Wide Angle 33 - Psychology of Human Misjudgment

This time I am going to write about something totally different. I happened to read an article which is actually a speech given by Charlie Munger at Harvard Business School, who is Warren Buffett’s partner and right hand man at Berkshire Hathway. He is known for his quotes, writings and lucid wisdom. If you are interested in reading practically sensible things, read “Poor Charlie’s Almanack” which is a very famous book by Munger. I intend to someday but haven’t saved enough money yet to buy it . Anyway, today I write out of his article which is called “The Psychology of Human Misjudgment” which I found on the net. I thought this was really interesting therefore I am writing about it, folks can do their own research on the concepts mentioned here. The article lists down about 21 factors which contribute towards misjudgment individually or in combination and lead to blunders. Let us go through them:

1. Under recognition of the power of incentives: Very self-explanatory. The underlying motivation behind every human action is incentives. These are both positive and negative but in the absence of them, there will be no action. Biggest difference is between the public sector or the government where there is no negative incentive for people to perform while in private sector there is (the threat of sacking) hence the difference in performance. Those who do not recognize the power of incentives are prone to misjudgment.

2. Simple psychological denial: An example is that mothers of criminals or terrorists continue to believe that their “boy” is innocent. The reality is too painful so the mind distorts it till it is bearable. This is a big cause of misjudgment.

3. Incentive cause bias: This simply means that to every man with a hammer, every object seems like a nail. A salt salesman always has the urge to tell everyone how much salt he needs. Wherever there is incentive, there is bound to be a bit of fib with the truth and that may lead to misjudgment in the minds of the receiving party as well as the salesman.

4. A little worded but in Munger’s own words – a superpower in error-causing psychological tendency: bias from consistency and commitment tendency: This means that once the mind is committed to believing something, there is an ability to shut it off to let any diverse opinion in. This is typically the case regarding religious beliefs – people are taught something in childhood which they believe. Even if shown contrary evidence after they grow up, they find it difficult to let go of the beliefs imbibed in child hood. This is a tendency to avoid or promptly resolve “cognitive dissonance” – this means that the human mind does not like to hold two differing thoughts in their mind at the same time (which is cognitive dissonance broadly) and hence tries to resolve it to the nearest deeply held belief.

5. Bias from Pavlovian association i.e. misconstruing past correlation as a reliable basis for decision making: A Russian scientist named Pavlov is very famous for his path breaking experiments with dogs where he demonstrated through experiments that dogs remembered different stimuli like ringing of a bell, smell of food, electric shocks and drooled or performed physical acts accordingly. This is true for us too, we often react to situations based on previous experiences and through formulations.

6. Bias from Reciprocation Tendency including the tendency of one person to act as other expect of him: This is out of the concept of “Influence: the psychology of persuasion” by Robert Cialidini. He has written a famous book called “Influence at work” wherein he has described six influences at work that make human beings act in the way they do. Reciprocation is one of them wherein one person acts the way he does because someone else has done the same for him or because his family/society expect that out of him. Very common cause of misjudgment.

7. Bias from Over influence by social proof – this simply means the belief that if ten people are doing something, it must be right and hence accepted. Most recent example of the Satyam board members – all prominent and wise personalities that simply rubber stamped Raju’s decisions because they saw no one else objecting. This also explains why in India, people stand around and look when someone is being murdered and do not interfere because the agreed wisdom is that there will be “trouble” if they do.

8. The efficient market theory: I haven’t explored this one in detail but something that the economists and the bankers did relying completely on math to solve problem and being sure that the market was efficient and worked the way they expected it to.

9. Bias from contrast-caused distortions of sensation, perception and cognition: This follows from that famous experiment that Einstein quoted where there are three buckets of water - one hot, one cold and the third lukewarm. To the person who dips his hand first in the cold water and then the lukewarm water, the water feels hot. To the person that dips hand first in the hot water, the lukewarm water feels cold. This is true of human experiences as well. Women who live in terrible homes before marriage settle for the first available person and may end up in terrible marriages simply because they had come to expect less from life.

10. Bias from Over influence by authority: There are a series of famous experiments under the title “Milgram experiments”. These were devised by a Yale psychologist Stanley Miligram who demonstrated that otherwise ordinary people go out of their way to be evil to their counterparts just to obey an authority figure and when given unlimited powers over the subjects. The study was aimed primarily to ascertain why ordinary Germans treated the Jews the way did under Hitler. You can read up on these experiments – they are quite fascinating. This is one bias that leads to misjudgment.

11. Bias from deprival super-reaction syndrome, including bias caused by present or threatened scarcity – Simply put, people react extremely violently and out of proportion to minor decrements to things they already have. Munger mentions about the Pavlovian dog who bites if you try to take a ball that is in its mouth. Notice the extreme reaction to the 9.15 hours rule, in my opinion, it was a simple reinforcement of a logical expectation from the organization but people perceived it as a decrement and this caused the deprival super reaction syndrome.

12. Bias from envy/jealousy – Munger says he has often heard Warren Buffett saying “It is not greed that drives the world but envy”. The whole Mahabharat happened because of Duryodhan’s envy for his cousins. This bias does not need more elaboration, everyone is familiar with it. I guess the hardest thing is to recognize it in oneself and tame it towards motivating oneself rather than burn with envy.

13. Bias from chemical dependency – I am assuming this is about physical dependency on substances.

14. Bias from mis-gambling compulsion – In essence this is about the tendency of human beings to think that it is alright to gamble on something because “I am doing it so it must be alright”. People fail to recognize that they are gambling and that it is a problem. There is an element of the commitment tendency here i.e. since one is committed to the decision, it has to be gone through. An example if Yudishthir’s suicidal game of dice with Shakuni that lost him everything.

15. This one is beautiful – quoting Munger fully – Bias from liking distortion, including the tendency to especially oneself, one’s own kind and one’s own idea structures, and the tendency to be especially susceptible to being misled by someone liked. Disliking distortion, bias from that, the reciprocal of liking distortion and the tendency not to learn appropriately from someone disliked: Need I explain more, Indian business and politics is full of examples. This bias is ripe to cause misjudgment.

16. Bias from non-mathematical nature of the human brain in its natural state as it deals with probabilities employing crude heuristics (heuristic is an adjective for experience-based techniques that help in problem solving) – basically people find ways out of a situation using ways and information that are more convenient to them than the contrary.

17. Bias from over-influence by extra-vivid evidence: Sometimes the evidence is so vivid and in your face that you tend to ignore it simply because it is so. I haven’t understood this one completely but Munger has given an example of him not buying 1500 extra shares from the director of a company simply because it seemed too good to be true. He ended up losing an extra $30 million because of not buying the shares.

18. Other normal limitations of sensation, memory, cognition and knowledge.

19. Stress-induced mental changes, small and large, temporary and permanent: Quite self explanatory, being stressed makes us make errors in judgment which may seem like silly blunders later on.

20. Common mental illnesses and declines, temporary and permanent, including the tendency to lose ability through disuse.

21. Finally – the developmental and organizational confusion from the say-something syndrome: Munger describes the case of the honey bee. The honeybee goes and finds the nectar in a flower and comes back and communicates this location to its cohorts through a coded dance. A scientist called Skinner placed the nectar straight up. The honeybee did go and fetch it but it had no way of conveying this to its friends since there exists no such signal. One would expect the honeybee to come back say nothing but it does a come into the hive and does an incoherent dance. We often see such people who have to say something for the sake of saying something.


Well, this is what Munger has to say about the causes behind human misjudgment. There may be a lot more that you folks may have observed in your life and careers. I wrote about this because life will simply get easier if we are able to figure out why certain people act the way they do in a certain situation. It is not always “Vinash kale viprit buddhi”, always more than that. Please let me know what you thought.