Seeking Wisdom

Title: Seeking Wisdom: From Darwin to Munger
Author: Peter Bevelin
Year Read: 2016
Buy This Book: Amazon

What Influences Our Thinking?

The Psychology of Misjudgments

  1. Mere Association
    • We automatically feel pleasure or pain when we connect a stimulus — a thing, situation or individual — with an experience we’ve had in the past or with values or preferences we are born with.
    • Evaluate things, situations and people on their own merits.
    • Create a negative emotion if you want to end a certain behavior.
  2. Reward and Punishment
    • Rewarding or punishing people is most effective when it is administered without delay and each time the behavior is repeated.
    • After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse — even in cases where success or failure was merely a result of chance.
  3. Self-Interest and Incentives
  4. Self-Serving Tendencies and Optimism
    • We see ourselves as unique and special and we have optimistic views of ourselves and our family. We overestimate the degree of control we have over events and underestimate chance.
    • Most of believe we are better performers, more honest and intelligent, have a better future, have a happier marriage, are less vulnerable than the average person, etc. But we can’t all be better than average.
  5. Self-Deception and Denial
    • We deny and distort reality to feel more comfortable, especially when reality threatens our self-interest. We view things the way we want to see them. We hear what we want to hear and deny what is inconsistent with our deeply held beliefs. We deny unpleasant news and prefer comfort to truth. We choose the right people to ask. We make sense of bad events by telling ourselves comforting stories that give them meaning.
  6. Consistency
    • Once we’ve made a commitment — a promise, a choice, taken a stand, invested time, money or effort — we want to remain consistent. We want to feel that we’ve made the right decision. And 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.
    • “Convictions are more dangerous enemies of truth than lies.” - Nietzsche
    • “What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.” - Warren Buffett
    • “A man should never be ashamed to own that he has been in the wrong, which is buy saying, in other words, that he is wiser today than he was yesterday.” - Jonathan Swift
    • Don’t force people to publicly make commitments that you don’t later want the opportunity to change.
    • When you are asked to perform a future action but are uncertain, ask yourself: Would I do this if I had to do it tomorrow?
    • Decisions should be based on where you want to be. Not where you’ve been.
  7. Deprival Syndrom
    • We dislike losing the things we have more than we appreciate gaining the things we don’t have.
    • “A very important principle in investing is that you don’t have to make it back the way you lost it. In fact, it’s usually a mistake to try to make it back the way you lost it.” - Warren Buffett
    • We want and value more what is scarce or unique.
    • What you paid for your house, stock, or car has no relevance to its value. If the value is below what you paid, you don’t have to get even. Ask: Suppose I hadn’t made the investment, would I make this investment today at today’s price?
  8. Status Quo and Do-Nothing Syndrome
    • We prefer to keep things the way they are. We resist change and prefer effort minimization. We favor routine behavior over innovative behavior.
    • We are more bothered by harm that comes from action than harm that comes from inaction. We feel worse when we fail as a result of taking action than when we fail from doing nothing.
    • Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking action.
  9. Impatience
    • We give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future. We prefer an immediate reward to a delayed but maybe larger reward.
    • We are impatient in the short run and patient in the far away future.
  10. Envy and Jealousy
    • We evaluate our own situation by comparing what we have with what others have.
    • It is people similar to us we envy the most.
  11. Contrast Comparison
    • We judge stimuli by differences and changes and not absolute magnitudes.
    • How we value things depends on what we compare them with.
    • The order in which something is presented matters. Sales people often try to sell the more costly item first.
    • We determine what is fair or not in reference to what we have been used to.
  12. Anchoring
    • We are over-influenced by certain information acting as a reference “anchor” for future judgements.
    • We don’t price a thing according to its value but its relative price.
    • Consider choices from a zero base level and remember what you want to achieve.
  13. Vividness and Recency
    • The more dramatic, salient, personal, entertaining, or emotional some information, event or experience is, the more influenced we are.
    • We give too much weight to information we’ve seen, heard, read or experienced most recently.
  14. Omission and Abstract Blindness
    • We react more strongly to the concrete and specific that to the abstract. We overweight personal experiences over vicarious. We see only what we have names for.
    • We tend to focus only on the present information rather than what information may potentially be missing.
  15. Reciprocation
    • We tend to repay in kind what others have done for us — good or bad.
    • We respond the same way as we are treated. If we are unfair to others, people are unfair to us back. If people trust us, we tend to trust them.
    • People don’t like to feel indebted. We are disliked if we don’t allow people to give back what we’ve given them.
  16. Liking and Social Acceptance
    • We believe, trust and agree with people we know and like. We like the people who like us (because we like to be liked).
    • Asking a favor of someone is like to increase that person’s liking for us. People want to be seen as consistent with their behavior.
  17. Social Proof
    • We feel more comfortable as part of a majority. It acts as a protection from criticism. If we are wrong and everybody else is too, we get less blame.
    • The more people, the more reduced we see our own responsibility.
    • When all are accountable, no one is accountable.
    • Appoint someone in your group to question things and point out risks and pitfalls.
  18. Authority
    • We tend to obey an authority, especially when we are uncertain, supervised, or when people around us are doing the same.
    • Keep in mind: names and reputation influence us.
  19. Sensemaking
    • “We understand life backwards but live it forwards.” - Soren Kierkegaard
    • We don’t like uncertainty. We have a need to understand and make sense of events. We therefore seek explanations for why things happen. By finding patterns and causal relationships we get comfort and learn for the future.
    • After an event a story is created so that the event makes sense. (hindsight bias)
  20. Reason-Respecting
    • When asked for a favor, people are more likely to comply if they are giver a reason — even if they don’t understand the reason or it’s wrong.
  21. Believe First and Doubt Later
    • Believing is easier than doubting. Doubting is active and takes effort.
    • We first believe all information we understand and only afterwards and with effort do we evaluate, and if necessary, un-believe it.
  22. Do-Something Syndrome
    • Don’t confuse activity with results. There’s no reason to do a good job with something you shouldn’t do in the first place.
  23. Say-Something Syndrome
    • “Wise men talk because they have something to say; fools, because they have to say something.” - Plato
    • “If you have nothing to say, say nothing.” - Mark Twain

The Physics and Mathematics of Misjudgments