THE PSYCHOLOGY OF HUMAN MISJUDGMENT: 4

21. Then we've got other common mental illnesses and declines, temporary and permanent, including the tendency to lose ability through disuse.

22. And then I've got development and organizational confusion from say-something syndrome.And here my favorite thing is the bee, a honeybee. And a honeybee goes out and finds the nectar and he comes back, he does a dance that communicates to the other bees where the nectar is, and they go out and get it. Well some scientist who is clever, like B.F. Skinner, decided to do an experiment. He put the nectar straight up. Way up. Well, in a natural setting, there is no nectar where they're all straight up, and the poor honeybee doesn't have a genetic program that is adequate to handle what he now has to communicate. And you'd think the honeybee would come back to the hive and slink into a corner, but he doesn't. He comes into the hive and does this incoherent dance, and all my life I've been dealing with the human equivalent of that honeybee. [Laughter] And it's a very important part of human organization so the noise and the reciprocation and so forth of all these people who have what I call say-something syndrome don't really affect the decisions.

Now the time has come to ask two or three questions.

This is the most important question in this whole talk:1. What happens when these standard psychological tendencies combine? What happens when the situation, or the artful manipulation of man, causes several of these tendencies to operate o­n a person toward the same end at the same time?The clear answer is the combination greatly increases power to change behavior, compared to the power of merely o­ne tendency acting alone. Examples are:- Tupperware parties. Tupperware's now made billions of dollars out of a few manipulative psychological tricks. It was so schlocky that directors of Justin Dart's company resigned when he crammed it down his board's throat. And he was totally right, by the way, judged by economic outcomes.- Moonie [as in Sun Myung Moon and the Unification Church] conversion methods: boy do they work. He just combines four or five of these things together. - The system of Alcoholics Anonymous: a 50% no-drinking rate outcome when everything else fails? It's a very clever system that uses four or five psychological systems at o­nce toward, I might say, a very good end.- The Milgrim experiment. It's been widely interpreted as mere obedience, but the truth of the matter is that the experimenter who got the students to give the heavy shocks in Milgrim, he explained why. It was a false explanation. "We need this to look for scientific truth," and so o­n. That greatly changed the behavior of the people. And number two, he worked them up: tiny shock, a little larger, a little larger. So commitment and consistency tendency and the contrast principle were both working in favor of this behavior. So again, it's four different psychological tendencies. When you get these lollapalooza effects you will almost always find four or five of these things working together.When I was young there was a whodunit hero who always said, "Cherche la femme." [In French, "Look for the woman."] What you should search for in life is the combination, because the combination is likely to do you in. Or, if you're the inventor of Tupperware parties, it's likely to make you enormously rich if you can stand shaving when you do it.One of my favorite cases is the McDonald-Douglas airliner evacuation disaster. The government requires that airliners pass a bunch of tests, o­ne of them is evacuation: get everybody out, I think it's 90 seconds or something like that. It's some short period of time. The government has rules, make it very realistic, so o­n and so o­n. You can't select nothing but 20-year-old athletes to evacuate your airline. So McDonald-Douglas schedules one of these things in a hangar, and they make the hangar dark and the concrete floor is 25 feet down, and they've got these little rubber chutes, and they've got all these old people, and they ring the bell and they all rush out, and in the morning, when the first test is done, they create, I don't know, 20 terrible injuries when people go off to hospitals, and of course they scheduled another o­ne for the afternoon.By the way they didn't read[?] the time schedule either, in addition to causing all the injuries. Well...so what do they do? They do it again in the afternoon. Now they create 20 more injuries and o­ne case of a severed spinal column with permanent, unfixable paralysis. These are engineers, these are brilliant people, this is thought over through in a big bureaucracy. Again, it's a combination of [psychological tendencies]: authorities told you to do it. He told you to make it realistic. You've decided to do it. You'd decided to do it twice. Incentive-caused bias. If you pass you save a lot of money. You've got to jump this hurdle before you can sell your new airliner. Again, three, four, five of these things work together and it turns human brains into mush. And maybe you think this doesn't happen in picking investments? If so, you're living in a different world than I am.Finally, the open-outcry auction. Well the open-outcry auction is just made to turn the brain into mush: you've got social proof, the other guy is bidding, you get reciprocation tendency, you get deprival super-reaction syndrome, the thing is going away... I mean it just absolutely is designed to manipulate people into idiotic behavior.

Finally the institution of the board of directors of the major American company. Well, the top guy is sitting there, he's an authority figure. He's doing asinine things, you look around the board, nobody else is objecting, social proof, it's okay? Reciprocation tendency, he's raising the directors fees every year, he's flying you around in the corporate airplane to look at interesting plants, or whatever in hell they do, and you go and you really get extreme dysfunction as a corrective decision-making body in the typical American board of directors. They o­nly act, again the power of incentives, they o­nly act when it gets so bad it starts making them look foolish, or threatening legal liability to them. That's Munger's rule. I mean there are occasional things that don't follow Munger's rule, but by and large the board of directors is a very ineffective corrector if the top guy is a little nuts, which, of course, frequently happens.

2. The second question: Isn't this list of standard psychological tendencies improperly tautological compared with the system of Euclid? That is, aren't there overlaps? And can't some items o­n the list be derived from combinations of other items? The answer to that is, plainly, yes.

3. Three: What good, in the practical world, is the thought system indicated by the list? Isn't practical benefit prevented because these psychological tendencies are programmed into the human mind by broad evolution so we can't get rid of them? [By] broad evolution, I mean the combination of genetic and cultural evolution, but mostly genetic. Well the answer is the tendencies are partly good and, indeed, probably much more good than bad, otherwise they wouldn't be there. By and large these rules of thumb, they work pretty well for man given his limited mental capacity. And that's why they were programmed in by broad evolution. At any rate, they can't be simply washed out automatically and they shouldn't be. Nonetheless, the psychological thought system described is very useful in spreading wisdom and good conduct when o­ne understands it and uses itconstructively.

Here are some examples:- o­ne: Karl Braun's communication practices. He designed oil refineries with spectacular skill and integrity. He had a very simple rule. Remember I said, "Why is it important?" You got fired in the Braun company. You had to have five Ws. You had to tell Who, What you wanted to do, Where and When, and you had to tell him Why. And if you wrote a communication and left out the Why you got fired, because Braun knew it's complicated building an oil refinery. It can blow up...all kinds of things happen. And he knew that his communication system worked better if you always told him why.
That's a simple discipline, and boy does it work.

- Two: the use of simulators in pilot training. Here, again, abilities attenuate with disuse. Well the simulator is God's gift because you can keep them fresh.-

Three: The system of Alcoholics Anonymous, that's certainly a constructive use of somebody understanding psychological tendencies. I think they just wandered into it, as a matter of fact, so you can regard it as kind of an evolutionary outcome. But just because they've wandered into it doesn't mean you can't invent its equivalent when you need it for a good purpose.-

Four: Clinical training in medical schools: here's a profoundly correct way of understanding psychology. The standard practice is watch o­ne, do o­ne, teach o­ne. Boy does that pound in what you want pounded in. Again, the consistency and commitment tendency. And that is a profoundly correct way to teach clinical medicine.-

Five: The rules of the U.S. Constitutional Convention: totally secret, no vote until the whole vote, then just o­ne vote o­n the whole Constitution. Very clever psychological rules, and if they had a different procedure, everybody would've been pushed into a corner by his own pronouncements and his own oratory and his own... And no recorded votes until the last o­ne. And they got it through by a whisker with those wise rules. We wouldn't have had the Constitution if our forefathers hadn't been so psychologically acute. And look at the crowd we got now.-

Six: the use of granny's rule. I love this. o­ne of the psychologists who works for the Center gets paid a fortune running around America, and he teaches executives to manipulate themselves. Now granny's rule is you don't get the ice cream unless you eat your carrots. Well granny was a very wise woman. That is a very good system. And so this guy, a very eminent psychologist, he runs around the country telling executives to organize their day so they force themselves to do what's unpleasant and important by doing that first, and then rewarding themselves with something they really like doing. He is profoundly correct.-

Seven: the Harvard Business School's emphasis o­n decision trees. When I was young and foolish I used to laugh at the Harvard Business School. I said, "They're teaching 28-year-old people that high school algebra works in real life?" We're talking about elementary probability. But later I wised up and I realized that it was very important that they do that, and better late than never.-

Eight: the use of post-mortems at Johnson & Johnson. At most corporations if you make an acquisition and it turns out to be a disaster, all the paperwork and presentations that caused the dumb acquisition to be made are quickly forgotten. You've got denial, you've got everything in the world. You've got Pavlovian association tendency. Nobody even wants to even be associated with the damned thing or even mention it. At Johnson & Johnson, they make everybody revisit their old acquisitions and wade through the presentations. That is a very smart thing to do. And by the way, I do the same thing routinely.-

Nine: the great example of Charles Darwin is he avoided confirmation bias. Darwin probably changed my life because I'm a biography nut, and when I found out the way he always paid extra attention to the disconfirming evidence and all these little psychological tricks. I also found out that he wasn't very smart by the ordinary standards of human acuity, yet there he is buried in Westminster Abbey. That's not where I'm going, I'll tell you. And I said, "My God, here's a guy that, by all objective evidence, is not nearly as smart as I am and he's in Westminster Abbey? He must have tricks I should learn." And I started wearing little hair shirts like Darwin to try and train myself out of these subconscious psychological tendencies that cause so many errors. It didn't work perfectly, as you can tell from listening to this talk, but it would've been even worse if I hadn't done what I did. And you can know these psychological tendencies and avoid being the patsy of all the people that are trying to manipulate you to your disadvantage, like Sam Walton. Sam Walton won't let a purchasing agent take a handkerchief from a salesman. He knows how powerful the subconscious reciprocation tendency is. That is a profoundly correct way for Sam Walton to behave.

- Ten: Then there is the Warren Buffett rule for open-outcry auctions: don't go. We don't go to the closed-bid auctions too because they...that's a counter-productive way to do things ordinarily for a different reason, which Zeckhauser would understand.

4. Four: What special knowledge problems lie buried in the thought system indicated by the list?Well o­ne is paradox. Now we're talking about a type of human wisdom that the more people learn about it, the more attenuated the wisdom gets. That's an intrinsically paradoxical kind of wisdom. But we have paradox in mathematics and we don't give up mathematics. I say damn the paradox. This stuff is wonderfully useful. And by the way, the granny's rule, when you apply it to yourself, is sort of a paradox in a paradox. The manipulation still works even though you know you're doing it. And I've seen that done by o­ne person to another. I drew this beautiful woman as my dinner partner a few years ago, and I'd never seen her before. Well, she's married to prominent Angelino, and she sat down next to me and she turned her beautiful face up and she said, "Charlie," she said, "What o­ne word accounts for your remarkable success in life?" And I knew I was being manipulated and that she'd done this before, and I just loved it. I mean I never see this woman without a little lift in my spirits. And by the way I told her I was rational. You'll have to judge yourself whether that's true. I may be demonstrating some psychological tendency I hadn't planned o­n demonstrating.How should the best parts of psychology and economics interrelate in an enlightened economist's mind?

Two views: that's the thermodynamics model. You know, you can't derive thermodynamics from plutonium, gravity and laws of mechanics, even though it's a lot of little particles interacting. And here is this wonderful truth that you can sort of develop o­n your own, which is thermodynamics. And some economists -- and I think Milton Friedman is in this group, but I may be wrong o­n that --sort of like the thermodynamics model. I think Milton Friedman, who has a Nobel prize, is probably a little wrong o­n that. I think the thermodynamics analogy is over-strained. I think knowledge from these different soft sciences have to be reconciled to eliminate conflict. After all, there's nothing in thermodynamics that's inconsistent with Newtonian mechanics and gravity, and I think that some of these economic theories are not totally consistent with other knowledge, and they have to be bent. And I think that these behavioral economics...or economists are probably the o­nes that are bending them in the correct direction.Now my prediction is when the economists take a little psychology into account that the reconciliation will be quite endurable. And here my model is the procession of the equinoxes. The world would be simpler for a long-term climatologist if the angle of the axis of the Earth's rotation, compared to the plane of the Euclyptic, were absolutely fixed. But it isn't fixed. Over every 40,000 years or so there's this little wobble, and that has pronounced long-term effects. Well in many cases what psychology is going to add is just a little wobble, and it will be endurable. Here I quote another hero of mine, which of course is Einstein, where he said, "The Lord is subtle, but not malicious." And I don't think it's going to be that hard to bend economics a little toaccommodate what's right in psychology.

5. Fifth: The final question is: If the thought system indicated by this list of psychological tendencies has great value not recognized and employed, what should the educational system do about it? I am not going to answer that o­ne now. I like leaving a little mystery.

Have I used up all the time so there's no time for questions?----------------------------------------------------------------------------

Moderator: I think that what we're going to do is we're going to borrow a little bit of time from the end of the day questions, and we're going to move it and allocate it to Charles Munger, if that's acceptable to everybody.

Munger: By the way, the dean of the Stanford Law School is here today, Paul Brest, and he is trying to create a course at the Stanford Law School that tries to work stuff similar to this into worldly wisdom for lawyers, which I regard as a profoundly good idea, and he wrote an article about it, and you'll be given a copy along with Cialdini's book. [The article Mr. Munger is referring to is called "On Teaching Professional Judgment" by Paul Brest and Linda Krieger. It was published in the July 1994 edition of the Washington Law Review.] Questions?

Audience Member #1: Will we be able to get a copy of that list of 24 standard causes of human misjudgment]?Munger: Yes. I presumed there would be o­ne curious man [laughter], and I have it and I'll put it over there o­n the table, but don't take more than o­ne, because I didn't anticipate such a big crowd. And if we run short, I'm sure the Center is up to making other copies.

Audience Member #2: If I had listened to this talk I might have thought that Charles Munger was a psychology professor operating in a business school. Every o­nce in a while a micro-issue -- you told us how you would've deal with o­ne of these issues, for example with the unfortunate lady See's -- but you didn't tell us how these tendencies affected you and what's probably the most important, or o­ne of the most important elements of your success, which was deciding where to invest your money. And I'm wondering if you might relate some of these principles to some of your past decisions that way.

Munger: Well of course an investment decision in the common stock of a company frequently involves a whole lot of factors interacting. Usually, of course, there's o­ne big, simple model, and a lot of those models are microeconomic. And I have a little list of -- it wouldn't be nearly 24, of those -- but I don't have time for that o­ne. And I don't have too much interest in teaching other people how to get rich. And that isn't because I fear the competition or anything like that -- Warren has always been very open about what he's learned, and I share that ethos. My personal behavior model is Lord Keynes: I wanted to get rich so I could be independent, and so I could do other things like give talks o­n the intersection of psychology and economics. I didn't want to turn it into a total obsession.

Audience Member #3: Out of those 24, could you tell us the o­ne rule that's most important?Munger: I would say the o­ne thing that causes the most trouble is when you combine a bunch of these together, you get this lollapalooza effect. And again, if you read the psychology textbooks, they don't discuss how these things combine, at least not very much. Do they multiply? Do they add? How does it work? You'd think it'd be just an automatic subject for research, but it doesn't seem to turn the psychology establishment o­n. I think this is a man from Mars approach to psychology.I just reached in and took what I thought I had to have. That is a different set of incentives from rising in an economic establishment where the rewards system, again, the reinforcement, comes from being a truffle hound. That's what Jacob Viner, the great economist called it: the truffle hound -- an animal so bred and trained for o­ne narrow purpose that he wasn't much good at anything else, and that is the reward system in a lot of academic departments. It is not necessarily for the good. It may be fine if you want new drugs or something. You want people stunted in a lot of different directions so they can grow in one narrow direction, but I don't think it's good teaching psychology to the masses. In fact, I think it's terrible.

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