Author Topic: Munger and Psychology of Misjudgment COBF Class idea  (Read 2647 times)

LongHaul

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Munger and Psychology of Misjudgment COBF Class idea
« on: May 27, 2020, 11:31:44 AM »
I was reading about Munger and how he said that fluency in important areas is critical. 
I think I could improve my understanding of psychological biases as they are really powerful on the human mind. 
It is actually really humbling to think of all the mistakes I have made from the biases.

What if I post 1 psychological bias every 2-7 days and then we can discuss it.  I will post from Munger's list and we can primarily do
discuss 2 things:

1.  Examples from real life.
2.  Antidotes for a particular bias.

I think it would be a great review and learning exercise for everyone involved.

Let me know if you are interested in participating and if there is enough interest I'll start posting.

Bias list.
https://novelinvestor.com/charlie-mungers-tendencies-of-human-misjudgment/

Edited for spelling, etc.
« Last Edit: May 28, 2020, 06:29:57 PM by LongHaul »


valueinvestor

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #1 on: May 27, 2020, 08:21:13 PM »
I'm game.  :)

longinvestor

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #2 on: May 27, 2020, 09:03:45 PM »
Fantastic idea. Will try to contribute if I can. Pretty sure I am a pro at making these misjudgments.

Hope the thread doesn't get hijacked off course!





D33pV4lue

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #3 on: May 28, 2020, 08:00:20 AM »
I'm in. I've worked at identifying my biases as part of my framework. Overcoming them is a different story.

LongHaul

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #4 on: May 28, 2020, 08:49:00 AM »
Awesome.  I will start posting.  I think if we do 1 at a time and discuss and digest it will be more meaningful for long term understanding and connections and fluency.  I think real life examples and stories are fantastic for learning.

Mungers: The Psychology of Human Misjudgment - Charlie Munger Full Speech
https://www.youtube.com/watch?v=pqzcCfUglws&list=WL&index=19&t=0s


1. Reward and Punishment Superresponse Tendency
…almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive superpower…

Rewards are a great motivator. Rewards also produce bad behavior or what Munger calls “incentives caused bias.”

One of the most important consequences of incentive superpower is what I call “incentive caused bias.” A man has an acculturated nature making him a pretty decent fellow, and yet, driven both consciously by incentives, he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior, like the salesmen at Xerox who harmed customers in order to maximize their sales commissions.

If the reward involves keeping a job or higher pay, it’s likely someone will game the system, especially when the consequences seem minimal. For instance, the recent Wells Fargo scandal where employees were pushed to meet account quotas, and with no checks on the system, Wells Fargo was soon awash in fake accounts. The scandal was compounded by the bias of social proof — it must be okay if every other employee is doing it too.

Commission-based advice is another potential conflict zone. A few months of insurance sales was enough to know at least a few agents would only push the higher commission policies whether it was best for the client or not. It’s not a stretch to think the same happens with most commission-based financial products. The solution in the case of incentivized “advice” is to be skeptical and double check anything you’re told.

Never, ever, think about something else when you should be thinking about the power of incentives.

The worst incentives tend to be short-term good, long-term bad.
« Last Edit: May 28, 2020, 10:28:06 AM by LongHaul »

LongHaul

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #5 on: May 28, 2020, 09:02:03 AM »
Incentives are definitely a very powerful bias.

Examples that I have come across:

1.  Dentist trying to drill out my teeth by claiming I have 8 cavities when perhaps I had 1 small one.  Find a dentist that you can trust.

2.  Car Dealer Service agents AND mechanics getting commissions or by the job.  Ends up recommending all types of fraudulent shit that you totally don't need.  I specifically told the last service agent "I know the game - don't recommend anything I don't need, I work on my car and know it well".
The service agent say ok - I respect that.  They do a simple oil change and end up recommending all this unnecessary work still.  Crazy how powerful the incentives are that he still couldn't not help himself.   The entire dealership is a psychology lab to manipulate you btw.

3. I have heard that insurance salesmen sell the complex ripoff insurance (vs what is best for the customer) solely because of the big commissions.

 
Possible Antidotes:  Know the incentives of how people who are giving you advice are paid.  Know enough about your subject that you can call BS on them.  I ended up doing a ton or research of dentistry and another time a dentist said my son had a cavity and I asked if it was down the the dentin - and she immediately said no and backpedaled on her recommendation.  There have been many times though where I did not understand how people were paid and paid the price. 

mjohn707

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #6 on: May 28, 2020, 09:26:50 AM »
Incentives are definitely a very powerful bias.

Examples that I have come across:

1.  Dentist trying to drill out my teeth by claiming I have 8 cavities when perhaps I had 1 small one.  Find a dentist that you can trust.

2.  Car Dealer Service agents AND mechanics getting commissions or by the job.  Ends up recommending all types of fraudulent shit that you totally don't need.  I specifically told the last service agent "I know the game - don't recommend anything I don't need, I work on my car and know it well".
The service agent say ok - I respect that.  They do a simple oil change and end up recommending all this unnecessary work still.  Crazy how powerful the incentives are that he still couldn't not help himself.   The entire dealership is a psychology lab to manipulate you btw.

3. I have heard that insurance salesmen sell the complex ripoff insurance (vs what is best for the customer) solely because of the big commissions.

 
Possible Antidotes:  Know the incentives of how people who are giving you advice are paid.  Know enough about your subject that you can call BS on them.  I ended up doing a ton or research of dentistry and another time a dentist said my son had a cavity and I asked if it was down the the dentin - and she immediately said no and backpedaled on her recommendation.  There have been many times though where I did not understand how people were paid and paid the price.

Incentives are incredibly powerful, but there’s one failure-proof way to beat this one.  What I like to do at say McDonalds when they ask me to “supersize” my dinner, is to fully and deliberately explain the super response tendency to them, which sometimes might entail a quick remedial lesson in marginal costs and marginal pricing beforehand.  In any case, I’ve tested this a few times times and I’ve found that in most cases after five to ten minutes of my explanations the drive-thru attendant not only relented with their spurious extra charges, but often waived the purchase price of my meal entirely.

It’s hard to know how much the cars honking behind me contributed to any of this, but experiments in social science are difficult.  In any case we can agree that the knowledge itself is an incredibly powerful antidote to this deep-rooted bias
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LC

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #7 on: May 28, 2020, 09:34:16 AM »
Some thoughts on incentives:

There are always multiple incentives at work; and surface-level incentives (or behavior) may only be a means to achieve deeper desires.

For example take a look at the urban office space thread. Here we see multiple incentives at play:
-Companies want to reduce costs while maintaining work quality & quantity. This is really companies wanting to be more efficient and durable. Long term, what is the effect? Will they be able to attract & retain the best employees?

-Employees want a variety of things, and often different employees want different things. Most want to improve their quality of life.  How does a WFH policy incentivize employee behavior in the short- and long- term in this context? Will it incentivize employees to move to lower-cost areas?

Personally I moved to Denver years ago and have been working remotely ever since. My incentive was to improve quality of life and this was a means to do so which benefited myself without harming my employer. Now given COVID, perhaps I could argue it achieves the incentives of both parties.

My point is that WFH is a surface level incentive. If you dig deeper you see it achieves deeper wants of both employers (become more resilient) and employees (increases quality of life - or at least provides an option to do so).

If you take it a step further, I would say the best incentives are not simply "long term" as CM suggests, but actually are meant to achieve deeper incentives for all parties involved.
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longinvestor

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #8 on: May 28, 2020, 09:40:59 AM »
All of the helicopter money dropping in people and business pockets as we speak will surely lead to monster incentive caused biases. Consequence? We will find out in due course as it’s early days.

Since these misjudgments work together, Munger’s #23: Twaddle tendency is in full expression everywhere. Very best answer would be “I don’t know “
« Last Edit: May 28, 2020, 09:43:09 AM by longinvestor »

Jurgis

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #9 on: May 28, 2020, 10:17:41 AM »
Incentives are incredibly complex topic (as LC has observed) and probably deserve a thread for themselves.

Overall, I think that a thread per bias would work better than single thread for multiple biases.
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