Sunday, July 26, 2009

The Psychology Of Human Misjudgement: Authority Misinfluence

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 has a follow-the-leader tendency. While this can often lead to effective group operation, particularly when the leader is proficient, it can lead to disaster if the leader is wrong or if the leader's communication is misunderstood. This is due to the fact that followers will often ignore logic in the belief that the action as suggested by the leader must be correct.

Munger describes several situations, from the humourous to the disastrous, where the instructions of leaders were clearly wrong or misunderstood, yet the followers would perform seemingly illogical acts in the belief that the leader must know what he's doing. Hitler's ability to convince a group of people to commit genocide is a particularly grave example.

Because people will follow leaders whether they are wrong or right, it is extremely important to choose good leaders. Many CEOs are able to remain in power because of the respect they are afforded due to their positions! Munger notes a specific example where a CEO was blind to reality but remained at the helm of his company simply because of the respect afforded to his position.

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