Saturday, June 13, 2009

The Psychology Of Human Misjudgement: Inconsistency Avoidance

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.

Man tends to resist all forms of change. Munger argues that this tendency is what leads to the fact that people have habits, be they good or bad. Furthermore, every man will carry many bad habits despite the fact that he knows that the habits are bad. Since man has this tendency to avoid change, in order to avoid bad habits, prevention is far more effective than cure (i.e. it is easier to prevent a habit than change it).

Also as a result of this tendency, man tends not to change his previous conclusions (even when facing convincing new information to the contrary), human loyalties, and role in civilization. Unfortunately, if a conclusion was reached quickly thanks to the "Doubt Avoidance" tendency previously discussed, this tendency to avoid change will lead to many errors in judgement!

Munger paraphrases from Lord Keynes who argued that it was not the fact that ideas were new that made them difficult to accept, but rather the fact that they were inconsistent with old ideas. In other words, people tend to accumulate a bunch of fixed conclusions over their lifetimes, and those conclusions and attitudes will not be reexamined or changed.

Munger argues that this tendency has also been useful to man in many areas. People are loyal to their roles in life as priests, physicians, solders, spouses etc. Unfortunately, when people learn dubious notions, they are also more prone to carry these notions for the rest of their lives. For this reason, Munger advocates that it is "important not to put one's brain in chains before one has come anywhere near his full potential as a rational person".

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