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.
- 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.
- Psychological Denial: This is the refusal to accept reality because it is too painful or difficult to bear.
- Incentive-Cause Bias: This occurs when personal incentives or those of a trusted advisor create a conflict of interest, leading to biased decisions.
- 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.
- 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.
- 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.'
- 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.
- 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.
- Bias from Contrast-Induced Distortions: This bias refers to the way our perceptions, sensations, and cognition can be significantly altered by contrasts.
- 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.
- 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.
- 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.
- Bias from Envy/Jealousy: This bias stems from feelings of envy or jealousy towards others.
- 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.
- Bias from Gambling Compulsion: This bias refers to the compulsive urge to gamble, driven by the psychological principle of variable reinforcement.
- 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.
- 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.
- 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.
- 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.
- Stress-induced mental changes, small and large, temporary and permanent.
- 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.