“Spend each day trying to be a little wiser than you were when you woke up” – Charlie Munger, Poor Charlies Almanack.

Charlie Munger was a legendary investor and philanthropist. As an investor and vice-chairman of Berkshire Hathaway, he is widely known for his sharp intellect and deep understanding of human behaviour. In his famous talk, The Psychology of Human Misjudgement, he outlines the cognitive biases and mental shortcuts that often lead individuals to poor decisions, both in business and in life. I read notes of his talk a few years ago and recently came across an updated revision. It is I believe is a useful reminder to all of us why it is important to reflect and understand how to approach situations with a broader perspective than what is being presented at face value.

I hope some of you will find some value of this famous talk as I did when I read it the first time. (For a copy of his full talk and background see the links at the bottom).

Munger highlights that humans are hardwired to make snap decisions based on emotions, previous experiences, or perceived patterns, even when evidence suggests otherwise. He identifies numerous biases, including confirmation bias (favouring information that supports existing beliefs) and authority bias (placing undue trust in perceived authority figures). These biases can cloud rational thinking, leading individuals to make decisions that are contrary to their best interests. In business, failing to recognise these biases can result in poor strategic moves, misguided investments, or faulty assessments of risk. My own take on these is:

1.Reward and Punishment Super-Response Tendency – Training a dog to do tricks with the promise of treats or justifying eating cake after doing exercise (I do this a lot). We are wired to seek rewards and avoid punishments, often making decisions based on short-term gains rather than long-term benefits.

2.Liking/Loving Tendency – We tend to favour people or their ideas, even if their taste (predominantly) differs from ours. Or avoiding asking the question am I ignoring the faults of, distorting facts in favor of, or seeking admiration of someone I like.

3. Disliking/Hating Tendency – An investor avoids investing in a successful company because they dislike the CEO’s personality, ignoring the company’s strong fundamentals, UVP and product market fit.

4. Doubt-Avoidance Tendency – Not open to a new (possibly better) route when driving because you’re unsure, preferring the comfort of a familiar, though possibly slower, road.

5. Inconsistency-Avoidance Tendency – Like sticking to a favourite restaurant order every time, even when new options might be better, we avoid change to keep things simple. (My partner can attest to this).

6. Curiosity Tendency – Going down a “YouTube” rabbit hole or “Shocking Headline” just to see what it’s about, our curiosity drives us to seek out new information, but it can sometimes lead us down irrelevant paths.  In a business context a tech entrepreneur can become overly focused on exploring new technologies and trends incessantly, neglecting the core business operations that need attention – our curiosity pushes us to explore and understand, but it can also lead us into distractions if unchecked.

7. Kantian Fairness Tendency – We expect everyone to follow the queue at a busy coffee shop, we expect fairness as a given and get frustrated when we see someone “cutting in line”, Perhaps that person ordered in advance via an app, and they are just there on time to pick up the coffee which is ready for them?

8. Envy/Jealousy Tendency – A startup founder obsessively compares their company to a rival’s success, making risky decisions just to catch up, rather than focusing on sustainable growth. Comparing one to others and often feel jealousy over their success, even if we don’t need what they have.

9. Reciprocity Tendency – When feeling obligated to return a favour when a friend buys you lunch, humans have a natural urge to repay kindness, sometimes even when it’s not necessary.

10. Influence-from-Mere-Association Tendency –  A hedge fund manager invests in a new tech company simply because it’s backed by a famous investor, without thoroughly analysing its business model or assuming a product must be good because a celebrity on tiktok endorses it, we often equate unrelated qualities to make decisions.

11. Simple, Pain-Avoiding Psychological Denial –   A business owner refuses to acknowledge falling revenues or market conditions, blaming external factors rather than making necessary changes to the business model. Or in the case of me avoiding a visit to the doctor because I don’t want to hear bad news, even though catching an issue early could save me trouble in the long term.

12. Excessive Self-Regard Tendency – A CEO who’s had previous successes overestimates their ability to lead a company through a downturn, ignoring market signals and expert advice.

13. Over-Optimism Tendency – A startup assumes their product will be a massive hit without thoroughly testing it in the market, leading to overproduction and wasted resources.

14. Deprival Super-Reaction Tendency – A stockholder reacts emotionally when their shares drop in value, selling off prematurely out of fear of further loss, missing out on future gains.

15. Social-Proof Tendency – An investor pours money into a stock because it’s trending and everyone else is buying, without researching whether it’s actually a good long-term investment.

16. Contrast-Misreaction Tendency – Buying an expensive pair of (running) shoes just because they’re discounted from an even higher price, our judgments can be skewed by what something is compared to.

17. Stress-Influence Tendency – Like forgetting your train of thought when you’re late to a meeting, stress affects how we process information and make decisions. Similarly a business under pressure to meet quarterly goals makes hasty cost-cutting decisions, such as laying off key employees, which hurts the business long-term.

18. Availability-Misweighing Tendency –   A board of directors overestimates the risk of a market crash because they remember the 2008 financial crisis vividly, leading them to avoid otherwise sound investments.

19. Use-It-or-Lose-It Tendency – Akin to a muscle that weakens without exercise, unused knowledge or skills fade if not practiced. In the world of tech, a skilled engineer who stops attending industry conferences and workshops gradually falls behind in new developments, which could make them less valuable to the company.

20. Drug-Misinfluence Tendency – Lots of caffeine giving you a temporary energy boost but leading to a crash, drugs (even social or psychological “drugs”) can distort our thinking and actions, and in some instances receiving significant venture funding to a startup at a modest valuation, leading them to expand too quickly without a solid plan.

21. Senescence-Misinfluence Tendency – When a sharp pencil gradually dulls with use, aging can affect our cognitive abilities, making misjudgements more common as we get older.

22. Authority-Misinfluence Tendency – Like believing a salesperson simply because they wear a suit (sharply dressed) or follow a senior executive’s directive without questioning its logic, even though the decision is flawed, just because of the person’s rank/title. we sometimes place undue weight on authority figures, even when they could be wrong.

23. Twaddle Tendency – At product or business meetings, participants focus on small, irrelevant details (like the colour of the company logo) instead of addressing important and time critical business issues, wasting time and resources.

24. Reason-Respecting Tendency – We are more likely to accept extra work when someone explains the importance of the task rather than simply demanding it be done by a certain time. Always declare why something is important instead of demanding something to be done.

25. Lollapalooza Tendency – It’s the “perfect” storm where several (very) bad (weather) conditions combine to create a catastrophe, multiple biases acting together can compound and lead to disastrous decision-making. The Lollapalooza Effect is particularly dangerous in business, where decision-making often occurs under pressure or in uncertain conditions.

By understanding and managing these tendencies we can aim to avoid self-inflicted errors and make smarter, more rational choices. Success, Munger insists, isn’t about being a genius; it’s about reducing mistakes. Being aware of these biases gives you an edge in business, finance, and life by helping you think clearly when others can’t.

One concept he advocates in his talk and other writings is for the use of mental models—frameworks for organising and interpreting information to make better decisions. He stresses the importance of understanding a wide range of disciplines, from psychology to economics to history, to build a robust set of mental models. By drawing on diverse perspectives, we can aim to counteract the influence of cognitive biases and approach decisions with greater objectivity.

Latest revised edition which includes new updates to the original talk can be downloaded or read online.

Old paper of the talk Psychology of Human Misjudgement: (Scanned original copy)

A web version of his talk via Shane Parrish

Book – Poor Charlie’s Almanack on Amazon

Acquired Podcast with Charlie Munger (January 1, 1924 – November 28, 2023)