- WOLF Financial
- Here's how to NOT make bad decisions
Here's how to NOT make bad decisions
Charlie Munger Edition
I’m Tanyo, and I wrote today’s edition of WOLF’s newsletter.
Charlie Munger is famous for being three things:
Extremely wise and smart.
An investing OG.
Warren Buffett’s business partner.
One of his most popular speeches online is called “Standard Causes of Human Misjudgement.”
It’s so full of insights that the billionaire Andrew Wilkinson called it “one of the most useful collections of ideas in a single piece of media.”
In 1995, Charlie Munger gave a speech at Harvard about the most common causes of human misjudgement.
I think this is one of the most useful collection of ideas in a single piece of media.
A few years ago, we made an abridged and animated version:
— Andrew Wilkinson (@awilkinson)
May 12, 2022
I spent 3 hours listening to it and taking notes, compiling all of the causes of human misjudgment.
Here’s the full list of twelve causes that affect your decision-making:
1) Reciprocation tendency
People will reciprocate if you do favors for them.
Ex: A company gives you a free sample of a product, so you’re more likely to buy another product.
2) Misgambling compulsion
In lotteries, where people pick their numbers, they play with bigger numbers because they feel they have more control.
3) Psychological denial
Reality is too painful, so we distort it in a way that’s bearable.
Ex: A person who takes a wrong turn on the driveway will blame the traffic when, in reality, they made a mistake.
4) Agency cost
Incentives rule the world, so beware of advisors who are incentivized against you.
Ex: Financial advisors that earn a percentage fee on your investment regardless of its performance.
5) Consistency & commitment tendency
You have made up your mind about something, so you don’t let any new information that might go against your preconceived beliefs.
Ex: Stubborn people with the “it’s my way or the highway” mentality.
6) Pavlovian association, also known as classical conditioning
A Russian physiologist, Ivan Pavlov, did an experiment.
Every time he whistled a bell, he gave his dog food. After a few times, he noticed that when the bell whistled, the dogs salivated even when there wasn’t any food.
Pavlovian conditioning works on any level.
Ex: When you see these Coca-Cola ads, you want to drink Coke.
7) Social proof
Making decisions based on the conclusions of others.
For example, we are more likely to buy products with more positive reviews/testimonials.
8) Contrast-cased distortion
Contrasting options and sensations manipulate us.
Ex: You have a romantic partner. You like them. But they’re a little too shy. So you decide to break up and get a new partner. One that’s more extroverted. A few months in, you realize that the first partner (the shy one) was a better fit for you than the current one.
9) Over-influence by authority
We tend to follow authority figures blindly.
Ex: It’s why we listen and respect people in suits or uniforms.
10) Deprival super-reaction syndrome
We tend to value things we lose more than we would like to pay for them.
If someone takes away from you, you’ll get angry.
11) Envy jealousy
“The world isn’t driven by greed but by envy.”
Ex: You see someone posting pics of their fast cars on Instagram. You don’t know them, but you envy them. So you start working extra, so you can earn more money and get yourself a nice car.
12) Liking distortion
You like yourself and your own ideas so much that it’s easy to be misled by someone like you.
Ex: You’re into fitness and entrepreneurship. So you listen online to people who are into these things. You buy their courses that promise you to get rich quickly. You get scammed. Why did that happen? Because you like yourself and your hobbies (business/fitness) so much so that you trust and like people who are into these things.
Review these every time you’re about to make an important decision.
You don’t want to become a victim of human nature.
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