Charlie Munger and The Psychology of Human Misjudgement [Outliers]

Charlie Munger, who considered himself in the top 5% at understanding incentives, admitted he underestimated their power his entire life. This highlights the pervasive and often hidden influence of reward systems on human behavior, which can override all other considerations.

Munger notes that many large law firms compensate senior partners equally, regardless of their individual contributions. This seemingly inefficient structure is a deliberate defense mechanism to prevent the powerful and destructive force of envy from creating disorder and tearing the firm apart.

The "Liking-Loving Tendency" causes investors to identify personally with their holdings. They ignore faults, favor associated things, and distort facts to maintain positive feelings. This emotional attachment leads them to rationalize bad news and hold deteriorating assets for too long, destroying capital.

To counteract the brain's tendency to preserve existing conclusions, Charles Darwin deliberately considered evidence that contradicted his hypotheses. He was most rigorous when he felt most confident in an idea—a powerful, counterintuitive method for maintaining objectivity and avoiding confirmation bias.

Munger argued that academic psychology missed the most critical pattern: real-world irrationality stems from multiple psychological tendencies combining and reinforcing each other. This "Lollapalooza effect," not a single bias, explains extreme outcomes like the Milgram experiment and major business disasters.

In his later, lesser-known work, Ivan Pavlov discovered that dogs subjected to extreme stress (like a flood) experienced a total reversal of their conditioned personalities. This suggests that severe stress doesn't just impair judgment; it can fundamentally and dangerously rewire cognitive patterns and loyalties.

Humans have a "Reason Respecting Tendency" so powerful that our brains respond to the structure of a reason, not just its substance. Experiments show that saying "I have to make some copies" is an effective way to cut a line, even though it's a tautology. The word "because" triggers automatic compliance.

The fear of loss is stronger than the attraction to gain. This "loss aversion" explains why people hesitate to initiate positive gestures, like smiling at a stranger in an elevator. They are willing to sacrifice an almost certain positive reciprocal outcome (98% chance) to protect against a tiny risk of looking foolish (2% chance).