Seeking Wisdom, Charlie Munger

INTRODUCTION

"All I want to know is where I'm going to die so I'll never go there."

- Charlie Munger

There are roads that lead to unhappiness. An understanding of how and why we can "die" should help us to avoid them.

The best way to learn what, how and why things work is to learn from others.

"I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart."

- Charlie Munger

The best way to achieve wisdom is to learn the big ideas that underlie reality. [...] Even people who aren't geniuses can outthink the rest of mankind if they develop certain thinking habits.

"The reading of all good books is like conversation with the finest minds of past centuries."

- Rene Descartes

WHAT INFLUENCES OUR THINKING

The brain changes continually as a result of our experiences. Experiences produce changes in the brain either through new neural connections or through the generation of new neurons. Studies suggest that the brain can change even during the course of a day.

Experiences are the reasons that all individuals are unique. There are no individuals with exactly the same upbringing, nutrition, education, social stamping, physical, social and cultural setting. This creates different convictions, habits, values and character. People behave differently because differences in their environtment cause different life experiences. This is why it is sometimes hard to understand other people's behavior. To do that, we must adapt to their environment and share their experiences. (Consideration)

"Our life is what our thoughts make it."

- Marcus Aurelius

It is not what happens to us that counts - it's what we think happens to us.

Studies show that a placebo can improve a patient's condition simply because the patient expects it will work. Clinical evidence shows placebos to have physical effects on the brain, just as drugs do. Studies in Sweden show a placebo activates the same brain circuits as painkilling drugs.

If people expect something to go wrong with their health, it often does. Negative expectations can influence our bodies and cause symptoms that over time may cause our body harm.

Beliefs have biological consequences - good and bad.

=> Control your beliefs. Align them with your goals.

Human beings have spent more than 99% of their evolutionary history in the hunter gatherer environtment. If we compress 4 million years into 24 hours, and if the history of humans began at midnight, agriculture made its appearance on the scene 23 hours and 55 minutes later.

Only behavior that is selfish or for the mutual good is in an individual's self-interest and therefore favored by natural selection. Some behavior may under certain conditions look like altruism but can often be explained by self-benefit. Social recognition, prestige, fear of social disapproval, shame, relief from distress, avoidance of guilt, a better after-life or social expectations are some reasons behind "altruistic" acts.

"Our fears are always more numerous than our dangers."

- Lucuys Annaeus Seneca

Fear guides us to avoid what didn't work in the past. It activates hormones like adrenaline and cortisol, which keeps us attentive to harm since we need full attention to escape from a threat.

The degree of fear we feel depends on our interpretation of the threat and our perception of control.

What we fear and the strength of our reaction depends on our genes, life experiences, and the specific situation. You may react instinctively at first, but if the situation is one that you've experienced before (since our brain is continuously "rewired" with life experiences), the final reaction may be to calm down. The more we are exposed to a stimulus, even a terrifying one, the higher our threshold of fear becomes.

=> "Always do what you fear." - R.W. Emerson; to get used to the 'fearful' situation

To learn what works and does not or what is good or bad for us means we have to explore.

Recent studies suggest that the brain responds to novelty.

For example, many animals, for foraging, start with a random search, and only change their behavior when they find a rewarding stimulus. Then they move towards it.

=> Explore to learn what works. Then do more of it.

Finding new ways to deal with the world is superior to overtraining old patterns.

Studies suggest that we learn better when we mix new information with what we already know.

=> Increase "complexity": learn new things/movements/skills/words/people every day

Our brain is wired to perceive before it thinks - to use emotion before reason.

=> False perceptions.

Male brain vs female brain

The brain exists to make better decisions about how to enhance reproductive success. Reproduction is the central act in the life of every living thing.

It is a natural tendency to act on impulse - to use emotions before reason. The behavior that was critical for survival and reproduction in our evolutionary history still applies today.

Cultural evolution vs genetic evolution

Cultural evolution is faster than genetic evolution since it allows much of what we learn to be passed on and combined with what others around us have learned. Unlike biological evolution, cultural evolution is not inherited. We don't inherit our parents' habit. We learn from them.

"Men's natures are alike; it is their habits that carry them far apart."

- Confucius

=> Nature you inherit. Habits you can develop.

THE PSYCHOLOGY OF MISJUDGMENTS

List of 28 reasons for misjudgements and mistakes

1. Mere Association

We move towards stimuli we associate with pleasure an away from those we associate with pain.

We tend to dislike people who tell us what we don't want to hear even when they didn't cause the bad news, i.e. kill the messenger. This gives people an incentive to avoid giving bad news.

Individuals are neither good nor bad merely because we associate them with something positive or negative.

Encourage people to tell you bad news immediately.

Past experiences are often context dependent.

Create a negative emotion if you want to end a certain behavior. If you want someone to stop smoking, one way could be to show them what they stand to lose.

2. Reward And Punishment

"The iron rule of nature is: you get what you reward for.

If you want ants to come, you put sugar on the floor."

- Charlie Munger

Give people what they desire (or take away something undesirable) and their behavior will repeat.

Give they something undesirable (or take away whay they desire) and their behavior will stop.

In the beginning, rewarding (or punishing) is most effective when it is administered without delay and each time the behavior is repeated.

Once behavior becomes learned, variable rewards strengthen the behavior.

"The chains of habit are too weak to be felt until they are too strong to be broken."

- Samuel Johnson

After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse.

Good consequences don't necessarily mean we made a good decision, and bad consequences don't necessarily mean we made a bad decision.

This automatic association to what worked in the past causes people to under-react to new condition and circumstances.

Praise is more effective in changing behavior than punishment. It is better to encourage what is right than to criticize what is wrong.

Set examples: "We do not improve the man we hang: we improve others by him." - Michel de Montaigne

"It is difficult to get a man to understand something when his salary depends upon him not understanding it."

- Upton Sinclair

Warren Buffet on business goals:

Goals should be:

(1) tailored to the economics of the specific operating business

(2) simple

(3) directly related to daily activities

Reward individual performance and not effort or length in organization. Reward people after and not before performance.

Don't let money be the only motivation. If we reward people for doing what they like to do anyway, we sometimes turn what they enjoy doing into work. The reward changes their perception.

The key is what a reward implies. A reward for our achievements makes us feel that we are good at something thereby increasing our motivation. But a reward that feels controlling and makes us feel that we are only doing it because we're paid to do it, decreases the appeal. Blase Pascal said: "We are generally better persuaded by the reasons we discover ourselves than by those given to us by others."

Have systems that make it hard for people to get away with undesirable behavior. Make undesirable behavior costly.

An example of a really responsible system is the system that the Romans used when they built an arch. The guy who created the arch stood under it as the scaffolding was removed. It's like packing your own parachute.(Skin In The Game/Neck On The Line ~ Nassim Taleb)

3. Self-Interest And Incentives

People do what they perceive is in their best interest and are biased by incentives.

"My doctor gave me 6 months to live. When I told him I couldn't pay the bill, he gave me 6 more months."

- Walther Matthau

People who are rewarded for doing stupid things continue to do them.

Studies show that teachers help students cheat on standardized tests when their jobs or pay increases depend on the outcome of the tests.

"Whose bread I eat, his song I sing."

- German proverb

How can we change people? Since the risk of losing is more motivating than the chance of gaining, we stand a better change changing people if we appeal to their fear of losing something they value - job, reputation, status, money, control, etc.

Changing people affects their motivation, feelings of responsibility, and tendency to reciprocate. It is better when people act out of their own free will.

Understand people's motivations. Money, status, power, envy?

People's interests are not only financial. They could also be social or moral. For example, public embarrassment, social exclusion, conscience, shame or guilt may cause people to stop some undesirable behavior.

"Do not train boys to learning by force and harshness, but lead them by what amuses them, so that they may better discover the bent of their minds."

- Plato

It is better to convince people by asking questions that illuminate consequences.

4. Self-Serving Tendencies And Optimism

We can't all be better than average.

People tend to put higher probability on desired events than on undesired events.

Experiments show that when we are successful (independent by chance or not), we credit our own character or ability.

When we fail, we blame external circumstances or bad luck. When others are successful, we tend to credit their success to luck and blame their failures on foolishness.

"If the only tool you have is a hammer, you approach every problem as if it were a nail."

- English proverb

Experts love to extrapolate their ideas from one field to all other fields. They define problems in ways that fit their tools rather than ways that agree with the underlying problem.

"An optimist is a person who sees a green light everywhere, while the pessimist sees only the red stoplight. The truly wise person is colorblind."

- Dr. Albert Schweitzer

How well do you know what you don't know?

"It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent."

- Charlie Munger

Focus on what can go wrong and the consequences. Know how you will handle things when they go wrong.

Consider people's actual accomplishments and past behavior over a long period of time rather than first impressions.

5. Self-Deception And Denial

We deny and distort reality to feel more comfortable, especially when reality threatens our self-interest.

On gurus:

We believe something is true because it sounds believable or we want to believe it, especially with issues of love, health, religion, and death. This is one reason why people follow gurus. They encourage followers to trust their hearts and forget their heads.

When the cost of denial is worse than the benefit of facing reality, we must face reality.

6. Consistency

The more we have invested in our behavior the harder it is to change.

We behave in ways that are consistent with how others see us. If people label us as talented, we try to appear talented whether or not it is true.

"What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact."

- Warren Buffett

We are most consistent when we have made a public, effortful or voluntary commitment. The more public a decision is, the less likely it is that we will change it.

In the low-ball technique, the salesperson gives the customer an incentive to enter into an agreement with the intention of changing the terms to the seller's advantage.

In the labeling technique, people try to get us commited by first applying a label to our personality or values that is consistent with the behavior they want us to take.

Foot-in-the door technique:

How do people seduce us financially, politically or sexually? They makes us agree to a small request, so small no one would refuse.

When people get us to commit, we become responsible.

How do we get people to take inner responsibility for their actions? Make it voluntary. We take responsibility for our behavior in cases when we are interanlly motivated by satisfaction or interest, when we feel in control, and when we are free from incentives or outside pressure.

If we can get people commited in advance, they tend to live up to their commitment.

Be self-critical and unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions. Consider alternative outcomes, viewpoints, and answers. Have someone tell you when your thinking is wrong.

7. Deprival Syndrome

One reason why horse races, bingo and these things have always been so popular is because of all these near misses. Frequent near misses are like small reinforcements and make us want to try again and again.

"All these feelings. And it has no impact whatsoever."

- Warren Buffett

We want and value more what is scarce and unique.

How do we create demand? Create competition.

Know your goals and options. Ask: Why do I want this?

"Captain Cook served sauerkraut to the officers, but not to the men. And then, finally he said, 'Well, the men can have it one day a week."

8. Status Quo And Do-Nothing Syndrome

Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action.

Remember what you want to achieve.

9. Impatience

We are impatient in the short run and patient in the far away future.

Consider both the short and long-term consequences of a decision. Weigh present good/bad against future good/bad. Short-term suffering may lead to long term pleasure.

10. Envy And Jealousy

"Man will do many things to get himself loved;

he will do all things to get himself envied."

- Mark Twain

It is people similar to us we envy most.

"There is nothing so disturbing to one's well-being and judgment as to see a friend get rich"

- Charles P. Kindleberger

Studies show that how happy we are is partly determined by where we stand in relation to similar others.

As long as you achieve your goals, it shouldn't matter if someone else does better.

Studies show that it matters whether we believe that others deserve their success.

"The best way to avoid envy is to deserve the success you get."

- Aristotle

11. Contrast Comparison

How we value things depends on what we compare them with.

Evaluate objects and people by themselves and not by their contrast.

12. Anchoring

"I always set low targets to exceed expectations."

Consider choices from a zero base level and remember what you want to achieve.

Adjust information to reality.

13. Vividness And Recency

Information we receive directly, through our eyes or ears has more impact than information that may have more evidential value.

Information that moves us emotionally makes us pay greater attention to the event itself than to its magnitude. Statistics rarely spark our emotions. An individual face and name will.

Sometimes we believe an event has increased in frequency because we see it more. But the media may only cover it more.

We give too much weight to information we've seen, heard, read or experienced most recently.

Accurate infomation is better than dramatic information. Back up vivid stories with facts and numbers.

Ask: is it relevant?

14. Omission And Abstract Blindness

We often both choose and reject options that are of a more striking or complex nature over average ones.

Consider missing information. Know what you want to achieve.

15. Reciprocation

Whenever someone does something for us we want to do something back.

We make a concession to people who have first made a concession to us.

People don't want to feel indebted. We are disliked if we don't allow people to give back what we've given them.

A favor or gift is more effective when it is personal, significant, and unexpected.

Give people what you want in return from them. Ask: Assuming others are like me, how would I like to be treated if the roles were reversed?

16. Liking And Social Acceptance

"The deepest principle in human nature is the craving to be appreciated."

- William James

We like people who compliment us - true or not - and make us feel special.

"Talk to a man about himself and he will listen for hours."

- Benjamin Disraeli

People believe we have the same personality as those we associate with.

Create an external common threat or an opportunity for mutual gain.

Asking a favor of someone is likely to increase that person's liking for us.

"He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged."

- Benjamin Franklin

17. Social Proof

"If 40 million people say a foolish thing, it does not become a wise one."

- Somerset Maugham

Since everybody else wants it, we assume there has to be a reason.

We trust testimonials from people that we see as similar to us.

"What the wise do in the beginning, fools do in the end."

- Warren Buffett

"I'd rather be wrong in a group than right by myself." (Sheeping)

Ponzi.

We have a tendency to not act in situations where we are uncertain if there is danger and when we don't feel individual responsibility. Also when we want to avoid embarrassment and when we're among strangers. The more people, the more reduced we see our own responsibility.

A bystander to an emergency is unlikely to help when there are other people around.

When we are uncertain, we have a tendency to look at people around us to see how they react. If others don't react, we interpret that as evidence that it is not an emergency.

Pluralistic ignorance: "Since nobody is concerned, nothing is wrong. It can't be an emergency."

Diffusion of responsibility: The more people there are, the less personal responsibility we feel.

So, how should we act if we are involved in an accident in a public place and need help? We should be specific. "You there, in the blue shirt. This is an emergency. Please help me!"

"Gentlemen, I take it we are all in complete agreement with the decision here. Then, I propose we postpone further discussion of this matter to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about."