Psychological Biases That Cause Us to Make Bad Decisions
I recently read an article by Michael Simmons in which he summarizes Charlie Munger’s views on the psychological biases that humans unconsciously use while making decisions. The premise is that these biases normally lead to poor decisions but being aware of them enables you to make critical decisions correctly and protect yourself from manipulation.
I found this topic very interesting and wanted to briefly write about it, not only to share with others, but to help me internalize the main ideas and to serve as a reference for the future. Note that I make no pretense of trying to be comprehensive here – if you wish to learn more about this, I suggest reading the original article at the very least, if not Munger’s own writing.
Here is my outline of these psychological biases, borrowing very liberally from the original article:
1. Reward & Punishment Superresponse Tendency
- People are motivated by incentives. Think “what’s in it for them?”
- Understanding this, you can: influence others, protect yourself from bad advice, influence yourself.
- Munger’s ‘Granny Rule’: “children eat their carrots before they get dessert.” Get your hardest work done before rewarding yourself.
2. Liking/Loving Tendency
- Aka in-group bias. We favor people we like to the point of irrationality.
- To keep liking them, we: distort facts, ignore faults, comply with wishes, favor associated things.
- We go to great lengths to be liked by others.
3. Disliking/Hating Tendency
- We disfavor people we already dislike to the point of irrationality.
- Results in: ignoring virtues of people/organizations we dislike, disliking associated things, distorting facts.
4. Doubt/Avoidance Tendency
- Brain resolves open issues (i.e. cognitive dissonance) by making decisions. To make speedy decisions, we eliminate potential doubts; this can cause mistakes.
- This tendency is triggered by puzzlement and stress.
- Force yourself to take a break / delay before making a decision.
5. Inconsistency-Avoidance Tendency
- We rarely do things inconsistent with our identity, beliefs and habits. We are reluctant to change our habits, especially bad ones. Such bad habits include biased thinking patterns, which lead to cognitive errors.
- Every action you take leads to good habits or bad habits. Endeavour to constantly create new positive habits.
- Be careful about the beliefs you take on. Find ways to challenge your preconceived beliefs.
6. Curiosity Tendency
- Curiosity counters negative effects of other psychological tendencies. Lets us enjoy learning.
7. Kantian Fairness Tendency
- When we are not treated fairly, we become angry. When one person feels betrayed by another, he may not act in his own immediately self-interest, in order to punish the other person.
8. Envy/Jealousy Tendency
- Evolutionary desire to own others’ possessions leads to worse situations. We feel the most jealous of other people when they’re close to us (i.e. sibling, friend) or outcompeting us in areas important to us.
- Disarm other people’s jealousy of you with vulnerability.
- Practice mindfulness when you feel jealous or envious – accept your emotions.
9. Reciprocation Tendency
- If people give to us, we feel we owe back. Companies can use this to: start a relationship by giving something, negotiate by asking for something unrealistic at first, use the ‘foot in the door’ technique (Franklin Effect).
- Start and develop relationships by proactively giving. Most people will reciprocate.
10. Influence-From-Mere-Association Tendency
- We perceive things based on who/what they are associated with. Advertisers use this. Aka classical conditioning.
- If we link a past event where we got lucky to skill rather than luck, we will make poor choices about the future. Note: This is discussed much further in Nassim Nicholas Taleb’s book Fooled By Randomness.
- When examining past successes, look for accidental, non-causative factors associated with them; these tend to mislead as you evaluate the odds of success of a new undertaking. Look for dangerous aspects of the new undertaking that were not present when past success occurred.
- Don’t shoot the messenger – make a habit of welcoming bad news to counter this tendency.
11. Pain-Avoiding Psychological Denial
- We distort facts to avoid psychological discomfort (aka cognitive dissonance).
- If we make a habit of this, we’ll develop a distorted view of reality and train other people not to tell us the truth.
12. Excessive Self-Regard Tendency
- We are overconfident, thinking we’re better than the average person.
- “Man’s excess self-regard makes one strongly prefer people like himself” (known as homophily).
- “Even man’s minor possessions tend to be over-appraised” (see endowment effect).
- Force yourself to be more objective when you are thinking about yourself, family, your property and value of your activity.
13. Over-Optimism Tendency
- We tend to be foolishly optimistic without calculating risks. We overestimate how much control we have over good future outcomes.
- “One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal.”
14. Deprival-Superreaction Tendency
- We intensely react to any real loss or potential loss irrationally. Note: This is also touched on in the book Fooled By Randomness.
15. Social-Proof Tendency
- We make a huge number of decisions based on others’ actions. In fact, a small group of people can make us question our own reality.
- This tendency easily triggered in the presence of puzzlement and stress.
- Entrepreneurs who create public social proof of their product (i.e. positive customer reviews) get more sales.
- “It is not only action by others that misleads, but also their inaction. In the presence of doubt, inaction by others becomes social proof that inaction is the right course.”
- “Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.”
16. Contrast-Misreaction Tendency
- Our attention goes to sudden changes. We notice value by contrasting it with something else.
- “The stock market is filled with individuals who know the price of everything but the value of nothing.”
- “Cognition, mislead by tiny changes involving low contrast, will often miss a trend that is destiny.”
- Train yourself to notice mall changes that other people miss. Train yourself to make small changes to your habits.
17. Stress-Influence Tendency
- Some stress helps focus, too much destroys decision making capabilities. We must learn to manage stress.
- Listen to your body. Meditate. Rest.
18. Availability-Misweighing Tendency
- We overemphasize information that is most available and vivid from our surroundings and mind. Aka availability bias.
- By painting a vivid picture of something, we can influence others or keep ideas in our own memories.
- In group environments, simple explanations of complex phenomena can rapidly spread even if they’re wrong (known as availability cascade).
- Train yourself to brainstorm all possibilities openly rather than jumping on your first conclusions. Use a checklist or procedure to curb this tendency.
- Always look for evidence that disproves your points. Assign a devil advocate role to someone you trust. In meetings, let other people talk first so you don’t bias how they respond.
19. Authority-Misinfluence Tendency
- We trust leaders too much. We also trust them in areas where they are not experts (aka Halo Effect).
20. Twaddle Tendency
- People tend to talk a lot about things they’re not an expert in. Surround yourself with people who show restraint in sharing their opinions until they’re more proven or thought through.
21. Reason-Respecting Tendency
- Before doing things, we love to have reasons. When delegating things to others, share the reasons why the task is important.
- When asking for a favor from a stranger, simply giving a reason for the request, even if it’s artificial, greatly increases the odds of the person complying.
- Keep track of the evidence for your valid beliefs so that when you explain it to others, it makes sense.
22. Lollapalooza Tendency
- Multiple psychological tendencies acting in favor of a particular outcome leads to extreme consequences.
- Effects can bolster each other. Effects can also cancel each other out.
Checklists allow Munger to use the right models at the right time when he’s making important decisions.
The following checklist is proposed in the book Seeking Wisdom (endorsed by Charlie Munger and Warren Buffett) for understanding the impact of our biases on any given decision:
- What is causing me to do this?
- What is the context?
- Can I judge him?
- What is in his self-interest to do?
- What are the psychological tendencies and shortcuts that influence him and can cause misjudgment?
- What are the consequences?
- What system would I like to have if the roles were reversed?
- Is this the right system?
Two-track Analysis – When analyzing any situation in which decision-making by people is involved, Munger considers two tracks:
- How they would act if they behaved rationally, according to their true best interests.
- How they would succumb to the pull of a number of irrational psychological biases that seem to be “programmed” into the human brain.