Standard Causes of Human Misjudgment (Munger)

Nov 29, 2023

In 1995, Charlie Munger gave a speech at Harvard on The Psychology of Human Misjudgment. It was filled with the research he had done later in life on human psychology, matched with real-life examples that he had observed in his work. The result was a succinct list of the top cognitive biases grounded in real-life experiences. I’ve summarized the biases here, but it’s worth giving the entire speech a listen to hear the stories behind each. I’ve tried to keep Charlie’s language and numbering when possible.

  1. Underestimation of Incentives: Despite understanding the significant influence of incentives (reinforcement in psychology and incentives in economics), there's a tendency to consistently underestimate their power.
  2. Psychological Denial: This is the refusal to accept reality because it is too painful or difficult to bear.
  3. Incentive-Cause Bias: This occurs when personal incentives or those of a trusted advisor create a conflict of interest, leading to biased decisions.
  4. Bias from Consistency and Commitment: This involves a strong tendency to stick to pre-existing beliefs or commitments, even in the face of contradictory evidence.
  5. Bias from Pavlovian Association: This bias refers to the error of basing decisions on past associations or correlations without considering their current relevance or accuracy.
  6. Bias from Reciprocation Tendency: This bias involves a natural inclination to reciprocate actions and behaviors, including conforming to others' expectations, especially when one is experiencing success or is 'on a roll.'
  7. Bias from Over-Influence by Social Proof: This bias refers to the heavy reliance on the actions or decisions of others, especially in situations of uncertainty or stress.
  8. Bias from Favoring Elegance over Practicality in Theory: This bias involves a preference for theories or explanations that are mathematically elegant or intellectually satisfying, even if they are less accurate in practical terms. “Better to be roughly right than precisely wrong” — Keynes.
  9. Bias from Contrast-Induced Distortions: This bias refers to the way our perceptions, sensations, and cognition can be significantly altered by contrasts.
  10. Bias from Over-Influence by Authority: This bias involves the tendency to conform to instructions or opinions provided by an authority figure, even when these instructions conflict with one's own moral judgment or common sense.
  11. Bias from Deprival Super Reaction Syndrome: This bias is characterized by an intense reaction to losing or the threat of losing something, especially something that one perceives as almost possessed but never fully owned.
  12. Bias from Deprival Super Reaction Syndrome: This bias is characterized by an intense reaction to losing or the threat of losing something, especially something that one perceives as almost possessed but never fully owned.
  13. Bias from Envy/Jealousy: This bias stems from feelings of envy or jealousy towards others.
  14. Bias from Chemical Dependency: This bias relates to the cognitive and behavioral changes that result from chemical dependency, such as addiction to drugs or alcohol.
  15. Bias from Gambling Compulsion: This bias refers to the compulsive urge to gamble, driven by the psychological principle of variable reinforcement.
  16. Bias from Liking Distortion: This bias involves a preference for things that are familiar or similar to oneself, including one's own ideas, kind, and identity.
  17. Bias from Disliking Distortion: This is the opposite of liking distortion, where there's a tendency to reject or not learn from sources that are disliked.
  18. Bias from the Non-Mathematical Nature of the Human Brain in Probability Assessment: This bias refers to the human brain's tendency to rely on crude heuristics and be easily misled by contrasts when dealing with probabilities, rather than using precise mathematical approaches.
  19. Bias from Over-Influence by Extra Vivid Evidence: This bias describes the tendency to give disproportionate weight to particularly vivid or emotionally striking information when making decisions.
  20. Stress-induced mental changes, small and large, temporary and permanent.
  21. Mental Confusion from Poorly Structured Information and Inadequate Explanations: This bias involves difficulties in understanding or decision-making due to information that is not well-organized or lacks a coherent theoretical framework.