The Human Misjudgment (2)

Below is the continuation of Charlie Munger's 24 causes of misjudment.

Fourthly, the bias from consistency and commitment tendency. For example, after a hard-won conclusion, our human minds shut off. Similarly, being so resistant to change, the laws of physics were never changed until the old guards have mostly passed on. In behavioral Finance, this is called Conservatism.

Fifthly, we often misconstrue past correlation as a reliable basis for decision making. Charlie Minger referred to this as the "Pavlovian" effect, where our minds works on association. For example, Coca Cola is often assocated with heroics at the Olympics, but never a funeral. Similarly, in Accounting, sloppy accounting allowed Institutions to book profits, and because nothing "bad" happened, theaccounting gets sloppier untl the bad behavior spreads.

Sixthly, there is bias from reciprocation tendency. This is a powerful phenomenon. Essentially, the human mind can be manipulated. Often we get better results, when we "ask for a lot, then back off" approach, because the human mind is influenced by the way how it thinks other people expects of you.

Seventhly, there is the Lollapalooza effect, the bias caused from over-influence by social proof. In other words, the conclusion of others (often of higher hierachy) having an impact on you. In Finance, there are stories of a large oil company buying fertilizer plants, which in turn influenced other oil companies into buying fertilizer plants too, without exactly knowing why (which were a disaster). To Charlie, the markets are living examples of bias from social proof as prices reflect what others think, and in turn affecting how we think... recipes for bubbles? Behaviorists have called this herd instinct, mania, positive extrapolitive thinking etc.

Wow. This is really Charlie Munger, the Psychologist. Explicitly, he acknowledged that markets are driven by psychology and in fact, he has rejected the Efficient Market Hypothesis Theory. But can Investors replicate the sort of discipline required by Charlie? Well another 17 points to go... Happy reading !