Sunday, June 14, 2009

The Psychology Of Human Misjudgement: Curiosity and Fairness Tendencies

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.

While all mammals are curious, apes are abnormally more curious than other mammals, and humans are by far the most curious of them all. Munger argues that this curiosity can drive the advancement of knowledge, using examples from Ancient Greece, where much math and science was developed out of pure curiosity. Individuals who are more curious than others also benefit from added wisdom long after their formal education is complete.

Munger also argues that man displays and expects fairness to and from others. Man's tendency towards reciprocity is part of this fairness tendency: when someone does something nice for you, you feel like doing something nice for them.

Sometimes, an individual will do something nice for another even when he knows that person will not have occasion to repay them. Man will allow drivers in front of them on the highway and even allow others to advance when they don't have right-of-way. This behaviour pattern may have evolved due to the fact that it makes everybody better off when these acts of indirect reciprocity are performed.

Because fairness has come to be expected, much conflict arises when fairness is expected and not provided!

1 comment:

Budlab said...

I enjoyed reading your article. Here is the link to the audiobook cds for "Four Filters" and in it I mentioned the importance of Munger's #18...
The Availability Misweighing Tendency. I think articles on each of the psychological tendencies are useful to your readers; especially if you can add new examples with each tendency discussed.