Saturday, July 18, 2009

The Psychology Of Human Misjudgement: Stress-Influence

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.

It is known to many that stress causes an adrenaline rush that results in faster, more extreme reactions. Furthermore, light stress can improve performance, but heavy stress can cause dysfunction. But Munger argues that few people understand the mental breakdowns that stress can help cause, apart from depression.

Munger discusses various stress-related experiments run by Pavlov on dogs that demonstrate the awesome power of stress. In these experiments, Munger discusses the fact that Pavlov was able to identify how easily a particular dog would succumb to a nervous breakdown, that any dog could be broken down, and that a breakdown could only be reversed by imposing more heavy stress.

Munger asserts that stress can be so powerful that it is the key ingredient in the success of cults. Some of Pavlov's work could conceivably be applied to help parents 'deprogram' children that have been broken down by cults.

While the business or investing implications of this human tendency are not immediately obvious in this discussion, Munger wished to bring up the subject of stress lest his examination of human tendencies be glaringly incomplete.

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