounting commits a real human sin, and it's also a dumb way to do business, as Westinghouse has so wonderfully proved

Oddly enough nobody mentions, at least nobody I've seen, what happened with Joe Jett and Kidder Peabody. The truth of the matter is the accounting system was such that by punching a few buttons, the Joe Jetts of the world could show profits, and profits that showed up in things that resulted in rewards and esteem and every other thing... Well the Joe Jetts are always with us, and they're not really to blame, in my judgment at least. But that bastard who created that foolish accounting system who, so far as I know, has not been flayed alive, ought to be

6 Sixth: bias from reciprocation tendency, including the tendency of one o n a roll to act as other - persons expect

Well here, again, Cialdini does a magnificent job at this, and you're all going to be given a copy of Cialdini's book. And if you have half as much sense as I think you do, you will immediately order copies for all of your children and several of your friends. You will never make a better investment

It is so easy to be a patsy for what he calls the compliance practitioners of this life. At any rate, reciprocation tendency is a very, very powerful phenomenon, and Cialdini demonstrated this by running around a campus, and he asked people to take juvenile delinquents to the zoo. And it was a campus, and so o NE in sixActually agreed to do it. And after he'd accumulated a statistical output he went around o n the same campus and he - asked other people, he said, Gee, would "you devote two afternoons a week to takingJuvenile delinquents somewhere and suffering greatly yourself to help them, "and there he got 100% of the people to say no. But after he'd made the first request, he backed up a little, and he said," Would you at least take them to the zoo o ­ ne afternoon? "He raised the compliance rate from a third to a half. He got three times the success by just going through the little ask-for-a-lot-and-back-off

Now if the human mind, o a subconscious level ­ n, can be manipulated that way and you don't know it, I always use the phrase, "You're like a one-legged man in an ass-kicking contest." I mean you are really giving a lot of quarter to the external world that you can't afford to give. And o n this so-called role. Theory, where you tend to act in the way that other people expect, and that's reciprocation if you think about the way society is organized

A guy named Zimbardo had people at Stanford divide into two pieces: o ne were the guards and the other - were the prisoners, and they started acting out roles as people expected. He had to stop the experiment after about five days. He was getting into human misery and breakdown and pathological behavior. I mean it was... It was awesome. However, Zimbardo is greatly misinterpreted. It's not just reciprocation tendency and role theory that caused that, it's consistency and commitment tendency. Each person, as he acted as a guard or a prisoner, the action itself was pounding in the idea. [For more o n this famous experiment:
Http://www.prisonexp.org/]

Wherever you turn, this consistency and commitment tendency is affecting you. In other words, what you think may change what you do, but perhaps even more important, what you do will change what you think. And you can say, "Everybody knows that." I want to tell you I didn't know it well enough early enough

7 Seventh, now this is a Lollapalooza, and Henry Kaufman wisely talked about this: bias from over-influence by social proof that is the conclusions, of others, particularly under conditions of natural uncertainty and stress

And here, o ne of the cases the psychologists - use is Kitty Genovese, where all these people -- I don't know, 50, 60, 70 of them -- just sort of sat and did nothing while she was slowly murdered. Now o ne of the explanations is that everybody - looked at everybody else and nobody else was doing anything, and so there's automatic social proof that the right thing to do is nothing. That's not a good enough explanation for Kitty Genovese, in my judgment. That's o nly part of it. There are microeconomic - ideas and gain/loss ratios and so forth that also come into play. I think time and time again, in reality, psychological notions and economic notions interplay, and the man who doesn't understand both is a damned fool

Big-shot businessmen get into these waves of social proof. Do you remember some years ago when o oil company bought a fertilizer company ­ ne, and every other major oil company practically ran out and bought a fertilizer company?And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa. I think they're all gone now, but it was a total disaster

Now let's talk about efficient market theory, a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact o of the economists who won ­ ne -- he shared a Nobel Prize -- and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn't quite as efficient as you think, he said, "Well, it's a two-sigma event." And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas -- better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone

If you think about the doctrines I've talked about, namely, o ­ ne, the power of reinforcement -- after all you do something and the market goes up and you get paid and rewarded and applauded and what have you, meaning a lot of reinforcement, if you make a bet o n a market and the market - goes with you. Also there's social, proof. I mean the prices o n the market are the ultimate - form of social proof, reflecting what other people think, and so the combination is very powerful. Why would you expect general market levels to always be totally efficient, say even in 1973-74 at the pit, or in 1972 or whatever it was when the Nifty 50 were in their heyday? If these psychological notions are correct, you would expect some waves of irrationality, which carry general levels, so they're inconsistent with reason

8 Nine [he means eight]: what made these economists love the efficient market theory is the math was so elegant

And after all, math was what they'd learned to do. To the man with a hammer, every problem tends to look pretty much like a nail. The alternative truth was a little messy, and they'd forgotten the great economists Keynes, whom I think said, "Better to be roughly right than precisely wrong"

9 Bias from contrast-caused distortions of sensation, perception and cognition

Here, the great experiment that Cialdini does in his class is he takes three buckets of water: o ­ ne's, hot, o ­ ne's cold and O room temperature and he ­ ne's, has the student stick his left hand in the hot water and his right hand in the cold water. Then he has them remove the hands and put them both in the room temperature bucket, and of course with both hands in the same bucket of water, o seems hot ­ ne, the other seems cold because the sensation apparatus of man is over-influenced by contrast. It has no absolute scale; it's got a contrast scale in it. And it's a scale with quantum effects in it too. It takes a certain percentage change before it's noticed

Maybe you've had a magician remove your watch -- I certainly have -- without your noticing it. It's the same thing. He's taking advantage of contrast-type troubles in your sensory apparatus. But here the great truth is that cognition mimics sensation, and the cognition manipulators mimic the watch-removing magician. In other words, people are manipulating you all day long o n this contrast phenomenon.

Cialdini cites the case of the real estate broker. And you've got the rube that's been transferred into your town, and the first thing you do is you take the rube out to two of the most awful, overpriced houses you've ever seen, and then you take the rube to some moderately overpriced house, and then you stick him. And it works pretty well which is, why the real estate salesmen do it. And it's always going to work

And the accidents of life can do this to you, and it can ruin your life. In my generation, when women lived at home until they got married, I saw some perfectly terrible marriages made by highly desirable women because they lived in terrible homes. And I've seen some terrible second marriages which were made because they were slight improvements over an even worse first marriage. You think you're immune from these things,And you laugh, and I want to tell you, you aren't.

My favorite analogy I can't vouch for the accuracy of. I have this worthless friend I like to play bridge with, and he's a total intellectual amateur that lives o inherited money but he ­ n, told me O something I really enjoyed hearing. ­ nce He said, "Charlie," he say, "If you throw a frog into very hot water, the frog will jump out, but if you put the frog in room temperature water and just slowly heat the water up, the frog will die there." Now I don't know whether that's true about a frog, but it's sure as hell true about many of the businessmen I know [laughter], and there, again, it is the contrast phenomenon. But these are hot-shot, high-powered people. I mean these are not fools. If it comes to you in small pieces, you're likely to miss, so if you're going
To be a person of good judgment, you have to do something about this warp in your head where it's so misled by mere contrast

10 Bias from over-influence by authority

Well here, the Milgrim experiment, as it's called -- I think there have been 1600 psychological papers written about Milgrim. And he had a person posing as an authority figure trick ordinary people into giving what they had every reason to expect was heavy torture by electric shock to perfectly innocent fellow citizens. And he was trying to show why Hitler succeeded and a few other things and so this, really caught the fancy of the world. Partly it's so politically correct, and over-influence by authority...

You'll like this o ne: You get a pilot and - a co-pilot. The pilot is the authority figure. They don't do this in airplanes, but they've done it in simulators. They have the pilot do something where the co-pilot, who's been trained in simulators a long time -- he knows he's not to allow the plane to crash -- they have the pilot to do something where an idiot co-pilot would know the plane was going to crash, but the pilot's doing it, and the co-pilot is sitting there, and the pilot is the authority figure. 25% of the time the plane crashes. I mean this is a very powerful psychological tendency. It's not quite as powerful as some people think, and I'll get to that later

11 Bias from deprival super-reaction syndrome, including bias caused by present or threatened scarcity, including threatened removal of something almost possessed, but never possessed

Here I took the Munger dog, a lovely, harmless dog. The o nly way to get that dog - to bite you is to try and take something out of its mouth after it was already there. And you know, if you've tried to do takeaways in labor negotiations, you'll know that the human version of that dog is there in all of us. And I have a neighbor, a predecessor who had a little island around the house, and his next door neighbor put a little pine tree o n it that was about three - feet high, and it turned his 180 degree view of the harbor into 179 3/4. Well they had a blood feud like the Hatfields and McCoys, and it went o ­ n and O ­ n and o ­ n...

I mean people are really crazy about minor decrements down. And then, if you act o them then you get ­ n, into reciprocation tendency, because you don't just reciprocate affection, you reciprocate animosity, and the whole thing can escalate. And so huge insanities can come from just subconsciously over-weighing the importance of what you're losing or almost getting and not getting

And the extreme business case here was New Coke. Coca-Cola has the most valuable trademark in the world. We're the major shareholder -- I think we understand that trademark. Coke has armies of brilliant engineers, lawyers, psychologists, advertising executives and so forth, and they had a trademark o a flavor and they'd ­ n, spent the better part of 100 years getting people to believe that trademark had all these intangible values too. And people associate it with a flavor. And so they were going to tell people not that it was improved, because you can't improve a flavor. A flavor is a matter of taste. I mean you may improve a detergent or something, but don't think you're going to make a major change in a flavor. So they got this huge deprival super-reaction syndrome

Pepsi was within weeks of coming out with old Coke in a Pepsi bottle, which would've been the biggest fiasco in modern times. Perfect insanity. And by the way, both Goizuetta [Coke's CEO at the time] and Keough [an influential former president and director of the company] are just wonderful about it. I mean they just joke. Keough always says, "I must've been away o ­ n vacation"He participated in every single decision -- he's a wonderful guy. And by the way, Goizuetta is a wonderful, smart guy, an engineer. Smart people make these terrible boners. How can you not understand deprival super-reaction syndrome? But people do not react symmetrically to loss and gain. Well maybe a great bridge player like Zeckhauser does, but that's a trained response. Ordinary people, subconsciously affected by their inborn tendencies...

12 Bias from envy/jealousy

Well envy/jealousy made, what, two out of the Ten Commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I've heard Warren say a half a dozen times, "It's not greed that drives the world, but envy"

Here again, you go through the psychology survey courses, and you go to the index: envy/jealousy, 1000-page book, it's blank. There's some blind spots in academia, but it's an enormously powerful thing, and it operates, to a considerable extent, o n the subconscious level. Anybody who - doesn't understand it is taking o n defects he shouldn't have.

13 Bias from chemical dependency

Well, we don't have to talk about that. We've all seen so much of it, but it's interesting how it'll always cause this moral breakdown if there's any need, and it always involves massive denial. See it just aggravates what we talked about earlier in the aviator case, the tendency to distort reality so that it's endurable

14 Bias from mis-gambling compulsion

Well here, Skinner made the o nly explanation you'll find in the standard - psychology survey course. He, of course, created a variable reinforcement rate for his pigeons and his mice, and he found that that would pound in the behavior better than any other enforcement pattern. And he says, "Ah ha!I've explained why gambling is such a powerful, addictive force in this civilization. "I think that is, to a very considerable extent, true, but being Skinner, he seemed to think that was the o explanation but the truth ­ nly, of the matter is that the devisors of these modern machines and techniques know a lot of things that Skinner didn't know

For instance, a lottery. You have a lottery where you get your number by lot, and then somebody draws a number by lot, it gets lousy play. You have a lottery where people get to pick their number, you get big play. Again, it's this consistency and commitment thing. People think if they have committed to it, it has to be good. The minute they've picked it themselves it gets an extra validity. After all, they thought it and they acted o n it.

Then if you take the slot machines, you get bar, bar, walnut. And it happens again and again and again. You get all these near misses. Well that's deprival super-reaction syndrome, and boy do the people who create the machines understand human psychology. And for the high-IQ crowd they've got poker machines where you make choices. So you can play blackjack, so to speak with the, machine. It's wonderful what we've done
With our computers to ruin the civilization

But at any rate, mis-gambling compulsion is a very, very powerful and important thing. Look at what's happening to our country: every Indian has a reservation, every river town, and look at the people who are ruined by it with the aid of their stock brokers and others. And again, if you look in the standard textbook of psychology you'll find practically nothing o it except maybe o ­ n ­ ne sentence talking about Skinner's rats. That is not an adequate coverage of the subject

15 Bias from liking distortion, including the tendency to especially like o ­ neself, O ­ ne's own kind and o own idea structures ­ ne's, and the tendency to be especially susceptible to being misled by someone liked. Disliking distortion, bias from that, the reciprocal of liking distortion and the tendency not to learn appropriately from someone disliked

Well here, again, we've got hugely powerful tendencies, and if you look at the wars in part of the Harvard Law School, as we sit here, you can see that very brilliant people get into this almost pathological behavior. And these are very, very powerful, basic, subconscious psychological tendencies, or at least party subconscious

Now let's get back to B.F. Skinner, man-with-a-hammer syndrome revisited. Why is man-with-a-hammer syndrome always present? Well if you stop to think about it, it's incentive-caused bias. His professional reputation is all tied up with what he knows. He likes himself and he likes his own ideas, and he's expressed them to other people -- consistency and commitment tendency. I mean you've got four or five of these elementary psychological tendencies combining to create this man-with-a-hammer syndrome

Once you realize that you can't really buy your thinking -- partly you can, but largely you can't in this world -- you have learned a lesson that's very useful in life. George Bernard Shaw had a character say in The Doctor's Dilemma, "In the last analysis, every profession is a conspiracy against the laity." But he didn't have it quite right, because it isn't so much a conspiracy as it is a subconscious, psychological tendency

The guy tells you what is good for him. He doesn't recognize that he's doing anything wrong any more than that doctor did when he was pulling out all those normal gall bladders. And he believes his own idea structures will cure cancer, and he believes that the demons that he's the guardian against are the biggest demons and the most important o ­ nes, and in fact they may be very small demons compared to the demons that you face. So you're getting your advice in this world from your paid advisor with this huge load of ghastly bias. And woe to you

There are o nly two ways to handle it: - you can hire your advisor and then just apply a windage factor, like I used to do when I was a rifle shooter. I'd just adjust for so many miles an hour wind. Or you can learn the basic elements of your advisor's trade. You don't have to learn very much, by the way, because if you learn just a little then you can make him explain why he's right. And those two tendencies will take part of the warp out of the thinking you've tried to hire done. By and large it works terribly. I have never seen a management consultant's report in my long life that didn't end with the following paragraph: "What this situation really needs is more management consulting." Never once. I always turn to the last page. Of course Berkshire doesn't hire them, so I o do this o ­ nly ­ n sort of a voyeuristic basis. Sometimes I'm at a non-profit where some idiot hires o ne. [Laughter]

16 Seventeen [he means 16]: bias from the non-mathematical nature of the human brain in its natural state as it deal with probabilities employing crude heuristics, and is often misled by mere contrast, a tendency to overweigh conveniently available information and other psychologically misrouted thinking tendencies o n this list.

When the brain should be using the simple probability mathematics of Fermat and Pascal applied to all reasonably obtainable and correctly weighted items of information that are of value in predicting outcomes, the right way to think is the way Zeckhauser plays bridge. It's just that simple. And your brain doesn't naturally know how to think the way Zeckhauser knows how to play bridge. Now, you notice I put in that availability thing, and there I'm mimicking some very eminent psychologists [Daniel] Kahneman, Eikhout[?] (I hope I pronounced that right) and [Amos] Tversky, who raised the idea of availability to a whole heuristic of misjudgment. And they are very substantially right

I mean ask the Coca-Cola Company, which has raised availability to a secular religion. If availability changes behavior, you will drink a Helluva lot more Coke if it's always available. I mean availability does change behavior and cognition. Nonetheless, even though I recognize that and applaud Tversky and Kahneman, I don't like it for my personal system except as part of a greater sub-system, which is you've got to think the way Zeckhauser plays bridge. And it isn't just the lack of availability that distorts your judgment. All the things o n this list distort judgment. And I - want to train myself to kind of mentally run down the list instead of just jumping o n availability. So that's why I state - it the way I do

In a sense these psychological tendencies make things unavailable, because if you quickly jump to o thing and then because ­ ne, you jumped to it the consistency and commitment tendency makes you lock in, boom, that's error number o if something is very vivid ­ ne. Or, which I'm going to come to next, I mean that will really pound in. And the reason that the thing that really matters is now unavailable and what's extra-vivid wins is, the extra-vividness, creates the unavailability. So I think it's much better to have a whole list of things that would cause you to be less like Zeckhauser than it is just to jump o ­ n o ­ ne factor

Here I think we should discuss John Gutfreund. This is a very interesting human example, which will be taught in every decent professional school for at least a full generation. Gutfreund has a trusted employee and it comes to light not through confession but by accident that the trusted employee has lied like hell to the government and manipulated the accounting system, and it was really equivalent to forgery. And the man immediately says, "I've never done it before, I'll never do it again. It was an isolated example"And of course it was obvious that he was trying to help the government as well as himself, because he thought the government had been dumb enough to pass a rule that he'd spoken against, and after all if the government's not going to pay attention to a bond trader at Salomon, what kind of a government can
It be?

At any rate, this guy has been part of a little clique that has made, well, way over a billion dollars for Salomon in the very recent past, and it's a little handful of people. And so there are a lot of psychological forces at work, and then you know the guy's wife, and he's right in front of you, and there's human sympathy, and he's sort of asking for your help, which encourages reciprocation, and there's all these psychological tendencies are working, plus the fact he's part of a group that had made a lot of money for you. At any rate, Gutfreund does not cashier the man, and of course he had done it before and he did do it again. Well now you look as though you almost wanted him to do it again. Or God knows what you look like, but it isn't good. And that simple decision destroyed Jim Gutfreund, and it's so easy to do

Now let's think it through like the bridge player, like Zeckhauser. You find an isolated example of a little old lady in the See's Candy Company, O of our subsidiaries ­ ne, getting into the till. And what does she say? "I never did it before, I'll never do it again. This is going to ruin my life. Please help me." And you know her children and her friends, and she'd been around 30 years and standing behind the candy counter with swollen ankles. When you're an old lady it isn't that glorious a life. And you're rich and powerful and there she is: "I never did it before, I'll never do it again"Well how likely is it that she never did it before? If you're going to catch 10 embezzlements a year, what are the chances that any o ne of them -- applying what Tversky - and Kahneman called baseline information -- will be somebody who o did it this o ­ nly ­ nce? And the people who have done it before and are going to do it again, what are they all going to say? Well in the history of the See's Candy Company they always say, "I never did it before, and I'm never going to do it again." And we cashier them. It would be evil not to, because terrible behavior spreads

Remember... What was it? Serpico? I mean you let that stuff... You've got social proof, you've got incentive-caused bias, you've got a whole lot of psychological factors that will cause the evil behavior to spread, and pretty soon the whole damn... Your place is rotten, the civilization is rotten. It's not the right way to behave. And I will admit that I have... When I knew the wife and children, I have paid severance pay when I fire somebody for taking a mistress o n an extended foreign trip. It's - not the adultery I mind, it's the embezzlement. But there, I wouldn't do it like Gutfreund did it, where they'd been cheating somebody else o n my behalf. There I think - you have to cashier. But if they're just stealing from you and you get rid of them, I don't think you need the last ounce of vengeance. In fact I don't think you need any vengeance. I don't think vengeance is much good

17 Now we come to bias from over-influence by extra-vivid evidence

Here's o ­ ne that... I'm at least $30 million poorer as I sit here giving this little talk because I o nce bought 300 shares of a - stock and the guy called me back and said, "I've got 1500 more," and I said, "Will you hold it for 15 minutes while I think about it And the?" CEO of this company - I have seen a lot of vivid peculiarities in a long life, but this guy set a world record; I'm talking about the CEO -- and I just mis-weighed it. The truth of the matter was the situation was foolproof. He was soon going to be dead, and I turned down the extra 1500 shares, and it's now cost me $30 million. And that's life in the big city. And it wasn't something where stock was generally available. So it's very easy to mis-weigh the vivid evidence, and Gutfreund did that when he looked into the man's eyes and forgave a colleague

18 Twenty-two [he means 18]: Mental confusion caused by information not arrayed in the mind and theory structures, creating sound generalizations developed in response to the question "Why?" Also, mis-influence from information that apparently but not really answers the question "Why?" Also, failure to obtain deserved influence caused by not properly explaining why

Well we all know people who've flunked, and they try and memorize and they try and spout back and they just... It doesn't work. The brain doesn't work that way. You've got to array facts o n the theory structures answering the - question "Why?" If you don't do that, you just cannot handle the world

And now we get to Feuerstein, who was the general counsel with Salomon when Gutfreund made his big error, and Feuerstein knew better. He told Gutfreund, "You have to said report this as a matter of morality and prudent business judgment. He," "It's probably not illegal, there's probably no legal duty to do it, but you have to do it as a matter of prudent conduct and proper dealing with your main customer." He said that to Gutfreund o n at least two or three occasions. - And he stopped. And, of course, the persuasion failed, and when Gutfreund went down, Feuerstein went with him. It ruined a considerable part of Feuerstein's life

Well Feuerstein, [who] was a member of the Harvard Law Review, made an elementary psychological mistake. You want to persuade somebody, you really tell them why. And what did we learn in lesson o ­ ne? Incentives really matter? Vivid evidence really works? He should've told Gutfreund, "You're likely to ruin your life and disgrace your family and lose your money." And is Mozer worth this? I know both men. That would've worked. So Feuerstein flunked elementary psychology, this very sophisticated, brilliant lawyer. But don't you do that. It's not very hard to do, you know, just to remember that "Why is very important.?"

19 Other normal limitations of sensation, memory, cognition and knowledge

Well, I don't have time for that

20 Stress-induced mental changes, small and large, temporary and permanent

Here, my favorite example is the great Pavlov. He had all these dogs in cages, which had all been conditioned into changed behaviors, and the great Leningrad flood came and it just went right up and the dog's in a cage. And the dog had as much stress as you can imagine a dog ever having. And the water receded in time to save some of the dogs, and Pavlov noted that they'd had a total reversal of their conditioned personality. And being the great scientist he was, he spent the rest of his life giving nervous breakdowns to dogs, and he learned a Helluva lot that I regard as very interesting

I have never known any Freudian analyst who knew anything about the last work of Pavlov, and I've never met a lawyer who understood that what Pavlov found out with those dogs had anything to do with programming and de-programming and cults and so forth. I mean the amount of elementary psychological ignorance that is out there in high levels is very significant[?

21 Then we've got other common mental illnesses and declines, temporary and permanent, including the tendency to lose ability through disuse

22 And then I've got development and organizational confusion from say-something syndrome

And here my favorite thing is the bee, a honeybee. And a honeybee goes out and finds the nectar and he comes back, he does a dance that communicates to the other bees where the nectar is, and they go out and get it. Well some scientist who is clever, like B.F. Skinner, decided to do an experiment. He put the nectar straight up. Way up. Well, in a natural setting, there is no nectar where they're all straight up, and the poor honeybee doesn't have a genetic program that is adequate to handle what he now has to communicate. And you'd think the honeybee would come back to the hive and slink into a corner, but he doesn't. He comes into the hive and does this incoherent dance and all, my life I've been dealing with the human equivalent of that honeybee. [Laughter] And it's a very important part of human organization so the noise and the reciprocation and so forth of all these people who have what I call say-something syndrome don't really affect the decisions

---

Now the time has come to ask two or three questions. This is the most important question in this whole talk

1 What happens when these standard psychological tendencies combine? What happens when the situation, or the artful manipulation of man, causes several of these tendencies to operate o n a person toward the same - end at the same time?

The clear answer is the combination greatly increases power to change behavior, compared to the power of merely o ne tendency acting alone. Examples are:

Tupperware parties. Tupperware's now made billions of dollars out Of a few manipulative psychological tricks. It was so schlocky that directors of Justin Dart's company resigned when he crammed it down his board's throat. And he was totally right, by the way, judged byEconomic outcomes

Moonie [as in Sun Myung Moon and the Unification Church] conversionMethods: boy do they work. He just combines four or five of theseThings together

The system of Alcoholics Anonymous: a 50% no-drinking rate outcome when everything else fails? It's a very clever system that uses fourOr five psychological systems at o toward I might ­ nce, say, a very good end

The Milgrim experiment. It's been widely interpreted as mere obedience, but the truth of the matter is that the experimenter whoGot the students to give the heavy shocks in Milgrim, he explained why. It was a false explanation. "We need this to look for scientificTruth, "and so o n. That greatly changed the behavior - of the People. And number two, he worked them up: tiny shock, a little larger, a little larger. So commitment and consistency tendency andThe contrast principle were both working in favor of this behavior. So again, it's four different psychological tendencies. When you get these Lollapalooza effects you will almost always find four or five of these things working together

When I was young there was a whodunit hero who always said, "Cherche La femme. " [In French, "Look for the woman." you should search for in life What is the combination, because the combination is likely to do you in. Or, if you're the inventor of Tupperware parties, it's likely to make you enormously rich if you can stand shaving when you do

One of my favorite cases is the McDonald-Douglas airliner evacuation disaster. The government requires that airliners pass a bunch of tests, O of them is evacuation: get everybody - Ne out, I think it's 90 seconds or something like that. It's some short period of time. The government has rules, make it very realistic, so o ­ N and so o n. You can't select. Nothing but 20-year-old athletes to evacuate your airline. So McDonald-Douglas schedules one of these things in a hangar, and they make the hangar dark and the concrete floor is 25 feet down, and they've got these little rubber chutes, and they've got all these old people, and they ring the bell and they all rush out, and in the morning, when the first test is done, they create, I don't know, 20 terrible injuries when people go off to hospitals, and of course they scheduled another o ne for the afternoon.

By the way they didn't read[the time schedule? Either, in addition to causing all the injuries. Well... So what do they do? They do it again in the afternoon. Now they create 20 more injuries and o ne case of a severed spinal - column with permanent, unfixable paralysis. These are engineers, these are brilliant people, this is thought over through in a big bureaucracy. Again, it's a combination of [psychological tendencies]: authorities told you to do it. He told you to make it realistic. You've decided to do it. You'd decided to do it twice. Incentive-caused bias. If you pass you save a lot of money. You've got to jump this hurdle before you can sell your new airliner. Again, three, four, five of these things work together and it turns human brains into mush. And maybe you think this doesn't happen in picking investments? If so, you're living in a different world than I am

Finally, the open-outcry auction. Well the open-outcry auction is just made to turn the brain into mush: you've got social proof, the other guy is bidding, you get reciprocation tendency, you get deprival super-reaction syndrome, the thing is going away... I mean it just absolutely is designed to manipulate people into idiotic behavior

Finally the institution of the board of directors of the major American company. Well, the top guy is sitting there, he's an authority figure. He's doing asinine things, you look around the board, nobody else is objecting, social proof, it's okay? Reciprocation tendency, he's raising the directors fees every year, he's flying you around in the corporate airplane to look at interesting plants, or whatever in hell they do, and you go and you really get extreme dysfunction as a corrective decision-making body in the typical American board of directors. They o act again the power ­ nly, of incentives, they o nly act when it gets so - bad it starts making them look foolish, or threatening legal liability to them. That's Munger's rule. I mean there are occasional things that don't follow Munger's rule, but by and large the board of directors is a very ineffective corrector if the top guy is a little nuts, which, of course, frequently happens

2 The second question: Isn't this list of standard psychological tendencies improperly tautological compared with the system of Euclid? That is, aren't there overlaps? And can't some items o n the list be derived from - combinations of other items?

The answer to that is, plainly, yes

3 Three: What good, in the practical world, is the thought system indicated by the list? Isn't practical benefit prevented because these psychological tendencies are programmed into the human mind by broad evolution so we can't get rid of them? I mean the [By] broad evolution, combination of genetic and cultural evolution, but mostly genetic

Well the answer is the tendencies are partly good and, indeed, probably much more good than bad, otherwise they wouldn't be there. By and large these rules of thumb, they work pretty well for man given his limited mental capacity. And that's why they were programmed in by broad evolution. At any rate, they can't be simply washed out automatically and they shouldn't be. Nonetheless, the psychological thought system described is very useful in spreading wisdom and good conduct when o ne understands it and uses it
Constructively

Here are some examples

O ne: Karl Braun's communication practices. He designed - oil Refineries with spectacular skill and integrity. He had a very simple rule. Remember I said, "Why is it important You got fired in the?"Braun company. You had to have five Ws. You had to tell Who, What you wanted to do, Where and When, and you had to tell him Why. And if youWrote a communication and left out the Why you got fired, because Braun knew it's complicated building an oil refinery. It can blow up... All kinds of things happen. And he knew that his communication system worked better if you always told him why. That's a simple discipline, and boy does it work

 Two: the use of simulators in pilot training. Here, again, abilities attenuate with disuse. Well the simulator is God's gift because you can keep them fresh

Three: The system of Alcoholics Anonymous, that's certainly a constructive use of somebody understanding psychological tendencies. I think they just wandered into it, as a matter of fact, so you can regard it as kind of an evolutionary outcome. But just because they've wandered into it doesn't mean you can't invent its equivalent when you need it for a good purpose

Four: Clinical training in medical schools: here's a profoundly correct way of understanding psychology. The standard practice is watch o ­ ne, do o ­ ne, teach o ne. Boy does that pound in - what you want pounded in. Again, the consistency and commitment tendency. And that is a profoundly correct way to teach clinical medicine

Five: The rules of the U.S. Constitutional Convention: totally secret, no vote until the whole vote, then just o ne vote o - n the - whole Constitution. Very clever psychological rules, and if they had a different procedure, everybody would've been pushed into a corner by his own pronouncements and his own oratory and his own... And no recorded votes until the last o ne. And they got it through by - AWhisker with those wise rules. We wouldn't have had the Constitution if our forefathers hadn't been so psychologically acute. And look at The crowd we got now

Six: the use of granny's rule. I love this. o ne of the psychologists who works for - the Center gets paid a fortune running around America, and he teaches executives to manipulate themselves. Now granny's rule is you don't get the ice cream unless you eat your carrots. Well granny was a very wise woman. That is a Very good system. And so this guy, a very eminent psychologist, he runs around the country telling executives to organize their day so they force themselves to do what's unpleasant and important by doing that first, and then rewarding themselves with something they really like doing. He is profoundly correct

Seven: the Harvard Business School's emphasis o n decision trees. When I was young - and foolish I used to laugh at the Harvard Business School. I said, "They're teaching 28-year-old people that high school algebra works in real life?" We're talking about elementary probability. But later I wised up and I realized that it was very important that they do that, and better late than never

Eight: the use of post-mortems at Johnson & Johnson. At most corporations if you make an acquisition and it turns out to be a disaster, all the paperwork and presentations that caused the dumb acquisition to be made are quickly forgotten. You've got denial, you've got everything in the world. You've got Pavlovian Association tendency. Nobody even wants to even be associated with the damned thing or even mention it. At Johnson & Johnson, they make everybody revisit their old acquisitions and wade through the presentations. That is a very smart thing to do. And by the way, I do the same thing routinely

Nine: the great example of Charles Darwin is he avoided confirmation bias. Darwin probably changed my life because I'm a biography nut, and when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks. I also found out that he wasn't very smart byThe ordinary standards of human acuity, yet there he is buried in Westminster Abbey. That's not where I'm going, I'll tell you. And I said, "My God, here's a guy that, by all objective evidence, is not nearly as smart as I am and he's in Westminster Abbey? He must have tricks I should learn. And I started wearing" little hair shirts like Darwin to try and train myself out of these subconscious psychological tendencies that cause so many errors. It didn't work perfectly, as you can tell from listening to this talk, but it would've been even worse if I hadn't done what I did. And you can know these psychological tendencies and avoid being the patsy of allThe people that are trying to manipulate you to your disadvantage, like Sam Walton. Sam Walton won't let a purchasing agent take a handkerchief from a salesman. He knows how powerful the subconsciousReciprocation tendency is. That is a profoundly correct way for SamWalton to behave

Ten: Then there is the Warren Buffett rule for open-outcryAuctions: don't go. We don't go to the closed-bid auctions too because they... That's a counter-productive way to do things ordinarily for a different reason, which Zeckhauser would understand

4 Four: What special knowledge problems lie buried in the thought system indicated by the list?

Well o ne is paradox. Now we're talking - about a type of human wisdom that the more people learn about it, the more attenuated the wisdom gets. That's an intrinsically paradoxical kind of wisdom. But we have paradox in mathematics and we don't give up mathematics. I say damn the paradox. This stuff is wonderfully useful. And by the way, the granny's rule, when you apply it to yourself, is sort of a paradox in a paradox. The manipulation still works even though you know you're doing it. And I've seen that done by o ne person to another. I drew this - beautiful woman as my dinner partner a few years ago, and I'd never seen her before. Well, she's married to prominent Angelino, and she sat down next to me and she turned her beautiful face up and she said, "Charlie," she said, "What o word accounts for your remarkable - Ne success in life?" And I knew I was being manipulated and that she'd done this before, and I just loved it. I mean I never see this woman without a little lift in my spirits. And by the way I tol D her I was rational. You'll have to judge yourself whether that's true. I may be demonstrating some psychological tendency I hadn't planned o n demonstrating.

How should the best parts of psychology and economics interrelate in an enlightened economist's mind? Two views: that's the thermodynamics model. You know, you can't derive thermodynamics from plutonium, gravity and laws of mechanics, even though it's a lot of little particles interacting. And here is this wonderful truth that you can sort of develop o your own which ­ n, is thermodynamics. And some economists - and I think Milton Friedman is in this group, but I may be wrong o n that --sort of like the thermodynamics - model. I think Milton Friedman, who has a Nobel prize, is probably a little wrong o n that. I think the thermodynamics - analogy is over-strained. I think knowledge from these different soft sciences have to be reconciled to eliminate conflict. After all, there's nothing in thermodynamics that's inconsistent with Newtonian mechanics and gravity, and I think that some of these economic theories are not totally consistent with other knowledge, and they have to be bent. And I think that these beha Vioral Economics... Or economists are probably the o NES that are bending them in the - correct direction

Now my prediction is when the economists take a little psychology into account that the reconciliation will be quite endurable. And here my model is the procession of the equinoxes. The world would be simpler for a long-term climatologist if the angle of the axis of the Earth's rotation, compared to the plane of the Euclyptic, were absolutely fixed. But it isn't fixed. Over every 40000 years or so there's this little wobble, and that has pronounced long-term effects. Well in many cases what psychology is going to add is just a little wobble, and it will be endurable. Here I quote another hero of mine, which of course is Einstein, where he said, "The Lord is subtle, but not malicious." And I don't think it's going to be that hard to bend economics a little to
Accommodate what's right in Psychology

5 Fifth: The final question is: If the thought system indicated by this list of psychological tendencies has great value not recognized and employed, what should the educational system do about it?

I am not going to answer that o ne now. I like leaving a little - Mystery

Have I used up all the time so there's no time for questions?

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Moderator: I think that what we're going to do is we're going to borrow a little bit of time from the end of the day questions, and we're going to move it and allocate it to Charles Munger, if that's acceptable to everybody

Munger: By the way, the dean of the Stanford Law School is here today, Paul Brest, and he is trying to create a course at the Stanford Law School that tries to work stuff similar to this into worldly wisdom for lawyers, which I regard as a profoundly good idea, and he wrote an article about it, and you'll be given a copy along with Cialdini's book. [The article Mr. Munger is referring to is called "On Teaching Professional Judgment" by Paul Brest and Linda Krieger. It was published in the July 1994 edition of the Washington Law Review.] Questions?

Audience Member #1: Will we be able to get a copy of that list of 24 standard causes of human misjudgment]?

Munger: Yes. I presumed there would be o curious man [laughter] and ­ ne, I have it and I'll put it over there o the table but ­ n, don't take more than o ­ ne, because I didn't anticipate such a big crowd. And if we run
Short, I'm sure the Center is up to making other copies

Audience Member #2: If I had listened to this talk I might have thought that Charles Munger was a psychology professor operating in a business school. Every o in a while a micro-issue ­ nce -- you told us how you would've deal with O of these issues ­ ne, for example with the unfortunate lady See's -- but you didn't tell us how these tendencies affected you and what's probably the most important, or o ne of the most important
Elements of your success, which was deciding where to invest your money. And I'm wondering if you might relate some of these principles to some of your past decisions that way

Munger: Well of course an investment decision in the common stock of a company frequently involves a whole lot of factors interacting. Usually, of course, there's o ­ ne big, simple model, and a lot of those models are microeconomic. And I have a little list of -- it wouldn't be nearly 24, of those don't have time for that - but I o ne. And I don't have too much - interest in teaching other people how to get rich. And that isn't because I fear the competition or anything like that -- Warren has always been very open about what he's learned, and I share that ethos. My personal behavior model is Lord Keynes: I wanted to get rich
So I could be independent, and so I could do other things like give talks o n the intersection of psychology and economics. - I didn't want to turn it into a total obsession

Audience Member #3: Out of those 24, could you tell us ne rule that's most important the o what?

Munger: I would say the o ne thing that causes the most trouble - is when you combine a bunch of these together, you get this Lollapalooza effect. And again, if you read the psychology textbooks, they don't discuss how these things combine, at least not very much. Do they multiply? Do they add? How does it work You'd think it'd? Be just an automatic subject for research, but it doesn't seem to turn the psychology establishment o n. I think this is a - man from Mars approach to psychology

I just reached in and took what I thought I had to have. That is a different set of incentives from rising in an economic establishment where the rewards system, again, the reinforcement, comes from being a truffle hound. That's what Jacob Viner, the great economist called it: the truffle hound -- an animal so bred and trained for o ne narrow purpose. That he wasn't much good at anything else, and that is the reward system in a lot of academic departments. It is not necessarily for the good. It may be fine if you want new drugs or something. You want people stunted in a lot of different directions so they can grow in one narrow direction, but I don't think it's good teaching psychology to the masses. In fact, I think it's terrible

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