We tend to evaluate results in relative terms, not in absolutes. Others come from emotions that we attach to what we have, what donвЂ™t have and what we desire. Some thinking errors emerge from an improper reference point or framing of the problem. The second group of tendencies are based on the way we evaluate our estimates, preferences and desires. We should also endeavour to understand the basics of our advisorsвЂ™ trades to avoid those that sell snake oil. For individuals, Munger recommends we scrutinise the behaviours of ourselves and others in the context of the incentives we face. It goes without saying that organisations should maintain strong audit systems, implement policies to discourage misconduct, and punish wrongdoing when it takes place. Where strong incentives exist, Munger expects to find individuals that try to вЂgameвЂ™ the system. While the former is typically more productive and motivated, theyвЂ™re also more susceptible to misconduct. Here, Munger contrasts commissions-driven sales teams with fixed-wage sales teams. The choice and design of incentives have important consequences. ItвЂ™s hard to imagine management consultants, for example, recommend their clients to spend less on consulting services. One by-product of this is an incentive-caused bias, where we rationalise our behaviours and choices due to the incentives we face. Incentives play an important role in our decision making process. And systems that reward good (bad) behaviour, will produce good (bad) habits. Benjamin Franklin, Poor RichardвЂ™s Almanack. вЂњIf you would persuade, appeal to interest and not to reasonвЂќ. Reward and punishment super-response tendency He spends a great deal of his speech talking about incentives, one indicator of its relative importance. Munger refers to them as the reward and punishment super-responses. The first class of tendencies refer to incentives that individuals, groups and systems face. While these sub-classes arenвЂ™t perfect by any means, itвЂ™s helped me to grasp his ideas. So, IвЂ™ve taken some liberties and reordered them into seven themes. This makes MungerвЂ™s tendencies difficult to remember. ItвЂ™s a pretty long list, filled with somewhat unusual names like the deprival super reaction tendency. Munger identified twenty five tendencies that lead to common thinking errors. (I donвЂ™t think IвЂ™ve seen a bigger book endorsement than that.) Tendencies in human misjudgement He even gave Cialdini one share of Class A Berkshire stock as a thank you. In fact, Munger enjoyed CialdiniвЂ™s book so much that he sent copies of it to all his children. One can see the traces of Cialdini in MungerвЂ™s speech. CialdiniвЂ™s described six tendencies that cause people to act in predictable, automatic and sometimes exploitable ways: (1) reciprocation, (2) commitment and consistency), (3) social proof, (4) authority, (5) liking and (6) scarcity. The psychology of persuasionД«efore diving in, itвЂ™s worth noting Robert CialdiniвЂ™s Influence: The Psychology of Persuasion and its impact on MungerвЂ™s thinking. This post summarises the key lessons I took from MungerвЂ™s speech. Dissatisfied with academic psychology, he developed his own model for standard thinking errors, which he kindly shared in his 1995 speech: The Psychology of Human Misjudgement. ItвЂ™s why Charlie Munger has held a lifelong interest in human cognition. We can make better decisions if we understand why people make poor choices and look for ways to avoid the same mistakes.

Charlie munger 1995 speech