The psychology of human misjudgment by charlie munger investor lawyer and business partner of warren buffett [Music] well I am very interested in the subject of human is judgments I don't have too much interest in teaching up people how to get rich and I wasn't because I bear the competition I saw this pattern irrationality which was so extreme and I had no theory or anything to deal with it I just started to create my own system of psychology partly by casual reading but largely from personal experience and I used that pattern they helped me get through life I'd like to share that with you standard causes of human misjudgment first simple psychological denial this first really hit me between the eyes when a friend of our family had a super athlete super student son and flew off a carrier in the North Atlantic and never came back and his mother who had was a very same woman just never believed it he was dead simple psychological denial the reality is too too painful to bear so you just started until it's bearable we all do that to some extent and it's a common psychological misjudgment that causes terrible problems agency costs here my early experience was a doctor who thought that the gallbladder was the source of all medical evil and that you really loved your patients you couldn't get that organ out rapidly enough he sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln Nebraska human nature causes this terrible abuse so you're getting your advice in this world from your paid advisor with this huge load of ghastly bias you can hire your advisor and then just apply a windage factor I got used to do when I was a rifle shooter just adjust for 70 miles an hour wind you can learn the basic elements of your advisors trade you don't have to learn very much by the way because you learn just a little and you could make him explain why he's right by us from consistency and commitment tendency and this is a superpower in error causing psychological damage the human mind is a lot like the human egg and human egg as a shutoff device women sperm gets in it shuts down so the next one can't get in the human mind has a big tendencies of the same sort and here again it doesn't just catch ordinary mortals it catches the deans of physics according to Max Planck the really innovative important new physics was never really accepted by the old guard instead a new guard came along with less brain blocked by its previous conclusions and at max Planck's crowd have this commitment tendency to in spite of disconfirming evidence you've been imagine with the crowd that you and I are part of games like and of course if you make a public disclosure of your conclusion you're pounding it in to your own head many of these students that are screaming at us if they aren't convincing us but performing metal chains for themselves because what they're shouting out there pounding in by us from Pavlovian association misconstruing pass correlation is a reliable basis for decision-making I never took a course in psychology or economics either for that matter and but I did learn about Pavlov in high school biology you know so the dogs salivated when the bell rang so what the Pavlovian association is an enormous ly powerful psychological force in the daily life of all of us I'd say three-quarters of advertising works on pure Pavlov take coca-cola company they want to be associated with every wonderful image correct and the Olympics wonderful music you name it then want to be associated with presidents funerals when a gatina coca-cola ad associated with bad psychologically rooted dependencies all these psychological tendencies work largely or entirely on a subconscious level which makes them very insidious talking about economics you've got two products now you think under the laws of economics that a product a costs X plus something if product equals X minus something it will sell better than if it sells at X plus something that's not so in many cases when you raise the price of the alternative product it will get a larger market share than it would when you make it lower than your competitors product if you're old a blob and his dog bias from reciprocation tendency including the tendency of one in a role to act as other persons expect it is so easy to be a patsy the compliance practitioners of this life sealed any demonstrated this by running around a campus and he asked people to take delinquents to the zoo one in six actually agreed to do it and after he'd accumulated the statistical output he went around on the sand campus and he asked other people would you do two afternoons a week and there he got 100% of the people to say no but after he'd made the first request he backed off alone he said well would you at least take them to the zoo one afternoon he raised the compliance rate to a half got three times the success by just going through the little Astro a lot and back off now the human mind on the subconscious level can be manipulated that way and you don't know it I always use the Frazier like a one-legged man in an ass-kicking contest over influenced by social proof that is the conclusions of others particularly under conditions of natural uncertainty and stress and here one of the cases the psychologists use is getting Genovese eager Olli people 50 60 70 of them just sort of patented nothing wealthy was fully murdered one of the explanations is that everybody looked at everybody else and nobody else was doing anything and so there's automatic social proof that the right thing to do is nothing that's only part of Big Shot businessman get into these waves of social breeds do you remember some years ago when an auto company bought a fertilizer company and every other major oil company practically ran out and bought fertilizer company and there was no more damn reason for all these oil companies to buy fertilizer companies but they didn't know exactly what to do and if Exxon was doing it it was good enough for mobile or vice versa and of course it was a total disaster what I always call man with a hammer semper – the man with a hammer every problem can still look pretty much like a nail by us from contrast cause distortions of sensation perception and cognition here the great experiment that sealed any does in his class he take three buckets of water one's hot ones cold and ones room-temperature he has the diligence stickers left hand in the hot water his right hand in the cold water and he has them removed the hands and put them both in the room temperature bucket and of course both hands in the same bucket of water one team's hot the other seems cold because the sensation apparatus of man is over influence by contrast it has no absolute scale maybe you have a magician remove your watch without your noticing it I certainly have it's the same thing taking advantage of compressed cognition mimics sensation and the cognition manipulators mimic the watch removing magician sealed any sites the case of the real estate broker you got the rule that some transferred into your town and the first thing you do is you take the robot the two of them awful overpriced houses you've ever seen and then you take the room to some moderately overpriced house and then you stick them and you think you're immune from these things and you laugh and I want to tell you you aren't my favorite analogy I have this friend I like W bridge with he said Charlie he says if you throw a frog in hot water the front will jump out so then you put the frog in room-temperature water and just slowly heat the water up the Frog will die there I don't know whether that's true about a frog but it sure does help true about many of the businessmen I know by us from over influenced by Authority well here the Milgram experiment had a person posing as an authority figure trick ordinary people into giving what bad every reason to expect was heavy torture by electric shock and perfectly innocent fellow says he was trying to show why Hitler succeeded in a few other things Milgram it's been widely interpreted as mere obedience but the truth of the matter is the experimenter who got the students to give her the heavy shocks and Milgram he explained why was a false explanation we need this deliver scientific truth and so on that greatly changed the behavior of the people and you'll like this one you get a pilot the copilot the pilot is the authority figure they don't do this in airplanes but they've done it in simulators they have a pilot to do something where the copilot but know the plane was going to crash but the pilots doing a pilot is the authority bigger twenty five percent of the time the blendra bias from deprival super reaction syndrome caused by present or threatened scarcity removals something almost possessed but never possessed here I took the Munger dog lovely harmless dog one way the only way to get that dog to bite you was to try and take something out of the small factor was already learned and the human version of that dog is there in all of us people are really crazy about minor decrements down if you act on only you get into reciprocation tendons because you don't do a percentage of affection you reciprocate and also the extreme business is here was no coke now coca-cola has the most valuable trade mark in the world focused on he's a brilliant engineers lawyers psychologists advertising executives and so forth and they spent better part of a hundred years getting people to believe that trademark have all these intangible values to and people associated with a flavor and so they're going to tell people not that it was improved because you can't improve a flavor and flavor as a matter of taste you man blew through what detergent or something but telling you're going to make a major change in flavor so they got the huge deprival super super reaction syndrome Pepsi was within week of coming out with old coke in a Pepsi bottle which would have been the biggest Fiasco in modern times by us from envy jealousy well envy jealousy made what two of the ten commandments here again you go through the psychology the survey courses go to the index and the jealousy thousand-page book it's ranked there's some blind spots and I get Enya I've read once a half a dozen times it's not greed that drives the world that Envy by us from chemical dependency well we don't have to talk about that we've all seems so much of it but it's interesting how it always causes moral breakdown if there's any need and always involves massive denial by osram if gambling compulsion for instance a lottery give a lottery where you get your number by lot and then somebody draws a number by lot and gets lousy play we get a lottery where you will get to pick their number get big play the minute they picked it themselves it gets an extra validity after all they thought it and they acted on and look at what's happening to our country every Indian Reservation every River town and and look at the people who are ruined but then you take slot machines you get bar bar lemon it happens again and again again you get all these near misses well that's deprival super reactions under and boy to the people who create the machines understand human psychology by us from liking distortion including the tendency to especially like oneself one's own kind and one's own idea structures and the tendency to be especially susceptible to being misled by someone like disliking Distortion reciprocal of liking distortion and the tendency not to learn appropriately from someone dislike hugely powerful tendencies man with a hammer syndrome revisited he believes his own idea structures will cure cancer and he believes that the demons that he's the guarding against are the biggest demons and the most important ones and in fact they may be very small demons converting the demons that you face other normal limitations of sensation memory cognition and knowledge smelling content of that stress induced mental changes here my favorite example is is the great Pablo from the Eloise dogs and cages which had all been conditioned into change behaviors great Leningrad flood came and went right up and the dogs in a cage and the dog was had as much stress as an imaginary dog ever having and the water was hidden time to save some of the dogs and Pavlov noted that they had a total reversal of their conditions personality being the great scientist he was he spent the rest of his life getting nervous Green Township dogs the thought system indicated by this list of psychological tendencies was great value not widely recognized and employed what should the educational system knew about it I am NOT going to answer that one now I like leaving google mystery [Music] you
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