Seeking Wisdom: From Darwin To Munger
It’s a compilation of ideas from other books about thought process debugging. At least the first half. Writing is concise. There’s a lot of deep quotes.
The second half was mostly about Buffet’s and Munger’s thoughts on investment bullshit so it was pretty useless.
“I read it in the New England Journal of Medicine, so it must be correct”.
Names and reputation influence us. And symbols of power or status like titles, possessions, rank, uniforms, or a nice suit and tie. For example, in one study 22 hospital nurses got a telephone call from an unknown physician and were ordered to administer an obvious overdose of an unauthorized drug. All but one nurse obeyed. Another example is when advertisers use famous people to endorse their products. But being famous doesn’t give people special expertise.
Ask: Could our explanation of the event help us predict future similar events?
Madness is a rare thing in individuals - but in groups, parties, peoples, and ages it is the rule.
In one experiment at Yale University, Psychology Professor Stanley Milgram tricked people by posing as an authority and caused normal people to impose what they had every reason to believe was intense pain to other people. The participants in the experiment were instructed to shock another person if they answered a question wrong. No real pain was delivered during the experiment.
But it showed that when we are given orders from what we believe to be a legitimate authority, we obey even if the result is that we end up hurting others. In later studies Milgram showed that obedience was maximized by first observing peers obey but dramatically reduced when peers rebelled, or when the victim acted like a masochist asking to be shocked. Milgram said in Obedience to Authority: “It is psychologically easy to ignore responsibility when one is only an immediate link in a chain of evil action”.
The public have an insatiable curiosity to know everything, except what is worth knowing.
He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged.
Always consider reliability, credibility, sensibility and bias.
To insure their trustworthiness, authorities often mention weaknesses before strengths and provide information that seems contrary to their interests. This technique is often used by salesmen and negotiators.
Noah principle: “Predicting rain doesn’t count; building arks does”
Today 14 million people didn’t win the lottery.
We base what is likely to happen on what we see. Not on what we don’t see. We don’t see what could have happened. We see the winners because they are vocal or visible and get media coverage. We don’t see the quiet losers.
Let’s look at the brokerage and investment banking business. Brokers have a strong incentive to get us to trade. They advise us what to buy and sell. Volume creates commissions. Investment bankers encourage overpriced acquisitions to generate fees. Investment bankers have every incentive to get initial public offerings (IPO) deals done, regardless of the company’s quality. Their compensation is tied to the revenues the deal brings in. Analysts are rewarded for helping sell the IPO. Brokers want to move the stock. What did Groucho Marx say? “I made a killing on Wall Street a few years ago .. I shot my broker”.
Evaluate people and objects by themselves and not by their contrast.
There’s no such thing as society. There are individual men and women, and there are families.
People’s interests are not only financial. They could also be social or moral. For example, public embarrassment, social exclusion, conscience, shame or guilt may cause people to stop some undesirable behavior. For example, by requiring restaurants to post hygiene quality scores in their front windows, the Los Angeles county health department caused a dramatic improvement in restaurant hygiene and a reduction in food-related illnesses.
The ancient Greek philosopher Plato said: “Do not train boys to learning by force and harshness, but lead them by what amuses them, so that they may better discover the bent of their minds.” Pressuring people or giving them orders often doesn’t work. It is better to convince people by asking questions that illuminate consequences. This causes them to think for themselves and makes it more likely that they discover what’s in their best interest.
Below is a list of 28 reasons for misjudgments and mistakes. It can be used as a checklist to explain or predict behavior or as a pilot’s checklist to avoid fooling ourselves. Each item on the list will be explained in the next chapter.
- Bias from mere association - automatically connecting a stimulus with pain or pleasure; including liking or disliking something associated with something bad or good. Includes seeing situations as identical because they seem similar. Also bias from Persian Messenger Syndrome - not wanting to be the carrier of bad news.
- Underestimating the power of rewards and punishment - people repeat actions that result in rewards and avoid actions that they are punished for.
- Underestimating bias from own self-interest and incentives.
- Self-serving bias - overly positive view of our abilities and future. Includes over-optimism.
- Self-deception and denial- distortion of reality to reduce pain or increase pleasure. Includes wishful thinking.
- Bias from consistency tendency - being consistent with our prior commitments and ideas even when acting against our best interest or in the face of disconfirming evidence. Includes confirmation bias - looking for evidence that confirms our actions and beliefs and ignoring or distorting disconfirming evidence.
- Bias from deprival syndrome - strongly reacting (including desiring and valuing more) when something we like and have (or almost have) is (or threatens to be) taken away or “lost.” Includes desiring and valuing more what we can’t have or what is (or threatens to be) less available.
- Status quo bias and do-nothing syndrome - keeping things the way they are. Includes minimizing effort and a preference for default options.
- Impatience - valuing the present more highly than the future.
- Bias from envy and jealousy.
- Distortion by contrast comparison - judging and perceiving the absolute magnitude of something not by itself but based only on its difference to something else presented closely in time or space or to some earlier adaptation level. Also underestimating the consequences over time of gradual changes.
- Bias from anchoring - over-weighing certain initial information as a reference point for future decisions.
- Over-influence by vivid or the most recent information.
- Omission and abstract blindness - only seeing stimuli we encounter or that grabs our attention, and neglecting important missing information or the abstract. Includes inattentional blindness.
- Bias from reciprocation tendency - repaying in kind what others have done for or to us like favors, concessions, information and attitudes.
- Bias from over-influence by liking tendency - believing, trusting and agreeing with people we know and like. Includes bias from over-desire for liking and social acceptance and for avoiding social disapproval. Also bias from disliking - our tendency to avoid and disagree with people we don’t like.
- Bias from over-influence by social proof - imitating the behavior of many others or similar others. Includes crowd folly.
- Bias from over-influence by authority - trusting and obeying a perceived authority or expert.
- Sensemaking - Constructing explanations that fit an outcome. Includes being too quick in drawing conclusions. Also thinking events that have happened were more predictable than they were.
- Reason-respecting - complying with requests merely because we’ve been given a reason. Includes underestimating the power in giving people reasons.
- Believing first and doubting later - believing what is not true, especially when distracted.
- Memory limitations - remembering selectively and wrong. Includes influence by suggestions.
- Do-something syndrome - acting without a sensible reason.
- Mental confusion from say-something syndrome - feeling a need to say something when we have nothing to say.
- Emotional arousal- making hasty judgments under the influence of intense emotions. Includes exaggerating the emotional impact of future events.
- Mental confusion from stress.
- Mental confusion from physical or psychological pain, the influence of chemicals or diseases.
- Bias from over-influence by the combined effect of many psychological tendencies operating together.
All commissioned salesmen have a tendency to serve the transaction instead of the truth. I put consultants in the same category, sometimes even lawyers - sometimes especially lawyers.
Many years ago, a Pasadena friend of mine made fishing tackle. I looked at this fishing tackle - it was green and purple and blue - I don’t think I’d ever seen anything like them. I asked him “God! Do fish bite these lures?” He said to me, “Charlie, I don’t sell to fish”.
A decision must be active.
Lucius Annaeus Seneca said: “There is nothing wrong with changing a plan when the situation has changed.”
Irish writer Jonathan Swift said: “A man should never be ashamed to own that he has been in the wrong, which is but saying, in other words, that he is wiser today than he was yesterday.”
J .M. Keynes said: “When somebody persuades me that I am wrong, I change my mind. What do you do?” Sometimes things don’t go the way we believe they will. The solution is to face it and act.
Charles Munger says: “We’ve done a lot of that - scrambled out of wrong decisions. I would argue that that’s a big part of having a reasonable record in life. You can’t avoid wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade”.
When people get us to commit, we become responsible. One experiment staged a theft to find out if onlookers would risk personal harm to stop a crime. A researcher sat on a beach blanket and listened to his portable radio five feet from the blanket of a randomly chosen person. After awhile, the researcher left the blanket to stroll the beach. A few minutes later a second researcher, pretending to be a thief, grabbed the radio and ran away. Four people out of twenty put themselves in harm by challenging the thief. But when the procedure was tried somewhat differently, nineteen people became vigilantes, and tried to stop the thief The difference? Before taking his stroll, the researcher asked the subject to “please watch my things” which they all agreed to do.
His rule for all the Braun Company’s communications was called the five W’s - you had to tell who was going to do what, where, when and why.
When he looked for a mechanic, he always stayed away from garages on big highways and near “strips.” Such mechanics, he said, knew that they were never going to see you again and were notorious shysters. Go to a neighborhood garage, where word of mouth serves as advertising, and they know you will be a long-term customer.
John and his family decided to buy a new car. They chose a dealership that agreed to sell the car $1,000 below the competition. Then the salesman changed the terms. He had discovered an error. In the end, the price ended up $200 above competition. In the low-ball technique, the salesperson gives the customer an incentive to enter into an agreement with the intention of changing the terms to the seller’s advantage (either by removing the advantage or adding something undesirable). Once John made the decision and took the time and effort to buy a new car, he committed to the purchase. Otherwise he would appear inconsistent. Instead of backing out of the deal, he found new reasons to justify his purchase of the car. Low-ball is often used by politicians in elections.
Mark Twain used to say, “A mine is a hole in the ground with a liar on the top.” And a projection prepared by anybody who stands to earn a commission or an executive trying to justify a particular course of action will frequently be a lie - although it’s not a deliberate lie in most cases. The man has come to believe it himself. And that’s the worst kind. Projections should be handled with great care - particularly when they’re being provided by someone who has an interest in misleading you.
In one experiment, a group of people was asked to choose between $6 and an elegant pen. Most choose the cash. Another group of people was asked to choose between $6, the elegant pen, or an inferior pen. Most choose the elegant pen. By adding an inferior option, another option seemed more attractive. Mary is looking at houses. The real estate broker knows that the house he is trying to sell Mary is in poor shape and a bad area. He starts by showing Mary bad properties in an ugly neighborhood. Afterwards, he takes her to the house he wanted to sell all along. Suddenly this house and the area seem great in comparison to the other houses she saw.
We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people’s behavior. And those are the factors that cause smart people to get bad results. I always look at IQ and talent as representing the horsepower of the motor, but then in terms of the output, the efficiency with which the motor works, depends on rationality. That’s because a lot of people start out with 400-horsepower motors and get a hundred horsepower of output. It’s way better to have a 200-horsepower motor and get it all into output. So why do smart people do things that interfere with getting the output they’re entitled to? It gets into the habits, and character and temperament, and it really gets into behaving in a rational manner.
Studies show that when deciding which parent should receive sole custody of a child, juries focus on information that makes one parent seem better than the other. But when deciding which parent should be denied custody, juries focus on information that makes one parent seem inferior to the other. This means that if one parent has average economic, social and emotional features and the other parent more striking positive and negative features, we will both choose and reject the same parent. This means that we often both choose and reject options that are of a more striking or complex nature over average ones.
We hate to admit we’ve lost money. Our loss aversion contributes to status quo bias - we prefer to hang on to what we have. We even put a higher value on the things we already own than we are willing to pay for the same things if we didn’t own them (giving them up feels like a loss). This is why many companies offer money-back guarantees on their products. Once we have taken possession of some item, we are not likely to return it.
People don’t want to feel indebted. We are disliked if we don’t allow people to give back what we’ve given them.
- A favor or gift is most effective when it is personal, significant, and unexpected.
- Before you make concessions, think about what you want to achieve.
- The American car manufacturer Henry Ford said: “If there is anyone secret of success, it lies in the ability to get the other person’s point of view and see things from his angle as well as from your own.”
- Follow Confucius: “What you don’t want yourself, don’t do to others. Reward hostility with justice, and good deeds with good deeds.” Give people what you want in return from them. Ask: Assuming others are like me, how would I like to be treated if the roles were reversed?
- Set the correct example. In Confucius words: “Example is better than law. For where the laws govern, the people are shameless in evading punishment. But where example governs, the people have a sense of shame and improve.
Experiments have shown that we go across town to save $10 on a clock radio but not to save $10 on a large-screen TV. The difference between $100 and $110 seems like a larger saving than the difference between $2850 and $2860. But it’s the same $10 saving.
Charles Munger tells us how a bad policy can become the norm: In the New York Police Department, they have a simple system. Your pension is based on your pay in your final year. So when anyone reaches the final year, everybody cooperates to give him about 1,000 hours of overtime. And he retires - in some cases after a mere 20 years of service - with this large income. Well, of course his fellow employees help him cheat the system. In substance, that’s what’s happened. But the one thing I guarantee you is that nobody has the least sense of shame. They soon get the feeling they’re entitled to do it. Everybody did it before, everybody’s doing it now - so they just keep doing it.
Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do when it ought to be done whether you like it or not. It is the first lesson that ought to be learned and however early a person’s training begins, it is probably the last lesson a person learns thoroughly.
Refusing to look at unpleasant facts doesn’t make them disappear. Bad news that is true is better than good news that is wrong.
The task of man is not to see what lies dimly in the distance, but to do what lies clearly at hand.
There was this huge grocery store owned by one of the great national chains. They’re a formidable competitor and they had the dominant big grocery store in this town for many, many years doing big volume. Sam Walton ofWal-Mart announced that he was opening a much bigger, better grocery store with a lot of other wonderful products at incredibly low prices. And the existing very experienced and successful chain, did not wait for Sam Walton’s store to open. They just closed their store right away.
Well, Cook didn’t want to tell ’em that he was doing it in the hope it would prevent scurvy - because they might mutiny and take over the ship if they thought that he was taking them on a voyage so long that scurvy was likely.
So here’s what he did: Officers ate one place where the men could observe them. And for a long time, he served sauerkraut to the officers, but not to the men. And then, finally, Captain Cook said, “Well, the men can have it one day a week.”
In due course, he had the whole crew eating sauerkraut. I regard that as a very constructive use of elementary psychology. It may have saved God knows how many lives and caused God knows how much achievement.
I have no use whatsoever for projections or forecasts. They create an illusion of apparent precision. The more meticulous they are, the more concerned you should be. We never look at projections, but we care very much about, and look very deeply at, track records. If a company has a lousy track record, but a very bright future, we will miss the opportuniry … I do not understand why any buyer of a business looks at a bunch of projections put together by a seller or his agent. You can almost say that it’s naive to think that those projections have any utiliry whatsoever. We’re just not interested
Warren Buffett says on being informed of bad news: “We only give a couple of instructions to people when they go to work for us: One is to think like an owner. And the second is to tell us bad news immediately - because good news takes care of itself. We can take bad news, but we don’t like it late
Charles Munger tells us about the toast we seldom hear: … Arco was celebrating their huge triumph of making a lot of money out of the North Slope oilfields in Alaska. And the house counsel there was an Irishman who was very outspoken and had a fair amount of charm. And he was highly regarded. So he could get by with talking frankly. And the whole group was toasting one another: “Aren’t we great people for having done this great thing?” and this Irish house counsel raised his glass and said “Well, I’d like to toast the man who really caused our triumph.” He said, “Here’s to King Faisal … Every calculation we made was offby 200%. All the costs were way higher, and the difficulties way greater than we ever conceived. All the predictions we made were totally asinine and wouldn’t have worked with the oil prices we ptojected. But along came King Faisal and the oil cartel and raised the price of oil so high that they made us all look good. Let’s honor the proper man here tonight. "
This is the kind of toast you will seldom hear in corporate life - because for most people, a toast like that will get you fired. And a guy who’s bringing reality into a pleasant party, and making people face their own limitations and errors, will have poor prospects
A man who has committed a mistake and doesn’t correct it, is committing another mistake
In one experiment a social psychologist asked people standing in line to use a copying machine if she could go in front of them, “Excuse me, I have 5 pages. May I use the Xerox machine because I have to make some copies?” Nearly all agreed.
A single death is a tragedy; a million deaths is a statistic
In 1989, Psychology Professor David Buss published a study of thousands of men and women from 37 cultures around the world showing the ranking of qualities that are most important in choosing someone to date or marry. Women placed more emphasis on a potential mate’s financial prospects. Women also preferred ambitious and industrious men. Women preferred older men. Men preferred younger women. Men ranked physical attractiveness higher than women did. The study also showed that a man felt most jealous when his woman was having sex with someone else. A woman felt most jealous when her man became emotionally attached to someone else.
The 19th Century American writer Henry David Thoreau said: “It is not enough to be busy; so are the ants. The question is: What are we busy about?” Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place.
The 17th Century philosopher Benedictus de Spinoza argued that understanding and believing are simply two different words for the same mental process. We first believe all information we understand and only afterwards and with effort do we evaluate, and if necessary, un-believe it. Studies show that Spinoza was right.
Wisdom is a two-headed beast. Roman dramatist Publilius Syrus wrote in 1st Century BC: “I have often regretted my speech, never my silence.”
Benjamin Franklin said: “He that would live in peace and at ease, must not speak all he knows, nor judge all he sees”.
People who lost a $10 theater ticket on the way to the theatre were reluctant to buy a second ticket. Those who instead lost a $10 bill on the way to buy a $10 theatre ticket saw the loss of the money and the purchase of the ticket as unrelated, so they would buy the ticket. But, in both cases, the loss was the same.
We should view our assets in terms of their entirety. A dollar is a dollar independent of where it comes from
We expect people to be consistent in their behavior. But we behave differently in different situations. For example, we behave differently at home, in school, at work, and among friends; when alone and when in a group; when seen and when anonymous.
We optimize one component at a time instead of optimizing the whole (what we finally want to accomplish). TransCorp forgot to consider how a change influences the whole system. Cost cutting doesn’t automatically translate into higher value. TransCorp’s decision to fire people caused manufacturing and delivery problems, which in turn caused delays in customer production. This created a loss of customers and reputation. The end result was lower profits.
One way to reduce unintended consequences is to stop focusing on isolated factors and instead consider how out actions affect the whole system.
He who knows men is clever; He who knows himself has insight; He who conquers men has force; He who conquers himself is truly strong.
Each item on the list will be explained over the next chapters
There will come a time when mathematical ignorance, like public smoking, will become socially unacceptable.
Research shows that the more bidders there are competing for a limited object, each having the same information, and the more uncertain its value is, the more likely we are to overpay. Instead, if our objective is to create value, the more bidders there are, the more conservative our bidding should be. This also implies that the less information we have compared to other bidders or the more uncertain we are about the underlying value, the lower we should bid. If we participate in auctions, we must ascertain the true value of what’s being sold or its value to us.
Three Atlantic Richfield engineers, Capen, Clapp and Campbell, introduced the idea behind the Winner’s Curse when they did a study of companies bidding for oil fields. Their basic idea was Uournalo/Petroleum Technology, June 1971), that “a lease winner tends to be the bidder who most overestimates reserve potential.” Let’s say TransCorp has 10 projects from 10 divisions to choose from. They only have time and money to invest in one project. Which one are they most likely to pick? Of course, the one that looks most attractive. But all division managers have an incentive to make their own project the most attractive one. The risk is therefore that TransCorp chooses the project with the most optimistic forecast and therefore more likely to disappoint.
A simple formula for doubling time is found by dividing 70 by the percent growth per year.
An example of statistical misuse is from 1992 when it was reported that 28 teenagers who frequently played the game of “Dungeons and Dragons” committed suicide. What conclusion should be drawn? Is there a link between teenage suicide and the game? The American mathematician John Allen Paulos tells us in Innumeracy to put this statement into the right perspective by considering two more facts. The game sold millions of copies and about 3 million teenagers played it. In that age group the annual suicide rate is about 12 people per 100,000. This means that we can expect 360 D&D playing teenagers (12/100,000 x 3 million players) to commit suicide.
When someone remarked to the French writer Voltaire, “Life is hard,” he retorted, “Compared to what?” We tend to ignore alternatives, and therefore we fail to make appropriate comparisons. Often we only consider information or evidence that is presented or available and don’t consider that information may be missing.
If we get a once in 100-year storm this year, another big one could happen next year. A 100-year event only means that there is a 1% chance that the event will happen in any given year.
Why do people play a game when the likelihood of losing is so high? Even if we exclude the amusement factor and the reinforcement from an occasional pay-off, it is understandable since they perceive the benefit of being right as huge and the cost of being wrong as low - merely the cost of the ticket or a dollar.
Remember the advice of Benjamin Franklin: “He that waits upon fortune, is never sure of a dinner”.
He that builds before he counts the cost, acts foolishly; And he that counts before he builds, finds he did not count wisely.
To predict the probability of developing the new product we need to know all the steps in the product development chain and the probability of each one. The project is composed of 6 steps and each step is independent of the others. Each step has an 80% probability of success. Based on similar development programs performed under the same conditions, TransCorp estimates that 8 out of 10 times each step is successful. In 2 times out of 10 something happens that prevents each step from succeeding. But since each step is independent, the probabilities must be multiplied together. The probability the company finally succeeds in developing the product is 26% - meaning that TransCorp should expect success one time out of four.
The test has a 97% sensitivity or true positive rate. This means that 97 out of 100 people with the disease correctly test positive. It also means that 3 people out of 100 with the disease wrongly test negative (false negatives). The test has a 95% specificity or true negative rate. This means that 95 out of 100 people without the disease correctly test negative. 5% of the time the test is incorrect. 5% of the people without the disease or 4,995 people wrongly test positive (false positives).
People like to look for systems that have worked over the past 20 years or so. If you could make money based on what has worked the past 20 years, all of the richest people would be librarians.
It is better to be roughly right than precisely wrong.
There are no foolish questions and no man becomes a fool until he has stopped asking questions.
If, in some cataclysm, all of scientific knowledge were to be destroyed, and only one sentence passed on to the next generations of creatures, what statement would contain the most information in the fewest words? I believe it is the atomic hypothesis (or the atomic fact, or whatever you wish to call it) that all things are made of atoms -little particles that move around in perpetual motion, attracting each other when they are a little distance apart, but repelling upon being squeezed into one another. In that one sentence, you will see, there is an enormous amount of information about the world, if just a little imagination and thinking are applied.
John has been offered to invest in a private venture capital fond. The venture manager’s track record is an average rate of return of 25% over the last five years. This doesn’t say much if we don’t look at how the underlying performance was produced. By looking closely at how this return was produced John found that the venture manager had done 10 deals. One deal had been a spectacular success, others were a failure.
Remember that some people leave out data when reporting their performance.
Bad terminology is the enemy of good thinking.
We should confess our errors and learn from them. We should look into their causes and take steps to prevent them from happening again. Ask:
- What was my original reason for doing something? What did I know and what were my assumptions? What were my alternatives at the time?
- How did reality work out relative to my original guess? What worked and what didn’t?
- Given the information that was available, should I have been able to predict what was going to happen?
- What worked well? What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?
Feynman provides a test we can do to check our understanding:
Without using the new word which you have just learned, try to rephrase what you have just learned in your own language. Without using the word “energy,” tell me what you know now about the dog’s motion.
See that bird? It’s a brown-throated thrush, but in Germany it’s called a halzenJugel and in Chinese they call it a chung ling and even if you know all those names for it, you still know nothing about the bird. You only know something about people; what they call the bird. Now that thrush sings, and teaches its young to fly, and flies so many miles away during the summer across the country, and nobody knows how it finds its way.
One friend of mine said that in hiring they look for three things: intelligence, energy, and character. If they don’t have the last one, the first two will kill you because, it’s true, if you are going to hire somebody that doesn’t have character, you had really better hope they are dumb and lazy, because, if they are smart and energetic, they’ll get you in all kinds of trouble
A room doesn’t have a tendency to get messy by itself. Some outside energy is needed. It is the energy concentrated in our muscles that is being spread and causes our desks to be messed up. There is no energy being spread out in the papers themselves. As Chemistry Professor Frank Lambert says, “There isn’t any ’tendency of objects to become disorganized’ in nature any more than bank tellers have a ’tendency to give money to robbers’ without a gun.
The difference between a good business and a bad one is that a good business throws up one easy decision after another, whereas a bad one gives you horrible choices - decisions that are extremely hard to make: “Can it work?” “Is it worth the money?”
One way to determine which is the good business and which is the bad one is to see which one is throwing management bloopers - pleasant, no-brainer decisions - time after time after time.
The formulation of a problem is often more essential than its solution, which may be merely a matter of mathematical or experimental skill.
What counts in this business is underwriting discipline. The winners are those that unfailingly stick to three key principles:
They accept only those risks that they are able to properly evaluate (staying within their circle of competence) and that, after they have evaluated all relevant foctors including remote loss scenarios, carry the expectancy of profit. These insurers ignore market-share considerations and are sanguine about losing business to competitors that are firing foolish prices or policy conditions.
They limit the business they accept in a manner that guarantees they will suffer no aggregation of losses from a single event or from related events that will threaten their independency. They ceaselessly search for possible correlation among seemingly-unrelated risks.
They avoid business involving moral risk: No matter what the rate, trying to write good contracts with bad people doesn’t work. While most policyholders and clients are honorable and ethical, doing business with the ftw exceptions is usually expensive, sometimes extraordinarily so
4 criteria as filters for new business ideas:
- Can I understand it? If it passes this filter,
- Does it look like it has some kind of sustainable competitive advantage? Ifit passes this filter,
- Is the management composed of able and honest people? Ifit passes this filter,
- Is the price right? If it passes this filter, then we write a check
Warren Buffett tells us what to look for in a spouse: “Look for someone who will love you unconditionally and will subtly encourage you to be better than you thought you can be”.
If you’re a captain in the Navy and you’ve been up for 24 hours straight and have to go to sleep and you turn the ship over to a competent first mate in tough conditions and he takes the ship aground - clearly through no fault of yours - they don’t court martial you, but your naval career is over.
Napoleon said he liked luckier generals - he wasn’t into supporting losers. Well, the Navy likes luckier captains.
You can say, “That’s too tough. That’s not law school. That’s not due process.” Well, the Navy model is better in its context than would be the law school model. The Navy model really forces people to pay attention when conditions are tough - because they know that there’s no excuse. Very simply, if your ship goes aground, your career is over. “It doesn’t matter whether it was your fault or not. Nobody’s interested in your fault. It’s just a rule that we happen to have - for the good of all, all effects considered.” I like some rules like that - I think that the civilization works better with some of these no-fault rules. But that stuff tends to be anathema around law schools. “It’s not due process. You’re not really searching for justice.”
Well, I am searching for justice when I argue for the Navy rule - for the justice of fewer ships going aground. Considering the net benefit, I don’t care if one captain has some unfairness in his life. After all, it’s not like he’s being court marshalled. He just has to look for a new line of work. And he keeps vested pension rights and so on. So it’s not like it’s the end of the world.
Leaving the question of price aside, the best business to own is one that over an extended period can employ large amounts of incremental capital at very high rates of return. The worst business to own is one that must, or will, do the opposite - that is, consistently employ ever-greater amounts of capital at very low rates of return.
Since a lot of evidence agrees with my explanation, I must be right. "
Not necessarily, the same evidence may agree with other explanations. Look for evidence that disproves your explanation.
Don’t spend time on already disproved ideas or arguments or those that can’t be disproved.
At the weekly meeting with his managers, John asked’ “What actions could our company take to destroy as much value as possible in as short time as possible?”
“Treat the employees badly. Reward bad work. Don’t appeal to the employee’s self interests but to a goal no one understands. Don’t inform people what the company stands for, what rules apply, and the consequences for breaking them. Make sure people don’t know their areas of responsibility. Put the right person in the wrong place. Don’t let people know if they achieve a goal. Everything should be impossible to measure. Never tell people why something should be done. Surround the CEO with confused, unmotivated subordinates. Give key customers reasons to be angry. Late and wrong deliveries, delays, and arrogance will help. Let the customers associate the business with misery and make sure that this feeling gets reinforced at every contact with the company.”
Instead of asking how we can achieve a goal, we ask the opposite question: What don’t I want to achieve (non-goal)? What causes the non-goal? How can I avoid that? What do I now want to achieve? How can I do that? For example, instead of searching for how John and Mary can improve their marriage, they ask: “What qualities will destroy our marriage?”.
The mental habit of thinking backward forces objectivity - because one of the ways you think a thing through backward is you take your initial assumption and say, “Let’s try and disprove it.”
That is not what most people do with their initial assumption. They try and confirm it. It’s an automatic tendency in psychology - often called “first-conclusion bias”. But it’s only a tendency. You can train yourself away from the tendency to a substantial degree. You just constantly take your own assumptions and try and disprove them.
Be happy while you’re living, for you are a long time dead.
I confess that I have been as blind as a mole, but it is better to learn wisdom late than never to learn it at all.
Whenever you think that some situation or some person is ruining your life, it is actually you who are ruining your life … Feeling like a victim is a perfectly disastrous way to go through life. If you just take the attitude that however bad it is in any way, it’s always your fault and you just fix it as best you can - the so-called “iron prescription” - I think that really works.
Carson’s prescriptions for sure misery included:
- Ingesting chemicals in an effort to alter mood or perception
Here are four more prescriptions from Munger:
- Be unreliable
- Learn everything you possibly can from your own personal experience, minimizing what you learn vicariously from the good and bad experience of others, living and dead.
- Go down and stay down when you get your first, second, or third severe reverse in the battle of life.
- Ignore a story they told me when I was very young about a rustic who said: “I wish I knew where I was going to die, and then I’d never go there.” Most people smile (as you did) at the rustic’s ignorance and ignore his basic wisdom.