Author Topic: Munger and Psychology of Misjudgment COBF Class idea  (Read 2653 times)

DooDiligence

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #10 on: May 28, 2020, 10:22:07 AM »
How about the incentive to pump an equity when you own it.

This can solidify your own improper perceptions about a company, & cause you to gloss over, or ignore, the negatives & attack anyone who presents a legitimate bear case.

May lead to "buy in haste, repent at leisure".
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longinvestor

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #11 on: May 28, 2020, 10:31:18 AM »
Or an incentive not to pump it because you have intention of buying lots of it. As in, say, Berkshire Hathaway?

fkw1979

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #12 on: May 28, 2020, 10:31:36 AM »
Great topic! All good info stated above. Here are my 2 cents:

When it comes down to it we want to do what is in our best interest. That in itself is driven by incentive. We seek desire and that which we like and think helps us and shun pain and that which we think can harm us. That just might be the most basic fundamental building block of our genes, humanity and our species.

I think that may be a first principle from which everything else is derived.

So maybe the next question is so what is in our best interest. And that is subjective. If you define it and follow it it can guide you. If you do not define it your impulses and your pleasure may come to control you and then you may have all the biases come in to justify it (confirmation, pain avoiding denial, doubt avoidance, incentive caused bias, easily accessible, excessive self regard, twaddle, stress misinfluence, liking, reason respecting...). Because our mind works this way, we should probably do everything we can to avoid this path because the lolapalooza is so strong. Why wouldn't you?

So if we can recognize and avoid that, then we should address what is in one's best interest. And that I believe each person must answer that themselves. You must ask what do you value. What is important to you? What kind of person do you want to be? How do you want to live your life? In a way which you will be personally proud of yourself (inner scorecard)? How do you want to be remembered?

Rationality seems like the most logical thing to seek. To make the right decisions based on the facts of the situation. To do it because it is right. Then you have to define what is right for you. Right for your inner self and what you deem important and an important way to live given the way the world works. Perhaps right in the way you treat others and how it often gives you back so much more when done right. That's another longer conversation but something each person should do.

Some people may value money above all. That is their right, but I believe if they really went to first principles, if they dug deeper and asked the right questions until they got to the most basic fundamental premise for money, they would often find out they have been wrong. And that in itself can be a very valuable thing.
« Last Edit: May 28, 2020, 11:21:27 AM by fkw1979 »

Jurgis

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Re: Munger and Psychology of Misjudgement COBF Class idea
« Reply #13 on: May 28, 2020, 10:43:28 AM »
Becoming an expert in a field X to overcome incentives of the salesperson in field X is a possible solution, but it's also a costly solution. To take the OP example, you'll never be a real dentist (unless you go to dentist school ;)). You might be able to bullshit a level-1 dental procedure salesperson, but you won't be able to bullshit level-2 one. Also there is a risk: what if they agree with you that procedure is unnecessary (because they are level-1 in sales or because they don't want to argue), but then you discover in couple months that instead of a cheaper filling you now have to do a root canal or crown? Are you gonna seek second opinion? Are you gonna read dental x-rays yourself?

Ultimately, this is IMO not an easily resolvable problem apart from simple or (obviously) scammy situations. It is tough to know if:
1. The salesperson is just pushing unneeded product/service because of incentives.
2. They really think you need this product/service
3. They are misinformed and think that you need this product/service
and on your side
4. You really don't need this product/service
5. You are misinformed and need this product/service

-------------------------------------

Another subtopic is self-incentives or pros/cons for decisions (this goes a bit above just incentives).
There's a popular advice to write pros/cons for some decision (financial or not) to ease making the decision. The issue there is that sometimes the pros/cons are difficult to measure, evaluate, and compare. To take LC's example, moving to Denver from NYC would probably fill pages of pros and cons on a paper. How would one evaluate and weigh each of these? Even in a simpler case, how much one would value extra half hour commute vs. $XX cheaper or YY-sqft bigger house? People make these decisions, but I'd say they are mostly hand-waved even if they try to make a rational weighted decision. And BTW hand-waved or emotional decisions might be better than 10-spreadsheet ones...  ::)
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fkw1979

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #14 on: May 28, 2020, 10:59:22 AM »
In working and interacting with others which is net-net a win in life, other people's reputations matter, integrity and rationality of the other person matter, your opportunity cost matters and perhaps accepting some imperfection in transactional exchanges would be rational, the time value of your money matters, understanding how other people are biased and that it is very hard to be rational and non-biased matters, testing them & initiating short trial periods matter, giving people some slack matters, and understanding people are imperfect and that's often ok in the grand scheme of things.

Rational people make rational decisions given the circumstances and that is personal to each person. See the world for what it is and watch your back especially when it matters to you most.

Seeing it from the other parties point of view and how they may be thinking at that moment as well as considering some of the above depending on the circumstance is probably a good start.
« Last Edit: May 28, 2020, 11:23:31 AM by fkw1979 »

fkw1979

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #15 on: May 28, 2020, 11:05:37 AM »
Re Jurgis comment, pros and cons list seems like good idea and then properly weigh them, I believe that may be the Ben Franklin approach, it may be helpful when weighing to ask yourself  "What's really important to me to consider in this situation and why?", here clarity is key, if you don't know what you really want or what really matters most then that's a problem unless it isn't
« Last Edit: May 28, 2020, 11:26:47 AM by fkw1979 »

Broeb22

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #16 on: May 28, 2020, 11:46:22 AM »
Here's a more mundane example...that I guess is related to JIT inventories

Let's say you perceive that you have 50 days worth of raw materials on hand in an industry that should turn inventory 10-12x per year and when your lead time on that raw material is about 4 days.

You could say, hey, if the lead time is 4 days, then if I can plan production a week out, if I order the raw material the same time I schedule production, I will get my raw material a couple days before production starts and it will be turned into a finished good within 3 days.

In theory this could reduce my inventories from 50 days of production to approximately 6, a huge savings.

But what happens the first time this delicate balance breaks? You get screamed at by sales, operations, supply chain, management,  for missing

What happens when you simply hold too much inventory? Half-hearted pleas from finance to manage things better.

If you're a person who isn't thinking like an owner in your role and are more concerned with not rocking the boat until you retire, the choice here is really easy.

Which is where constant support from management to pursue practices like these even when they occasionally cause problems is very important.

rkbabang

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #17 on: May 28, 2020, 12:00:56 PM »
Here's a more mundane example...that I guess is related to JIT inventories

Let's say you perceive that you have 50 days worth of raw materials on hand in an industry that should turn inventory 10-12x per year and when your lead time on that raw material is about 4 days.

You could say, hey, if the lead time is 4 days, then if I can plan production a week out, if I order the raw material the same time I schedule production, I will get my raw material a couple days before production starts and it will be turned into a finished good within 3 days.

In theory this could reduce my inventories from 50 days of production to approximately 6, a huge savings.

But what happens the first time this delicate balance breaks? You get screamed at by sales, operations, supply chain, management,  for missing

What happens when you simply hold too much inventory? Half-hearted pleas from finance to manage things better.

If you're a person who isn't thinking like an owner in your role and are more concerned with not rocking the boat until you retire, the choice here is really easy.

Which is where constant support from management to pursue practices like these even when they occasionally cause problems is very important.

The choices here are not 6 days or 50?   Maybe the best thing to do is reduce it to 15 days.  This way you realize most of the cost savings and still have some margin of safety for supply problems and delays.

DooDiligence

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #18 on: May 28, 2020, 12:10:46 PM »
Or an incentive not to pump it because you have intention of buying lots of it. As in, say, Berkshire Hathaway?

That too.

Exception: Founder CEO's who've sandbagged their business prospects for decades & don't take advantage of "apparent" opportunities.

---

I think my initial example applies also to analysts who have conflict of interest.
AFL // BRK.B // CLB an incredibly stupid move // EW // GPC // MO an incredibly stupid ex-CEO // MTB // NVO // PSX // TRMD // ULTA // VDE // VLGEA // WFC

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D33pV4lue

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Re: Munger and Psychology of Misjudgment COBF Class idea
« Reply #19 on: May 28, 2020, 12:14:07 PM »
I'll try to stick to one theme, incentives within a company. This can impact everyone from sales to management. One huge issue I have is with stock-based comp and bonus incentives. There is so much room for Management to implement policies that financially benefit themselves. Basing incentives on share price return or EPS growth vs. fundamental metrics (ROIC) can lead to companies approving a buyback with debt. Closely aligning shareholders and management incentives is something I look for, but even that can be manipulated. Independent board members and proper corporate governance are all ways to help mitigate this issue. At a lower level retaining the top employees often requires increasing compensation usually through stock-based comp at the expense of diluting shareholders. I get how offering stock benefits companies as it is added back in operating cash flow and time to vest may result in employees forfeiting rewards. Why can't companies issue cash to employees and allow them the option to buy back in the public market? At the lowest level sales incentives are equally important. Look at the shift in asset management from AUM based flat fee (RIA Model) vs commission (Broker-Dealer). Wall Street used to be incentivized to have a company split stock just so more shares could be traded. More recently a flat fee for commissions was commonplace now most places offer 0 commission trades. Part of this is disruption, incentives that hurt consumers were weeded out by companies that were offering a more cost-efficient model. This isn't always the case annuities, insurance, etc. The tough question is what is the balance between rewarding employees for good work without screwing over the client?