The Psychology of Human Misjudgment: Timeless Lessons from Charlie Munger
Charlie Munger, the long-term business partner of Warren Buffett, died November 28th 2024 just 33 days before his 100th birthday. In his following annual letter Warren Buffett called him the architect of the present Berkshire Hathaway. Charlie was a special individual gifted with an incredible intellect, curiosity and desire to constantly learn. Luckily he was also ever keen on sharing his wisdom throughout his life in lectures, speeches, interviews and the famous Berkshire annual meetings. He drew a lot of inspiration from Benjamin Franklin conveying deep foundational messages in a witty way.
One of his greatest speeches was delivered in 1995 at Harvard University titled
The Psychology of Human Misjudgment. It dives deep into the cognitive biases and psychological tendencies that influence human decision making. Munger’s insights, rooted in behavioral psychology, remain remarkably relevant today, offering invaluable guidance for investors, business leaders, and anyone seeking to make better decisions.
Recognizing these tendencies/ biases is the first step toward better decision-making. By being aware of our biases, we can:
• Pause and Reflect: Before making decisions, especially significant ones, take a moment to consider if any biases might be influencing your judgment.
• Seek Diverse Perspectives: Engaging with individuals who have different viewpoints can help challenge our assumptions and reduce blind spots.
• Embrace Rationality: Strive to base decisions on logic and evidence rather than emotions or social pressures.
Do yourself a favour and read the speech in full, because the examples he provides illustrate the points he lays out much more thoroughly, but below is a list of the main principles he identifies in his speech:
1. Reward and Punishment Superresponse Tendency
People respond dramatically to incentives (both rewards and punishments).
2. Liking/Loving Tendency
We tend to favor people, products, and ideas that we like or love.
3. Disliking/Hating Tendency
Conversely, we distort facts to harm things or people we dislike or hate.
4. Doubt-Avoidance Tendency
When in doubt or uncertainty, humans want to quickly remove the doubt — often by making a hasty decision.
5. Inconsistency-Avoidance Tendency
We are reluctant to change, even when presented with new information that contradicts our previous beliefs or actions.
6. Curiosity Tendency
Humans naturally seek to understand and explore the unknown — though this can be suppressed in poor environments.
7. Kantian Fairness Tendency
A natural inclination toward fairness and reciprocity, even when it’s not rational.
8. Envy/Jealousy Tendency
We are deeply driven by feelings of envy and jealousy toward others' success or possessions.
9. Reciprocation Tendency
We feel compelled to return favors and reciprocate both good and bad actions.
10. Influence-from-Mere-Association Tendency
We tend to like or dislike something based on its association with something else, even if the connection is meaningless.
11. Simple, Pain-Avoiding Psychological Denial
People deny painful realities to avoid suffering or stress.
12. Excessive Self-Regard Tendency
Humans consistently overrate themselves and their own abilities.
13. Overoptimism Tendency
We are naturally prone to being overly optimistic, especially regarding our own actions or outcomes.
14. Deprival-Superreaction Tendency
Losses loom larger than gains — people react irrationally to even small losses or potential losses.
15. Social-Proof Tendency
People copy the actions of others, assuming if many are doing something, it must be correct.
16. Contrast-Misreaction Tendency
Perceptions are often distorted by comparisons — e.g., a $1,000 suit looks cheap next to a $10,000 suit.
17. Stress-Influence Tendency
Stress can severely distort judgment and decision-making.
18. Availability-Misweighing Tendency
We overweight information that is recent, vivid, or easy to recall rather than what is truly important.
19. Use-It-or-Lose-It Tendency
Skills and knowledge deteriorate when not used or practiced regularly.
20. Drug-Misinfluence Tendency
Substances (like alcohol or other drugs) can seriously impair judgment and thinking.
21. Senescence-Misinfluence Tendency
Aging naturally diminishes mental capacity and judgment.
22. Authority-Misinfluence Tendency
People tend to blindly obey authority figures, even against their own judgment.
23. Twaddle Tendency
Humans waste time and energy on trivial or foolish activities (talking nonsense, consuming junk media, etc.).
24. Reason-Respecting Tendency
We have a tendency to comply with requests when given any reason — even if the reason is irrelevant or irrational.
25. Lollapalooza Tendency
When multiple biases combine and reinforce each other, the effects can become extreme — leading to wildly irrational behavior.