Book notes: Poor Charlie’s Almanack

The book is a collection of speeches that Charlie Munger, partner of Warren Buffett at Berkshire Hathaway, gave over the years (1986 - 2007) at universities and institutions.

I found four interesting themes across the speeches:

Advocating interdisciplinary collaboration between university departments

He believes that the social sciences, especially economics and psychology, are focusing on too narrow theoretical problems. Academics suffer from a man-with-a-hammer-syndrome. He suggests that they collaborate more across departments, e.g. economics borrowing from psychology, and within departments, e.g. macroeconomists shouldn’t avoid microeconomic explanations. Moreover, the social science should try to incorporate findings / models from the hard sciences (physics, chemistry, etc.) and attribute properly.

Fraud and advice for endowment funds

In some of his talks, he uses fictional examples of companies to show the problems with accounting and financial engineering fraud.

He thinks that charitable foundations and endowment funds should as much as possible avoid wasteful investment practices. He criticizes the trend of university endowment funds to employ layers of analysts and consultants to use fund of funds. These multilayered systems erode a large chunk of the endowment funds’ returns when compared to simpler alternatives, like unlevered domestic equity indices. He directly criticizes the practices of his audience of consultants and fund managers in talk six, but he uses humour and self-deprecation to get away with it.

(Inverted) Advice for Graduates

In his commencement speeches for university graduates, he gives advice on how to guarantee misery in life.

1. Be unreliable.
2. Don’t learn from other’s mistakes. Instead, make common mistakes of others again (join a cult, drive while drunk, gamble) and don’t learn from people that came before you.
3. Give up after adversity and failures. Just give up when the inevitable hard times occur.
4. Don’t ever invert. Don’t attempt to learn from thinking about achieving the opposite of your goals. Don’t try to be objective.

Mental checklist to analyse problems

A recurring topic in his speeches is a checklist of mental models and human biases. He developed this checklist over time and iterated through it when analysing a problem or evaluating an investment. Using appropriate checklists and the inversion technique   are two main tools that he promotes for better thinking.

Here are 25 human biases from talk eleven: The Psychology of Human Misjudgment   .

1. Reward and Punishment Superresponse Tendency: If you want to persuade people, appeal to their own interests. Ensure the incentives of people you work with are aligned with the outcome you want. Don’t reward them for metrics that they can easily game.

2. Liking/Loving Tendency: People are seeking love and approval from other people. Moreover, we favour people and products that are merely associated with the target of our affection. We can use this to our advantage by liking truly admirable people or ideas.

3. Disliking/Hating Tendency: People can have a tendency to dislike things different to them or products or people that are associated with the object of their dislike.

4. Doubt-Avoidance Tendency: Our brains are conditioned to quickly remove doubt after reaching a first decision. This tendency should be countered by forcing a delay for reflection before an important decision, e.g. jury decisions in court.

5. Inconsistency-Avoidance Tendency: A tendency to stick to previous conclusions, habits, and ideas to avoid change. Practically, this means that it is much easier to prevent a bad habit than to change it. To counter this tendency, we should force the discussion of counterarguments before a decision can be made. This tendency can be used to manipulate people (see also Ben Franklin effect   , Cialdini’s consistency principle   .

6. Curiosity Tendency: Humans have a general tendency to be curious, which can be supercharged with today’s access to information. This fortunate tendency should be used to counteract other psychological tendencies.

7. Kantian Fairness Tendency: People have a tendency in direct interactions to behave fairly (following Kant’s categorical imperative).

8. Envy/Jealously Tendency: People’s tendency to envy someone else’s status, wealth, or compensation. “It is not greed that drives the world but envy.” (Buffett)

9. Reciprocation Tendency: People have a tendency to reciprocate favours and disfavours. This can also be used for manipulation, e.g. a salesman could do you a small favour to get a much better outcome in negotiation.

10. Influence-from-Mere-Association Tendency: Valuing something by the association with another unrelated factor/idea/concept. Examples:

    • association of quality with the highest price
    • purchasing of luxury items to boost status
    • advertising of products with unrelated but positive images
    • associating one’s ability with past successes and making bad decisions
    • thinking of someone worse because they are a competitor

11. Simple Pain-Avoiding Psychological Denial: Denying reality because it is too painful to accept, e.g. addition, bankruptcy.

    • Denial a reality that’s too painful to accept, e.g. addiction to alcohol.

12. Excessive Self-Regard Tendency: People’s tendency to overestimate their abilities, decisions, and posessions. Moreover, their preference of people that are similar to them.

13. Overoptimism Tendency: A tendency to be overly optimistic of the future, especially if one has done well in the past.

14. Deprival-Superreaction Tendency: Reacting stronger to losses than to gains, e.g. losing $10 is considered worse than gaining $10. Irrational overreaction to threatened loss of status, territory, love, friendship, or property.

15. Social-Proof Tendency: A tendency to act and think the same way as people around you (Group-think).

16. Contrast-Misreaction Tendency: Making bad decisions by anchoring on an irrelevant comparison. Examples:

    • Adding $1000 of useless add-ons to a car only because the car costs $65k.
    • A real estate agent presenting 3 terrible and expensive houses, then showing a merely bad house to make it look more desirable.

17. Stress-Influence Tendency: Light stress can increase performance temporarily, while heavy stress can cause dysfunctional thinking and bad decision-making.

18. Availability-Misweighting Tendency: Tendency to overweight or overvalue things (people, decisions, work, ideas) that are close or readily accessible to you. This also holds for metrics that are easy to measure and actions that easy to take. This can be countered by following checklists of actions and by considering more difficult (or less accessible) alternatives.

19. Use-It-or-Lose-It Tendency: Over time, our skills and knowledge fades. Therefore we should deliberately train and repeat the skills we want to retain. Write them down as a checklist and work through them regularly.

20. Drug-Misinfluence Tendency: Most people can’t handle drugs responsibly over a long period of time. Not worth trying to prove that you can.

21. Senescence-Misinfluence Tendency: Older people have a harder time to learn new skills. Knowing this, the best counter is to actively maintain the accumulated knowledge, see 19).

22. Authority-Misinfluence Tendency: Tendency to blindly follow the leader (see also: HiPPO effect   ).

23. Twaddle Tendency: Some people waste time talking about things they are not an expert in. Try to separate these people from and follow the experts.

24. Reason-Respecting Tendency: People can learn better when they can think through the reasons behind a directive or action. Therefore, when giving orders explain your reasoning.

25. Lollapalooza Tendency: Often multiple human biases act together to drive a certain behaviour or outcome.

Conclusion

I gave only 3/5 stars because the format of reading his talks didn’t appeal to me. I was already aware of most of the human biases listed by Munger. Some are discussed in Thinking Fast and Slow (2011)   and Influence: Science and Practice (2001)   . However, what I found impressive is that he talked about and used these biases already 20 years ago, before they were widely discussed. I also liked that in many speeches he directly criticizes the audience that invited him to speak. However, he does it in a charming and humorous way.