The psychology of human misjudgment

Speech Transcript I am very interested in the subject of human misjudgment, and Lord knows I've created a good bit of it. I don't think I've created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with. When I saw this patterned irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life.

The psychology of human misjudgment

But this is not often so. One of my favorite cases about the power of incentives is the Federal Express case. Federal Express had one hell of a time getting the night shift to do the right thing.

They tried moral suasion. They tried everything in the world without luck. And, lo and behold, that solution worked. Early in the history of XeroxJoe Wilson, who was then in the government, had a similar experience.

One case of excess emphasis happened at Harvard, where B. At one time, Skinner may have been the best-known psychology professor in the world. Using food rewards, he even caused strong superstitions, pre-designed by himself, in his pigeons. Nonetheless, Skinner was right in his main idea: They used to say: One of the doctors who participated in the removal was a family friend, and I asked him: Consider the presentations of brokers selling commercial real estate and businesses.

The psychology of human misjudgment

The general antidotes here are: The power of incentives to cause rationalized, terrible behavior is also demonstrated by Defense Department procurement history. Now there are huge implications if the human mind is put together this way.

And so the cash register was a great moral instrument when it was created. He had a little store, and his employees were stealing him blind, so that he never made any money. Perhaps the most important of these antidotes is the use of sound accounting theory and practice.

The officers of Westinghouse, perhaps influenced by envy of General Electricwanted to expand profits from loans to outsiders. Now there are two special classes of loans that naturally cause much trouble for lenders. Who was at fault?

My answer puts most blame on the accountants and other senior people who created the accounting system. I wish I could tell you that this sort of thing no longer happens, but this is not so. And after that, much accounting became even worse, perhaps reaching its nadir at Enron. So incentive-caused bias is a huge, important thing, with highly important antidotes, like the cash register and a sound accounting system.

In some cases, other disciplines showed more interest in psychological tendencies than did psychology, at least as explicated in psychology textbooks. The inevitable ubiquity of incentive-caused bias has vast, generalized consequences. On the other hand, a purely commissioned sales force may well be more efficient per dollar spent.

Therefore, difficult decisions involving trade-offs are common in creating compensation arrangements in the sales function. The extreme success of free-market capitalism as an economic system owes much to its prevention of many of bad effects from incentive-caused bias.

Anti-gaming features, therefore, constitute a huge and necessary part of almost all system design. Of course, money is now the main reward that drives habits.

Averaged out, money is a mainspring of modem civilization, having little precedent in the behavior of nonhuman animals. Although money is the main driver among rewards, it is not the only reward that works. Given reward superpower, this practice is nice and sound. The emphasis on daily use of this practice is not accidental.

Punishments, of course, also strongly influence behavior and cognition, although not so flexibly and wonderfully as rewards. Military and naval organizations have very often been extreme in using punishment to change behavior, probably because they needed to cause extreme behavior.

And George Washington hanged farm-boy deserters forty feet high as an example to others who might contemplate desertion.

And what will a man naturally come to like and love, apart from his parent, spouse and child? Well, he will like and love being liked and loved. For instance, it is obviously desirable to attract a lot of lovable, admirable people into the teaching profession.

Admiration also causes or intensifies liking or love.Jan 13,  · of human misjudgement given to an audience at Harvard University circa Jun Mr. Munger speaks about the framework for decision making and the factors contributing to misjudgements.

The Psychology of Human Misjudgment by Charles T. Munger PREFACE When I read transcripts of my psychology talks given about fifteen years ago, I realized that I could now cre­. The Psychology of Human Misjudgment, a speech given in by legendary investor Charlie Munger, opened my eyes to how behavioral psychology can be applied to business and problem-solving.

Munger, for those of you who haven’t heard of him, is the irreverent partner of . The Psychology of Human Misjudgment Economists assume that people are rational in the sense that they use all available information as they take actions intended to achieve their goals.

But behavioral economists don’t agree with the view of standard economics. Charlie Munger and the Psychology of Human Misjudgment, Continued This series covers each of the 25 tendencies Munger addresses in his book Poor Charlie’s Almanack.

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The psychology of human misjudgment

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"The Psychology of Human Misjudgment" by Charlie Munger