Saturday, July 25, 2009

The Psychology Of Human Misjudgement: Use It Or Lose It

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.

Skills degrade when not practiced. The antidote to this unfortunate reality is to frequently practice useful but rarely used skills. This is akin to how pilots use flight simulators to practice rarely-used skills that they can't afford to lose.

Munger argues that if man does not practice his existing skills, his learning capacity will also shrink. This is due to the fact that he creates gaps in the framework he needs for understanding new experiences. A wise man creates a checklist of his skills, to ensure they are kept sharp.

But this tendency does not treat all skill bearers equally. If a skill is practiced diligently until fluency is reached, it degrades much more slowly and is refreshed much more quickly than if a skill is quickly crammed to, say, pass an exam.

With advanced age also comes more severe deterioration of skill. But an individual can maintain well-practiced skills to even a very old age. Munger also argues that continuous thinking and learning can help delay the deterioration that is inevitable.

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