Charlie Munger on cognitive biases
Behavioral New World
January 1, 2024
Charlie Munger on cognitive biases
Charlie Munger [link here] died on November 28, 2023, at age 99. He was the right-hand man of Warren Buffett [link here], arguably the most famous investor of our time. Munger was an original thinker and lifelong learner who came up with his own list of cognitive biases. Given his experience, wisdom, and success, it makes sense for us to pay attention to his list and look for their influence on our decision-making.
Regular readers of this newsletter know of the field of Behavioral Economics (BE), pioneered by Daniel Kahneman and Amos Tversky. (An excellent book about their work is The Undoing Project by Michael Lewis.) We might characterize their approach as “academic”—they ran experiments that demonstrated that people are not always strictly rational in the “Econ 101” sense (see my October 2020 newsletter).
In contrast, Munger identified biases based on his experiences and observation of human decision-making (although, as an avid reader, he probably read BE studies). However, there is overlap between the accepted BE biases and Munger’s list. Here I highlight a few of the overlaps. I also look at two of Munger’s biases that do not readily correspond to the list of accepted BE biases (although with some websites showing more than 250 biases, you probably make a case for overlap with almost anything).
Using this list of Munger’s biases [link here], off we go. I show the dates of my newsletters that cover roughly the same territory.
Bias 3: “We blindfold ourselves” relates to confirmation bias (May 2022). Confirmation bias is our tendency to be open to information that supports what we believe and to discount or ignore information that is contrary to our beliefs.
Blindfolding ourselves is reinforced by Bias 5, “We have a reluctance to change ourselves and our habits.” Change can make us uncomfortable and requires effort. Aren’t we pretty close to perfect just as we are? So no need to change, right?
Bias 12: “Excessive Self-Regard Tendency” leads to overconfidence (September 2022). The cocktail party word for overconfidence is “hubris.” Depending on the study, roughly 80% of drivers think they are above average. Hmmm…. Confirmation bias can reinforce hubris as only complimentary information gets through our filters.
Bias 15: “Social Proof Tendency.” Groupthink and herd mentality (February 2022). We are social creatures. We often feel uneasy standing out from the crowd. A Japanese proverb states, “The nail that sticks out gets hammered.” An old column in the Wall Street Journal was called, “Herd on the Street” (not a typo).
Bias 18: “We overweight what’s easily available.” Availability bias (December 2020). We tend to rely on information that is right in front of us. It takes effort to recall (or research) information that is not readily available, even though it might be valuable.
Bias 22: “Authority-Misinfluence Tendency.” Authority bias (June 2022). We tend to defer to authority under the assumption that the “expert” knows more than we do. Ever wonder why advertisements for health products feature actors wearing white coats?
Let’s consider two other biases put forth by Munger. I am fond of:
Bias 23: “Twaddle Tendency.” Spending too much time on “nonsense” such as Facebook. One way to think about this: Do you not have a better use for your time? Socializing with friends and family (in person) is linked to a longer and healthier life, for example. Ditto for exercise.
I am not fond of, but will pay attention to:
Bias 21: “Senescence-Misinfluence Tendency. As we age there is a natural loss of certain skills and abilities.” I hate to admit it, but it is true. And there is reliable evidence: My research shows that, as we age, our financial skills decline but our confidence in them increases—not a good combination.[1]
Bottom line: Let 2024 be your Year of Making Better Decisions. You can jumpstart the year by reviewing Charlie Munger’s list of 25 biases. And of course, feel free to read any or all of my past newsletters. You might also take a look at my website: jshowe.com
[1] https://pubsonline.informs.org/doi/abs/10.1287/mnsc.2015.2293