Saturday, August 8, 2009

The Psychology Of Human Misjudgement: Lollapalooza Tendency

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.

Lollapalooza tendency is Munger's name to describe the many tendencies already described when they act in concert. When tendencies work together and reinforce each other, extreme outcomes can occur. As examples, Munger cites the Milgram experiments and the formation of cults as extreme outcomes due to the fact that many tendencies are at play.

But according to Munger, most psychology textbooks look at tendencies in oversimplified forms, where other tendencies are not present. In the fields of chemistry and physics, students learn the effects of several forces acting in combination. In the field of psychology, however, Munger believes there is much to be learned by studying the effects of these tendencies when seen in combination.

Munger describes a real world example of how several tendencies acted together to cause an unfortunate event that could have been prevented if antidotes had been applied. At McDonnell Douglas, an evacuation accident causing paralysis was caused by tendencies towards rewards, doubt-avoidance, authority-misinfluence, inconsistency-avoidance, social proof, and deprival.

Munger finishes the talk by making it clear that these tendencies have likely been more helpful than not to mankind over time, or they wouldn't exist. However, that doesn't mean rational individuals can't improve their situations by using antidotes where appropriate.

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