Charlie Munger on Human Misjudgment
I had a chance to re-read Charlie Munger's 24 Standard Causes of Human Misjudgment, taken from his 1995 address to the Harvard Law School.
He has some interesting ideas.
Why institutions tolerate and are eventually undone by fraud:
"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 on an extended foreign trip. It's not the adultery I mind, it's the embezzlement."
Why we fail to have the influence we deserve:
"Feuerstein, who was the general counsel with Salomon when Gutfreund made his big error, and Feuerstein knew better. He told Gutfreund, "You have to report this as a matter of morality and prudent business judgment." He said, "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 on 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 one? 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."
On Board of Directors protecting the shareholder's interests:
"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 only act, again the power of incentives, they only 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."
One spectacular misjudgment that isn't talked about is the use of Pascal's wager - the tendency to bet on events with low probability, but high gain.
Munger's article is worth clipping and reviewing every 4 or 5 months. Create your own examples of his misjudgments.
