Sunday, June 28, 2009

The Psychology Of Human Misjudgement: Pain-Avoiding Denial

Charlie Munger is Warren Buffett's right hand man at Berkshire Hathaway. Over the next few weekends, we'll be summarizing the text he authored titled "The Psychology Of Human Misjudgement", where he describes some of man's tendencies. By understanding and learning from these tendencies, we better equip ourselves to avoid psychological biases when investing.

The perfectly sane mother of a soldier who had not been heard from since World War II refused to believe her son was not alive and well. In order to avoid the pain she would feel from acknowledging his death, she distorted the facts in her own mind. This is what Munger refers to as simple, pain-avoiding, psychological denial.

It is difficult to criticize an individual who has used this denial to shield themselves from pain, but Munger finds it an admirable trait that others prefer to live by a different creed: "It is not necessary to hope in order to persevere."

While Munger believes we all use this form of denial at various points in our lives, it is particularly visible when used by those who suffer from some form of chemical dependency. Those under the influence of addiction often believe themselves to be in respectable condition with good prospects, when this is clearly not the case.

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