In the "Psychology of Human Misjudgment," Charlie Munger, Warren Buffet’s long-time business partner, assembled a list of 25 psychology-based tendencies that, while often useful, often mislead.

Number 13 - Overoptimism Tendency.  Demosthenes, the most famous Greek orator, said, "What a man wishes, that also will he believe."  How else do you explain our love of gambling and investing?  Antidote: simple probability math that we all learned in high school.

Number 14 -  Deprival-Superreaction Tendency.  Munger describes two types of tendencies here.  First, the fact that humans generally feel the pain of a loss much more than the thrill of a gain.  Second, if we are very close to gaining something we greatly want, but lose it at the last moment, we react as if we had owned the gain and it was stolen from us.  So, in displaying this tendency, we often compare what is near instead of what really matters.  For instance, the guy with $10 million in his brokerage account who is highly irritated when he accidentally loses $100 of the $300 in cash he’s carrying around.  See, we ordinarily react with such an irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing.  Munger notes that, given that bureaucracies are perfect breeding grounds for these kinds of reactions, one of Jack Welch’s wisest actions at GE was fighting to eliminate bureaucracy.

Munger cites a number of different, and very interesting, examples and variations of this tendency.  One is how it operates, in combination with the Inconsistency-Avoidance Tendency (No. 5), as between ideological believers and non-believers.  The believers are highly threatened, sensing a possible loss of safety and security in their beliefs and the status quo.  Great agitation, and often violence, results.  Possible antidote to the ideological group thinkers: never let them get too comfortable; always make sure there are able and articulate non-believers who are accepted by the leader as critical team members.  Another idea: insist on a culture of courtesy, much like the U.S. Supreme Court.

Number 15 - Social Proof Tendency.  The tendency to think and act as we see others around us acting and thinking.  And leaders are often the prime examples of this tendency at work.  Witness the Internet bubble of the late 1990s and very early 2000s.  We see another leader, or several leaders, doing something, and we doubt our current position and wonder if that other leader or those other leaders know something we don’t.  This tendency is intensified by stress or puzzlement.  It’s why cults target people who are out of sorts, feeling lost. By the way, this tendency is just as potent when it comes to omission as commission.  We are often lulled into inaction by the inaction of others, when we know in our hearts we should be acting.  

From Poor Charlie’s Almanack (2005), a compilation of the wit and wisdom of Charles T. Munger.

In the "Psychology of Human Misjudgment," Charlie Munger, Warren Buffet’s long-time business partner, assembled a list of 25 psychology-based tendencies that, while often useful, often mislead.

Number 10 - Influence-from-Mere-Association Tendency.  You know this one.  The one that makes beer producers put beautiful women in their television ads.  More insidiously, the one that makes makers of some products charge a high price, knowing that many consumers associate that with quality.  This one is at work constantly, often working on the sub- and even unconscious level.  Another take on this is "to assume is to make an "ass" out of "u" and "me"."  

Munger talks about one bad effect of this tendency, what he calls the "Persian Messenger Syndrome."  Ancient Persians would kill the messenger of bad news.  Today, it’s what makes some lawyers keep toiling away on a bad case, rather than tell their client what they know in their heart.  It’s what makes subordinates shy away from telling leaders what is really happening in the market or in their shop. Antidote: build a culture, as Warren Buffet has done at Berkshire, of welcoming bad news, even before the good news.

Number 11 - Simple, Pain-Avoiding Psychological Denial Tendency.  The reality is too painful to bear, so distort the facts until they become bearable.  I worked with the board of a company once that did this for several years with respect to the extremely poor performance of its CEO, only because the pain of having to replace him seemed  too great to bear. 

Number 12 - Excessive Self-Regard Tendency.  We all know this one.  The one that leads ninety percent of Swedish drivers to rate themselves as above average.  It also applies to one’s major relationships and possessions.  We tend to over-appraise our spouses, children, cars, homes, you-name-it.  And then we tend to prefer people who are most like ourselves.  (Think about the negative effect of this in the hiring process.)  And we tend to like our decisions a lot after we have made them, often more than is objectively justified.

Antidote: force yourself to be more objective when thinking about yourself, your family and friends, your property, and the value of your future and past activity.  It’s not easy, but will serve you better than simply letting this natural tendency take its course.  (Chapter One of my book, The Source of Leadership, deals with employing presence as a means of achieving, among other things, higher conscious awareness.)

From Poor Charlie’s Almanack (2005), a compilation of the wit and wisdom of Charles T. Munger.