Charlie Munger’s Guide to Making Better Decisions (Part 3)
When I was young, my mom was a big fan of the phrase:
Do as I say, not as I do.
I hated it.
It’s a get out of jail free card for when your actions and words are fundamentally at cross-purposes. It’s a lazy way to end any discussion, negating the need for a critical assessment of why we do the things we do.
But then again, I’m just as lazy as the next adult and I, too, have used these words when dealing with a rambunctious youth for whom I just didn’t have the time, patience, or mental energy to give a full, unvarnished run-down of why I can break the rules, but you cannot.
All this is to say, it’s not hypocritical to expect somebody else to follow rules you yourself frequently break. There are very good reasons why this might be the case.
Namely, to reach a certain skill level in a particular activity, or field, you must display a requisite understanding of the rules.
Following the rules can get you quite far in life.
Achieving true mastery of an activity, however, well…that requires the knowledge of when to break the rules.
But you can’t start from this position of rule-breaking when you are still building up your core competency. That’s a recipe for disaster.
And so it is in this third installment of A Billionaire’s Guide to Making Better Decisions, we dive into another of the 5 Cognitive Biases Charlie Munger (famed partner of Warren Buffet) described as plaguing all of our rational decision-making skills.
We are at the point in learning this game that we must understand the rules (ie: the 25 cognitive biases), whereupon once we’ve grasped the full extent of their reach, we can then go about freeing ourselves from their restrictive bonds.
If you’re just joining us, I highly recommend you backpedal and start with Part One and Part Two in this series, as we laid a lot of groundwork and I’d hate for you to leave this masterclass more confused than when you entered.
As for the rest of you yahoos…let’s dive into 5 more Cognitive Biases Charlie Munger says is plaguing your decision making.
Simple, Pain-Avoiding Psychological Denial
I used to live across the street from an elderly woman who’d years ago lost her husband. She had some children, all of which were long grown and out of the house with families of their own.
This lady was the poster child for the type of loneliness that plagues such a high proportion of our aging population.
The long-term ramifications of loneliness and isolation can be devastating, but this lady had something to combat the slow decline into existential irrelevance.
She had a cat.
Now, this woman put her entire psychological well-being into this animal. She doted upon it as though it were an actual human.
This isn’t so strange in-and-of-itself, many of us have similar relationships with our animals.
The problem for this gal was the fact that this animal was her only social outlet, her only substantial relationship.
It was her everything.
So it was that one day that cat went for its rounds about the neighborhood and never returned.
Not peculiar behavior for a cat, but after two weeks of absence, it became painfully obvious (to everybody but this poor lady) that her cat would not be returning.
Accepting that truth would’ve been too much for her, however. Too much pain. Too much hurt.
And with nothing else to fall back on, it was a truth she refused to acknowledge.
She denied that anything was wrong and pretended as though at any minute her prodigal cat would return.
Years later and she still hasn’t accepted the truth that her beloved cat is not returning.
This is heartbreaking, but it’s not surprising.
My little old neighbor has simply fallen prey to the Simple, Pain-Avoiding Psychological Denial bias.
That is, she has denied an objective truth because of the resulting pain it would cause.
This bias is typically intermingled with love, death, and chemical dependency, and it is almost always devastating.
The results of indulging this bias is the simple, inescapable truth that you are living in a fantasy, divorced from objective reality.
This is not a place from which one should ever make decisions.
Excessive Self-Regard Tendency
Nobody thinks they are average.
Everybody thinks they are smarter, or more attractive, or more capable than they really are.
Sadly, we can’t all be above-average.
For every genius, there is a dullard.
For every superstar athlete, there is a klutz.
This is the way of the world.
Interestingly enough, the people who tend to not think of themselves as being above-average are, ironically, the ones who are most likely to actually be above-average.
This is known as the Dunning-Kruger Effect and simply put:
People who are below average in a skill tend to rate themselves as being above-average, whereas individuals who consistently test as being above-average tend to rate themselves lower.
There are some good reasons for this.
First, people who are the most competent at an activity have an intimate understanding of what mastery in that realm looks like. They know their strengths and weaknesses, and they know how they stack up against the pantheon of greats who’ve come before them.
People on the bottom side of the ability curve, however, lack this perspective and clear objectivity. As a result, they are overconfident in the assessment of their ability.
This is particularly problematic because these people who are on the bottom of the curve, with their overconfidence, tend to be the most vocal when it comes to making decisions in a group.
The experts, on the other hand, fully aware of their limitations, tend to be more reserved and passive in their assessments which often come off as being non-committal and lacking confidence.
You can probably see where this is going.
People respond to confidence. As a result, some of the least competent people (though the most confident) are the ones making the decisions.
This is not good.
This is how you end up with a human-Cheeto for a President. I don’t think we need to talk about why that’s a bad thing.
Overoptimism Tendency
Tied intimately with the previous bias, the Overoptimism Tendency is everything it sounds like:
We tend to be overly optimistic about the chances of good things happening.
This evolved because hope spurs action. Without optimism, our ancestors never would’ve left home on a hunt. After all, if you’re pessimistic about your chances of finding food, why bother?
Might as well stay home and save the energy.
To combat the Overoptimism Tendency it’s critical to rely on probability math. Your mental models around chance are not up to the task.
Do not rely on them.
Trust the math. Trust the numbers.
Actually listen to what they are telling you, not what you want to hear.
Deprival-Superreaction Tendency
Known more widely as Loss Aversion, this theory is one of the primary reasons famed economist Daniel Kahneman won a Nobel Prize.
Loss Aversion tells us that we suffer more pain from losing a thing than we gain in pleasure from gaining an equivalent thing.
That is, the pleasure gained from earning $100 is less than the displeasure we incur from losing $100.
The wide-reaching implications of this bias can hardly be overstated.
The Loss Aversion bias is intricately tied to the Sunk Cost Fallacy, and it’s the reason why we continue throwing good money after bad. It’s because we can’t accept the idea of our previous efforts being wasted.
As long as we continue throwing money, time, and energy at a situation, there is always the chance to recoup the previous losses.
The moment you fold up shop and cut your losses, however… well, that by definition means you’ve lost.
People who get sucked into this mode of thinking make some extraordinarily bad decisions. And not just one, mind you, but a cavalcade of bad decisions, one after another, in the misguided hope that the situation might still work itself out.
Combat this bias by calibrating losses and gains in absolute terms, rather than relative terms.
Telling yourself, “Oh, it’s just another $100,” when you’ve already put in $10,000 is wrong, wrong, wrong.
Deceiving yourself is a sure-fire way of ruining yourself.
Social-Proof Tendency
This bias is closely related to Influence From Mere Association Tendency which we discussed in Part Two.
When we fall prey to Social-Proof Tendency we rely on the thoughts and actions of other people, or groups, to guide our own thoughts and actions.
This isn’t always bad.
After all, we are doing just that in this series as we attempt to learn what we can from Charlie Munger.
Problems arise when we fail to critically analyze the advice and behaviors and actions of those individuals or groups from whom we’re taking advise.
As they say, never trust a skinny chef, and never take advice from somebody who you wouldn’t trade places with.
Who you take your social proof from matters.
You should pay particularly close attention to that previous sentence considering the platform upon which this article was first published (Medium).
I love Medium as much as the next person (probably more, actually), but that doesn’t change the fact that there are a lot of wood-be gurus floating around this digital ecosystem (me included).
You must carefully vet any advice you glean from this site. Filter it through the lens of your own experience and apply critical judgment.
Always ask yourself: Does this ring true?
If not, well…it’s probably not.
And with those depressing words, we’ve reached the conclusion of our three part series on Charlie Munger’s Guide to Making Better Decisions.
If you haven’t already, hop on over and check out Part One and Part Two to learn about the first 10 Cognitive Biases likely to plague your decision making
If you enjoyed this series, do me a favor and tell a friend. If you don’t have any friends, well, I’ll be your friend! But only if you promise to slap that clap button a couple of dozen times.
Deal?
Deal!
