Psychology of Human Misjudgement

AuthorMinerva Review / Posted on1 Comment

In a speech to Harvard University in 1995, Charlie Munger presented a framework, based on his lifetime’s observation of human behaviour, to describe common causes of patterned irrationality and misjudgement in human decision making.

These behavioural tendencies reflect a part of our programming from millennia of human evolution, and as a part of broader psychological, social and economic forces. These traits are not necessarily good or bad, noting that such rules of thumb can help individuals to make sound decisions when mental capacity or resources are constrained. In other situations (Munger cites Tupperware parties or the Milgrim experiment as examples), these biases can contribute to irrationality and misjudgement. Munger further highlights that the capacity to change or bias behaviour greatly increases when these psychological tendencies combine.

While neither all-encompassing or tautology-free, Munger describes this psychological thought system as a very useful tool to encourage wisdom and good conduct if it is well understood and used constructively by its user. A brief outline is presented below.

Standard Causes of Human Misjudgement

  1. Under-recognition of the power of incentives or ‘reinforcement’ bias;
  2. Simple psychological denial;
  3. Incentive-cause bias or agency costs in one’s own mind or of one’s trusted adviser (e.g. conflicts of interest);
  4. Bias from consistency and commitment tendency. This includes the tendency to avoid or resolve cognitive dissonance, and the self-confirmation tendency of conclusions (particularly if they’re hard won and/or already expressed);
  5. Bias from Pavlovian association or misconstruing past correlation as a reliable basis for decision making;
  6. Bias from reciprocation tendency, including the tendency to act as other people expect;
  7. Bias from over-influence by social proof (i.e. conclusions of others), particularly during uncertainty or under stress;
  8. Bias from over-reliance on elegant or simplified solutions and models for thinking;
  9. Bias from contrast-caused distortions of sensation, perception and cognition;
  10. Bias from over-influence by authority;
  11. Bias from overreaction to fear of missing out or deprival. This includes bias caused by present or threatened scarcity, and bias caused by threatened removal of something almost but never possessed;
  12. Bias from envy or jealousy;
  13. Bias from chemical dependency;
  14. Bias from mis-gambling compulsion;
  15. Bias from liking/disliking distortion. This includes the tendency to like oneself and one’s conclusions, and to dismiss the lessons or conclusions of others that are disliked;
  16. Bias from the non-mathematical nature of the human brain as it deals with probabilities through crude heuristics. This includes the tendency to be misled by mere contrast, to over weigh conveniently available information;
  17. Bias from extra-vivid evidence
  18. Confusion or mis-influence from generalisations or inadequate information when answering the question “Why?”
  19. Stress-induced mental changes, small and large, temporary and permanent;
  20. Development and organisational confusion from say-something syndrome;
  21. Other normal limitations of sensation, memory, cognition and knowledge;
  22. Common mental illnesses and declines, temporary and permanent, including the tendency to lose ability through disuses;

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