Poor Charlie’s Almanack: The Wit and Wisdom of Charlie Munger

Today we’re going to talk about Poor Charlie’s Almanack (The Wit and Wisdom of Charlie Munger). This is by Charlie Munger, who’s the billionaire partner of Warren Buffet at Berkshire Hathaway, and some people argue one of the smartest men alive. This is a pretty unique book… I’d say it’s a combination between a text book, graphic novel, and self-improvement. It’s also relatively expensive (Amazon has it around $60 today), and huge. So, I’ll be completely honest: I’ve had this book for years, and I still haven’t read everything in it. There’s that much good stuff.

Today, we’re going to go over a section near the end that’s about 50 pages, and Charlie refers to as 25 psychology-based tendencies. Other people have referred to these as cognitive biases, and basically, they’re just instances where our brain is strongly influenced for one reason or another. We can’t stop the influence, but, by being aware of them, we can limit the damage they have on our lives, and, if we learn them really well, we can use them to our advantage in arenas like marketing our products. Because there are 25 of these, I’ll just go over each one and give my two cents. Down the line, we can always talk more about this book!

But first let’s start with a quote, and in case you didn’t get the reference in the title, he’s a huge fan of Benjamin Franklin and self-improvement, as am I, and this quote reflects that: “I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were when they got up and boy does that help, particularly when you have a long run ahead of you.” This is a great way to keep your eye on the prize when you’re working away in your daily routine. We can’t expect everything to happen overnight, but if we keep bettering ourselves, we can be confident that life will improve steadily.

So, let’s jump right into the “golden nuggets” for today, which are going to be these 25 cognitive biases. They’re all listed here, and let’s just go over them one at a time. Just remember that these are all tendencies that your brain has developed through evolution for one reason or another. Try to put them in the context of how you interact with another person, an advertisement, a book. Don’t try to beat them, because they’re part of you; instead, consider how you can make yourself more aware of the tendencies you have and, by doing so, take greater control over your life. At the end, I’ll give a great example of a situation where there are so many of these in play that it’s almost impossible to make rational decisions.

Reward and punishment – Charlie puts this first and says that you can’t overestimate its influence. He says every year he thinks he has a grip on it, and they something happens that shows that it’s even more influential than he thought. Fortunately, it’s easy to wrap your head around this one: People respond to incentives. I love thinking about this in jobs: If I’m an hourly employee, I’m incentivized to work for hours. If I’m a salaried employee, I’m incentive to work as little time as possible. If I work on commission, I’m incentivized to drive sales. Obviously it’s never quite this simple—you don’t want to get fired, you take pride in your work etc.—but this is the tendency. Ben Franklin says “if you would persuade, appeal to interest and not to reason.”

Liking/loving – This one’s pretty easy: It says that we will like and love whatever likes and loves us. How do you react differently to a dog that comes up to you wagging its tail versus one baring its teeth?

Disliking/hating – Just the opposite of #2. In, fact, they could probably be combined.

Doubt-avoidance – This could also be described as the “certainty bias,” and it just means that we’re programmed to make decisions. For this one, I think of the whole “fight or flight” response. Throughout our evolution, when we were threatened, we had to choose one or the other, and it didn’t do us any good to sit down and ponder all of our options.

Inconsistency-avoidance – It’s a lot easier to keep doing what we’ve been doing than to challenge our actions. And this is why I think it’s so important. Otherwise, we develop a bunch of bad habits that never go away. This is why what we learned about breaking bad habits and creating good ones in Awaken The Giant Within is so important.

Curiosity – humans are naturally curious. We’re learning machines, like Munger said, and anything that makes us wonder what’s behind the curtain will grab our attention.

Kantian Fairness – This is the “golden rule:” Treat others as you would like to be treated. Most people have enough empathy to follow this for the most part, but we also understand that fairness is needed to a degree for any society to function. I think this will become more and more important as our population grows…

Envy/jealousy – It’s easy to want what other people have, because it represents survival in most cases. Having food, shelter, or just stuff is something we all want. This one makes it important to understand our own definition of success, so we don’t get caught chasing crap that won’t really make us happy.

Reciprocation – You scratch my back, I’ll scratch yours.

Influence-from-mere-association – Any friend of Joe’s is a friend of mine.

Simple, pain-avoiding psychological denial – Denial is so dangerous. All we can do is look in the mirror and try to be honest with ourselves.

Excessive self-regard – This is just narcissism. When good things happen to us, we give ourselves credit, and when bad things happen, we blame outside forces. We need to be more aware.

Over optimism – The sun will come out tomorrow…

Deprival-superreaction – This one’s really interesting. It basically says that if we gain something that gives us pleasure, we will feel even more pain by losing it. I love the GPS on my phone, but if it were taken away from me for good, I don’t know what I would do with myself! Even though, once upon a time, I didn’t have it, need it, or appreciate it.

Social-proof – Monkey see, monkey do.

Contrast-misreaction – A great example is when you see a price that’s crossed out, and then a “lower” price offered. Whatever the actual price is, it looks better. I think this one is paramount to think about in other areas of our lives. For example, if I make $30K per year, it’s hard to even imagine making $1M a year. But we can do two things: 1) We can appreciate making an increase to $35K per year, because it’s a nice bump, and 2) we can put ourselves around people and learn how they make $1M a year, so we can adjust our understanding of what’s possible. This applies to everything in life, not just money.

Stress-influence says that hormones like cortisol and adrenaline will affect how we behave.

Availability-misweighing – A great example of this is if you’ve ever played Apples to Apples, or maybe Cards Against Humanity, people are more likely to pick the last card they read, because it’s fresh in their mind.

Use-it-or-lose-it – as it applies to skills, we need to use them as often as possible, or we will forget and deteriorate. Practice makes perfect.

Drug-misinfluence – Alcohol’s lowering of inhibitions is an easy example.

Senescense-misinfluence – We can’t live forever, and age does affect us.

Authority-misinfluence – We pay more attention to someone who’s in charge or clearly an expert. This is one reason why I think writing a book is so valuable for a knowledge business: It shows everyone that you are the expert.

Twaddle – I remember tests in elementary school where we had to give essay answers. When I was completely clueless, I would just write something as close to the subject as I could to show I at least knew something and hopefully get partial credit. Twaddle is just blabbing and talking too much in an effort to get attention or demonstrate ability. I’ve found it’s usually the people who listen and are quiet that actually know what they’re talking about when they choose to.

Reason-respecting – Even though Ben Franklin said don’t appeal to reason, it still has some value, just not as much as interest. We all like solving puzzles and understanding how things work.

Lollapalooza is a fun word that Charlie uses to describe a situation in which multiple of these tendencies come together to be extremely influential.

A great example of this is at an Auction. So many of these are in effect that it’s almost impossible to make a rational decision. This is especially true at a live auction, but a lot of research has been done on ebay and other online auction sites too that show the outcome is still the same: People pay higher prices at auctions than they expect and that they normally would. Let’s look at some that are in effect:

Reward is obvious—you want what he auctioneer has. The auctioneer himself is an authority figure, being up on a pedestal usually. You’re surrounded by other people all bidding on the same stuff, so it must be a good idea. People go into an auction hoping to get a better deal. There’s extreme urgency as the auctioneer talks so fast it makes your head spin. Every bid is a small increase to the one before, so your contrast is all messed up. It’s extremely available right in your face. There’s stress in the auctioneer’s voice, in the people around you, and in your desire to be the winner. You could probably think of how more apply as well, but we’ll stop there, and move onto the summary.

I’m pretty sure I’ll revisit this book at some point, there’s so much good stuff in it. I hope you all are working your way through books, articles, and other ways to improve your skills and overall awareness and knowledge. But today’s summary is just that there are countless stimuli flying at us from all directions these days, so we have to be aware of our tendencies to be influenced by them, and keep our FOCUS on what we want.

Exercise time. Comment below for each of these, and see what other people are saying. 1) What’s a situation where you or someone else responded perfectly to incentive? 2) Which of the other tendencies are you frequently affected by? And 3) Can you think of another situation where Lollapalooza happens?

Thanks everyone, and I hope to see you in the next one!