Poor Charlie’s Almanack

However, he never forgot the sound principles taught by his grandfather: to concentrate on the task immediately in front of him and to control spending.

Like Franklin, Charlie has made himself into a grandmaster of preparation, patience, discipline, and objectivity.

Charlie generally focuses first on what to avoid—that is, on what not to do—before he considers the affirmative steps he will take in a given situation. “All I want to know is where I’m going to die, so I’ll never go there”

In business, as in life, Charlie gains enormous advantage by summarily eliminating the unpromising portions of the chessboard, freeing his time and attention for the more productive regions.

Yet, within this pursuit of rationality and simplicity, he is careful to avoid what he calls physics envy, the common human craving to reduce enormously complex systems (such as those in economics) to one-size-fits-all Newtonian formulas.

Instead, he faithfully honors Albert Einstein’s admonition: “A scientific theory should be as simple as possible, but no simpler.” Or, in his own words: “What I’m against is being very confident and feeling that you know, for sure, that your particular action will do more good than

Similarly, Charlie recognizes that even among the most competent and motivated of people, decisions are not always made on a purely rational basis. For this reason, he considers the psychological factors of human misjudgment some of the most important mental models that can be applied to an investment opportunity:

“It’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and more multidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experience.”

To stay within these circles, he first applies a basic, overall screen, designed to limit his investment

field to only “simple, understandable candidates.” As he says, “We have three baskets for investing: yes, no, and too tough to understand.”

Superior companies have deep moats that are continuously widened to provide enduring protection.

“a great business at a fair price is superior to a fair business at a great price.”

While poor outcomes are excusable in the Munger–Buffett world—given the fact that some outcomes are outside of their control—sloppy preparation and decision-making are never excusable because they are controllable.

“extreme patience combined with extreme decisiveness.”

Good ideas are rare—when the odds are greatly in your favor, bet (allocate) heavily.

Resist the natural human bias to act.

Enjoy the process along with the proceeds, because the process is where you live.

When proper circumstances present themselves, act with decisiveness and conviction. Be fearful when others are greedy and greedy when others are fearful. Opportunity doesn’t come often, so seize it when it does. Opportunity meeting the prepared mind—that’s the game.

Preparation. Discipline. Patience. Decisiveness.

First, be unreliable. Do not faithfully do what you have engaged to do. If you will only master this one habit, you will more than counterbalance the combined effect of all your virtues, howsoever great.

My second prescription for misery is to learn everything you possibly can from your own experience, minimizing what you learn vicariously from the good and bad experiences of others, living and dead.

third prescription to you for misery is to go down and stay down when you get your first, second, or third severe reverse in the battle of life.

“I wish I knew where I was going to die, and then I’d never go there.”

“Invert, always invert.” It is in the nature of things, as Jacobi knew, that many hard problems are best solved only when they are addressed backward.

“curiosity, concentration, perseverance, and self-criticism.”

For example, one great advantage of scale taught in all of the business schools of the world is cost reductions along the so called experience curve. Just doing something complicated in more and more volume enables human beings, who are trying to improve and are motivated by the incentives of capitalism, to do it more and more efficiently. The very nature of things is that if you get a whole lot of volume through your operation, you get better at processing that volume. That’s an enormous advantage. And it has a lot to do with which businesses succeed and fail.

which is a pretty personal place, after all—for a lousy dime? So, in effect, Wrigley, simply by being so well known, has advantages of scale—what you might call an informational advantage.

Another advantage of scale comes from psychology. Psychologists use the term social proof.

We are all influenced—subconsciously and, to some extent, consciously—by what we see others do and approve. Therefore, if everybody’s buying something, we think it’s better.

One advantage of Coca Cola is that it’s available almost everywhere in the world.

And, again, that’s a scale thing. Once I get most of the circulation, I get most of the advertising. And once I get most of the advertising and circulation, why would anyone want the thinner paper with less information in it? So it tends to cascade to a winner-take all situation. And that’s a separate form of the advantages of-scale phenomenon.

Similarly, all these huge advantages of scale allow greater specialization within the firm. Therefore, each person can be better at what he does. And these advantages of scale are so great,

That was a very tough minded thing to do, but I think it was a very correct decision if you’re thinking about maximizing shareholder wealth. And I don’t think it’s a bad thing to do for a civilization either, because I think that General Electric is stronger for having Jack Welch there.

The great defect of scale, of course, which makes the game interesting, so that the big people don’t always win, is that as you get big, you get the bureaucracy. And with the bureaucracy comes the territoriality—which is again grounded in human nature.

Then, while people are justifying all these layers, it takes forever to get anything done. They’re too slow to make decisions, and nimbler people run circles around them.

The constant curse of scale is that it leads to big, dumb bureaucracy—which, of course, reaches its highest and worst form in government, where the incentives are really awful.

But bureaucracy is terrible. And as things get very powerful and very big, you can get some really dysfunctional behavior.

In all cases, the people who sell the machinery—and, by and large, even the internal bureaucrats urging you to buy the equipment—show you projections with the amount you’ll save at current prices with the new technology. However, they don’t do the second step of the analysis, which is to determine how much is going to stay home and how much is just going to flow through to the customer. I’ve never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read, “This capital outlay will save you so much money that it will pay for itself in three years.”

But the benefit of the cost reductions didn’t go to the guy who bought the equipment. It’s such a simple idea. It’s so basic. And yet it’s so often forgotten.

When technology moves as fast as it does in a civilization like ours, you get a phenomenon that I call competitive destruction.

any rate, surfing is a very powerful model.

Every person is going to have a circle of competence.

So you have to figure out what your own aptitudes are. If you play games where other people have the aptitudes and you don’t, you’re going to lose. And that’s as close to certain as any prediction you can make. You have to figure out where you’ve got an edge. And you’ve got to play within your own circle of competence.

Some of you may find opportunities surfing along in the new high tech fields—the Intels, the Microsofts, and so on. The fact that we don’t think we’re very good at it and have pretty well stayed out of it doesn’t mean that it’s irrational for you to do it.

Is the stock market so efficient that people can’t beat it? Well, the efficient-market theory is obviously roughly right, meaning that markets are quite efficient and it’s quite hard for anybody to beat the market by significant margins as a stock picker by just being intelligent and working in a disciplined way. Indeed, the average result has to be the average result.

Again, to the man with a hammer, every problem looks like a nail.

who look and sift the world for a mispriced bet—that they can occasionally find one. And the wise ones bet heavily when the world offers them that opportunity.

They bet big when they have the odds. And the rest of the time, they don’t. It’s just that simple.

And yet, in investment management, practically nobody operates that way. We operate that way—I’m talking about Buffett and Munger. And we’re not alone in the world. But a huge majority of people have some other crazy construct in their heads.

“I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches, representing all the investments that you got to make in a lifetime. And once you’d punched through the card, you couldn’t make any more investments at all.” He says, “Under those rules, you’d really think carefully about what you did, and you’d be forced to load up on what you’d really thought about. So you’d do so much better.”

As one factor, Graham had this concept of value to a private owner—what the whole enterprise would sell for if it were available. And that was calculable in many cases. Then, if you could take the stock price and multiply it by the number of shares and get something that was one third or less of sellout value, he would say that you’ve got a lot of edge going for you.

At any rate, the trouble with what I call the classic Ben Graham concept is that gradually the world wised up, and those real obvious bargains disappeared. You could run your Geiger counter over the rubble, and it wouldn’t click.

Over the long term, it’s hard for a stock to earn a much better return than the business that underlies it earns. If the business earns 6 percent on capital over 40 years and you hold it for that 40 years, you’re not going to make much different than a 6 percent return, even if you originally buy it at a huge discount.

And ideally—and we’ve done a lot of this—you get into a great business that also has a great manager, because management matters.

However, averaged out, betting on the quality of a business is better than betting on the quality of management.

In other words, if you have to choose one, bet on the business momentum, not the brilliance of the manager. But very rarely, you find a manager who’s so good that you’re wise to follow him into what looks like a mediocre business.

I would say that trying to minimize taxes too much is one of the great standard causes of really dumb mistakes. I see terrible mistakes from people being overly motivated by tax considerations.

Within the growth stock model, there’s a sub position: There are actually businesses that you will find a few times in a lifetime where any manager could raise the return enormously just by raising prices, and yet they haven’t done it. So they have huge untapped pricing power that they’re not using. That is the ultimate no brainer.

And they practically all use the following formula—I call it the cancer surgery formula. They look at this mess, and they figure out if there’s anything sound left that can live on its own if they cut away everything else. And if they find anything sound, they just cut away everything else. Of course, if that doesn’t work, they liquidate the business. But it frequently does work.

business, because on a net basis, the whole investment management business together gives no value added to all buyers combined.

I think a select few—a small percentage of the investment managers—can deliver value added. But I don’t think brilliance alone is enough to do it. I think that you have to have a little of this discipline of calling your shots and loading up if you want to maximize your chances of becoming one who provides above average real returns for clients over the long pull.

So if you want to be a good thinker, you must develop a mind that can jump the jurisdictional boundaries. You don’t have to know it all. Just take in the best big ideas from all these disciplines. And it’s not that hard to do.

Similarly, I’ve told you to think forward and backward. Well, great declarers in bridge think, “How can I take the necessary winners?” But they think it through backward, too: “What could possibly go wrong that could cause me to have too many losers?” Both methods of thinking are useful. So in the game of life, get the needed models into your head and think it through forward and backward. What works in bridge will work in life.

Since your academic structure, by and large, doesn’t encourage minds jumping jurisdictional boundaries, you’re at a disadvantage because, in that one sense, even though academia’s very useful to you, you’ve been mistaught.

And it’s kind of fun to sit there and outthink people who are way smarter than you are because you’ve trained yourself to be more objective and multidisciplinary. Furthermore, there’s a lot of money in it—as I can testify from my own personal experience.

Ideology does some strange things and distorts cognition terribly. If you get a lot of heavy ideology young, and then you start expressing it, you are really locking your brain into a very unfortunate pattern. And you are going to distort your general cognition.

Warren observed this as a kid, and he decided that ideology was dangerous and that he was going to stay a long way away from it. And he has throughout his whole life. That has enormously helped the accuracy of his cognition.

How can smart people be so wrong? Well, the answer is that they don’t do what I’m telling you to do—which is to take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems.

A very significant fraction of the people in the world will steal if a) it’s very easy to do and b) there’s practically no chance of being caught. And once they start stealing, the consistency principle—which is a big part of human psychology—will soon combine with operant conditioning to make stealing habitual.

Serpico41 effects: If enough people are profiting in a general social climate of doing wrong, then they’ll turn on you and become dangerous enemies if you try and blow the whistle. It’s very dangerous to ignore these principles and let slop creep in. Powerful psychological forces are at work for evil.

Incidentally, that’s Pavlovian mere association, too. When people get bad news, they hate the messenger.

This sort of tragedy is caused by letting the slop run. You must stop slop early. It’s very hard to stop slop and moral failure if you let it run for a while.

makes investment hard, as I said at USC, is that it’s easy to see that some companies have better businesses than others. But the price of the stock goes up so high that all of a sudden, the question of which stock is the best to buy gets quite difficult.

And 98 percent of the time, our attitude toward the market is that we’re agnostics. We don’t know. Is GM valued properly vis-à-vis Ford? We don’t know.

We just look for no-brainer decisions. As Buffett and I say over and over again, we don’t leap 7-foot fences. Instead, we look for 1-foot fences with big rewards on the other side. So we’ve succeeded by making the world easy for ourselves, not by solving hard problems.

If you wait for the big opportunity and have the courage and vigor to grasp it firmly when it arrives, how many do you need? For example, take the top 10 business investments Berkshire Hathaway’s ever made. We would be very rich if we’d never done anything else—in two lifetimes.

The advantage of low-tech stuff for us is that we think we understand it fairly well. The other stuff we don’t. And we’d rather deal with what we understand.

I’m just saying that you can learn to make fewer mistakes than other people—and how to fix your mistakes faster when you do make them. But there’s no way that you can live an adequate life without making many mistakes. Part

of what you must learn is how to handle mistakes and new facts that change the odds.

Life, in part, is like a poker game, wherein you have to learn to quit sometimes when holding a much-loved hand.

fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something.

“I can afford to write this one off and live to fight again. I don’t have to pursue this thing as an obsession, in a way that will break me.”

“He was a duck sitting on a pond, and they raised the level of the pond.”

Well, I’d be amazed if the capitalized value of all American business weren’t considerably higher 25 years from now.

Each person has to play the game given his own marginal utility considerations and in a way that takes into account his own psychology.

But in part, that’s because I’m good at taking losses. I can take ’em psychologically. And, besides, I have very few. The combination works

must have the confidence to override people with more credentials than you

whose cognition is impaired by incentive-caused bias or some similar psychological

force that is obviously present. But there are also cases where you have to recognize that you have no wisdom

“I don’t have any special competence that would enable me to answer that question.”

And I’ll give you the very same answer. That’s not a field in which I’m capable of giving you any special insight.

When you don’t know and you don’t have any special competence, don’t be afraid to say so.

Nobody expects you to know everything about everything. I try to get rid of people who always confidently answer questions about which they don’t have any real knowledge. To me, they’re like the bee dancing its incoherent dance. They’re just screwing up the hive.

This case demonstrates one of the troubles with practicing law. To a considerable extent, you’re going to be dealing with grossly defective people. They create an enormous amount of the remunerative law business. And even when your own client is a paragon of virtue, you’ll often be dealing with gross defectives on the other side or even on the bench. That’s partly what drove me out of the profession.

The lesson? As you go through life, sell your services once in a while to an unreasonable blowhard if that’s what you must do to feed your family. But run your own life like Grant McFayden.

There, again, we’re talking about elementary psychology. It’s elementary literature. Good literature makes the reader reach a little for understanding. Then it works better. You hold it better. It’s the commitment and consistency tendency. If you’ve reached for it, the idea’s pounded in better.

failed to recognize that what works best in most cases is to appeal to a man’s interest.

Einstein has a marvelous statement on that: “Everything should be made as simple as possible, but no more simple.”

The human mind is not constructed so that it works well without having reasons.

You’ve got to hang reality on a theoretical structure with reasons.

“Spoon-feed me what you know.” And, of course, what they’re often saying is “Teach me how to get rich with soft white hands faster. And not only let me get rich faster, but teach me faster, too.”

But whatever you decide, I think it’s a huge mistake not to absorb elementary worldly wisdom if you’re capable of doing it because it makes you better able to serve others, it makes you better able to serve yourself, and it makes life more fun.

So if you have an aptitude for doing it, I think you’d be crazy not to. Your life will be enriched—not only financially, but in a host of other ways—if you do.

Yeah, I’m passionate about wisdom. I’m passionate about accuracy and some kinds of curiosity.

believe in the discipline of mastering the best that other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.

I still like its emphasis on the desirability of making human systems as cheating-proof as is practicable, even if this leaves some human misery unfixed. After all, the people who rewarded cheating on a massive scale leave a trail of super-ruin in their wake, since the bad conduct spreads by example and is so very hard to reverse.

You must also think in reverse, much like the rustic who wanted to know where he was going to die so that he’d never go there. Indeed, many problems can’t be solved forward. And that is why the great algebraist Carl Jacobi so often said, “Invert, always invert,”

Instead, your troubles come from his subconscious bias. His cognition will often be impaired, for your purposes, by financial incentives different from yours. And he will also suffer from the psychological defect caught by the proverb “To a man with a hammer, every problem looks like a nail.”

The fifth helpful notion is that really big effects, lollapalooza effects, will often come only from large combinations of factors.

The best way to avoid envy, as recognized by Aristotle,54 is to plainly deserve the success we get. We will be fanatic about product quality, quality of product presentation, and reasonableness of prices, considering the harmless pleasure we will provide.

“everything should be made as simple as possible, but no more simple.”

And thus, the only rational excuse for not acquiring more B is that it is not practical to do so, given the man’s need for A and the other urgent demands in his life. I will later try to demonstrate that this excuse for unidisciplinarity, at least for our most gifted people, is usually unsound.

Broadscale problems, by definition, cross many academic disciplines. Accordingly, using a unidisciplinary attack on such problems is like playing a bridge hand by counting trumps while ignoring all else.

Modern academia now gives more multidisciplinarity than we received and is plainly right to do so.

All we have to do is examine our most successful narrow-scale education, identify essential elements, and scale up those elements to reach the sensible solution.

instead look where incentives for effective education are strongest and results are…

the hugely successful education now mandatory for pilots. Yes, I am suggesting today that mighty Harvard would do better if it…

we train a pilot in a strict six-element system: His formal education is wide enough to cover practically everything useful in piloting. His knowledge of practically everything needed by pilots is not taught just well enough to enable him to pass one test or two; instead, all his knowledge is raised to practice-based fluency, even in handling two or three intertwined hazards at once. Like any good algebraist, he is made to think sometimes in a forward fashion and sometimes in reverse, and so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen. His training time is allocated among subjects so as to minimize damage from his later malfunctions, and so what is most important in his performance gets the most training coverage and is raised to the highest fluency levels. Checklist routines are always mandatory for…

Thus it follows, as the night the day, that in our most elite broadscale education, wherein we are trying to make silk purses out of silk, we need for best results to have multidisciplinary coverage of immense amplitude, with all needed skills raised to an ever-maintained practice-based fluency, including considerable power of synthesis at boundaries between disciplines, with the highest…

being employed in a manner reminding one of inversion in algebra, and with checklist routines being a permanent…

There can be no other way, no easier way, to broadscale…

Instead, it turns out that the truly big ideas in each discipline, learned only in essence,…

And they are not so numerous, nor are their interactions so complex, that a large and multidisciplinary understanding is impossible for many,…

Third, thinking by inversion and thorough use of checklists is easily learned, in…

achieved a massive multidisciplinary synthesis with less time in formal education than is now available to our numerous brilliant young, and 2) thus become better performers in their own disciplines, not worse, despite diversion of learning time…

Given the time and talent available and examples of successful masters of multiple disciplines, what is shown by our present failure to minimize bad effects from man-with-a-hammer tendency is…

in soft-science academia if you are so satisfied with the status quo, or so frightened by the difficulties of change, that you…

First, many more courses should be mandatory, not optional. And this, in turn, requires that the people who decide what is mandatory must possess large, multidisciplinary knowledge maintained in fluency. This conclusion is as obvious in the training of the would-be broadscale problem-solver as it is in the training of the would-be pilot.

truth is hard to assimilate in any mind when opposed by interest. And if institutional incentives cause the problem, then a remedy is feasible, because incentives can be changed.

Even when nothing but unleveraged stock picking is involved, the total cost of all the investment management, plus the frictional costs of fairly often getting in and out of many large investment positions, can easily reach 3 percent of foundation net worth per annum if foundations, urged

This full cost doesn’t show up in conventional accounting. But that is because accounting has limitations and not because the full cost isn’t present.

“What a man wishes, he will believe.” And in self-appraisals of prospects and talents, it is the norm, as Demosthenes predicted, for people to be ridiculously over-optimistic.

Smart, hardworking people aren’t exempted from professional disasters from overconfidence.

Often, they just go aground in the more difficult voyages they choose, relying on their self-appraisals that they have superior talents and methods.

The best defense is that of the best physicists, who systematically criticize themselves to an extreme degree, using a mindset described by Nobel laureate Richard Feynman as follows: “The first principle is that you must not fool yourself, and you’re the easiest person to fool.”

have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough, so that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken.

go even further. I think it can be a rational choice, in some situations, for a family or a foundation to remain 90 percent concentrated in one equity. Indeed, I hope the Mungers follow roughly this course.

The controversial prediction is that, if some of you make your investment style more like Berkshire Hathaway’s, in a long-term retrospect, you will be unlikely to have cause for regret, even if you can’t get Warren Buffett to work for nothing. Instead, Berkshire will have cause for regret as it faces more intelligent investment competition. But Berkshire won’t actually regret any disadvantage from your enlightenment. We only want what success we can get despite encouraging others to share our general views about reality.

And other, similar career models are even worse. Rather than encourage such models, a more constructive choice at foundations is long-term investment concentration in

few domestic corporations that are wisely admired.

foregoing acceptance of the possibility that stock value in aggregate can become irrationally high is contrary to the hard-form efficient-market theory that many of you once learned as gospel from your mistaken professors of yore. Your mistaken professors were too much influenced by “rational man” models of human behavior from economics and too little by “foolish man” models from psychology and real-world experience.

Crowd folly—the tendency of humans, under some circumstances, to resemble lemmings—explains much foolish thinking of brilliant men and much foolish behavior, like the investment management practices of many foundations represented here today. It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from the practices of the rest of the crowd.

“If you would persuade, appeal to interest and not to reason.” The man changed his silly view when his incentives made him change it and not before.

had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen. I also was born with a huge craving for synthesis. And when it didn’t come easily, which was often, I would rag the problem, and then, when I failed, I would put it

aside, and I’d come back to it and rag it again. It took me 20 years to figure out how and why cult conversion methods worked. But the psychology departments haven’t figured it out yet, so I’m ahead of them.

Under this ethos, you’ve got to know all the big ideas in all the disciplines more fundamental than your own. You can never make any explanation that can be made in a more fundamental way in any other way than the most fundamental way.

And you always take them with full attribution to the most fundamental ideas that you are required to use. When you’re using physics, you say you’re using physics. When you’re using biology, you say you’re using biology. And so on and so on. I could early see that that ethos would act as a fine organizing system for my thought. And I strongly suspected that it would work really well in the soft sciences as well as the hard sciences, so I just grabbed it and used it all through my life in soft science as well as hard science. That was a very lucky idea for me.

The only antidote for being an absolute klutz due to the presence of a man-with-a-hammer syndrome is to have a full kit of tools. You don’t have just a hammer, you’ve got all the tools. And you’ve got to have one more trick: You’ve got to use those tools checklist-style, because you’ll miss a lot if you just hope that the right tool is going to pop up unaided whenever you need

Well, practically everybody 1) overweighs the stuff that can be numbered because it yields to the statistical techniques they’re taught in academia, and 2) doesn’t mix in the hard-to-measure stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no regrets for having done that.

Thomas Hunt Morgan, who was one of the greatest biologists who ever lived, when he got to Caltech had a very interesting, extreme way of avoiding some mistakes from overcounting what could be measured and undercounting what couldn’t.

But it’s amazing what you can do in life without the placer mining if you’ve got a few good mental tricks and just keep ragging the problems the way Thomas Hunt Morgan did.

Well, that’s the way Mankiw does it. He just grabs. This is much better than not grabbing. But it is much worse than grabbing with full attribution and full discipline, using all knowledge plus extreme reductionism where feasible.

my view that economics could avoid a lot of this trouble that comes from physics envy. I want economics to pick up the basic ethos of hard science, the full attribution habit, but not the craving for an unattainable precision that comes from physics envy. The sort of precise, reliable formula that includes Boltzmann’s constant is not going to happen, by and large, in economics. Economics involves too complex a system. And the craving for that physics-style precision does little but get you in terrible trouble, like the poor fool from McKinsey.

Well, Einstein is easy because Einstein is famous for saying “Everything should be made as simple as possible, but no more simple.”

So economics should emulate physics’ basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics.

think my experience with my simple question is an example of how little synthesis people get, even in advanced academic settings, considering economic questions. Obvious questions, with such obvious answers. Yet people take four courses in economics, go to business school, have all these IQ points, and write all these essays, but they can’t synthesize worth a damn.

Anyway, as the Medicare example showed, all human systems are gamed, for reasons rooted deeply in psychology, and great skill is displayed in the gaming because game theory has so much potential.

That’s what’s wrong with the workers’ comp system in California. Gaming has been raised to an art form. In the course of gaming the system, people learn to be crooked.

The people who design easily gameable systems belong in the lowest circle of hell.

No. It’s just the incentive structure that so rewards all this fraud is put in place by these ignorant legislatures, many members of which have been to law school, and they just don’t think about what terrible things they’re doing to the civilization because they don’t take into account the second-order effects and the third-order effects in lying and cheating. So this happens everywhere, and when economics is full of it, it is just like the rest of life.

I frequently cite the example of having your career over in the Navy if your ship goes aground, even if it wasn’t your fault. I say the lack of justice for the one guy who wasn’t at fault is way more than made up by a greater justice for everybody when every captain of a ship always sweats blood to make sure the ship doesn’t go aground. Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you. But again, I wouldn’t put it in your assigned college work if you want to be graded well, particularly in a modern law school wherein there is usually an overlove of fairness-seeking process.

He demonstrated convincingly, to me, anyway, that envy was a great driver of proclivity to spend.

And so, here’s this terrible vice, which is forbidden in the Ten Commandments, and here it’s driving all these favorable results in economics. There’s some paradox in economics that nobody’s going to get out.

Well, if the mathematicians can’t get the paradox out of their system when they’re creating it themselves, the poor economists are never going to get rid of paradoxes, nor are any of the rest of us. It doesn’t matter. Life is interesting with some paradox. When I run into a paradox, I think either I’m a total horse’s ass to have gotten to this point or I’m fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is. As I conclude, I want to tell one more

story demonstrating how awful it is to get a wrong idea from a limited repertoire and just stick to it.

Keynes said, “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.”

By self-criticism, he meant becoming good at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.

Well, it’s time to repeat the big lesson in this little talk. What I’ve urged is the use of a bigger multidisciplinary bag of tricks, mastered to fluency, to help economics and everything else. And I also urged that people not be discouraged by irremovable complexity and paradox. It just adds more fun to the problems. My inspiration again is Keynes: Better roughly right than precisely wrong.

Well, luckily I had the idea at a very early age that the safest way to try to get what you want is to try to deserve what you want. It’s such a simple idea. It’s the golden rule. You want to deliver to the world what you would buy if you were on the other end. There

is no ethos in my opinion that is better for any lawyer or any other person to have. By and large, the people who have had this ethos win in life, and they don’t win just money and honors. They win the respect, the deserved trust of the people they deal with. And there is huge pleasure in life to be obtained from getting deserved trust.

The second idea that I developed very early is that there’s no love that’s so right as admiration-based love, and such love should include the instructive dead. Somehow I picked up that idea, and I’ve lived with it all my life. It’s been very useful to me. A love like that described by [William] Somerset Maugham in his book Of Human Bondage90 is a sick kind of love. It’s a disease, and if you find yourself with a disease like that, you should eliminate it.

It requires that you’re hooked on lifetime learning. Without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You’re going to advance in life by what you learn after you leave here.

Warren Buffett had to be a continuous learning machine.

The same requirement exists in lower walks of life. 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 that morning. And boy, does that habit help, particularly when you have a long run ahead of you.

Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning.

I came to law school having learned the method of learning, and nothing has served me better in my long life than continuous learning.

If you watched him with a time clock, you’d find that about half of his waking time is spent reading. Then a big chunk of the rest of his time is spent talking one-on-one, either on the telephone or personally, with highly gifted people whom he trusts and who trust him.

And because the really big ideas carry about 95 percent of the freight, it wasn’t at all hard for me to pick up about 95 percent of what I needed from all the disciplines and to include use of this knowledge as a standard part of my mental routines. Once you have the ideas, of course, you must continuously practice their use. Like a concert pianist, if you don’t practice you can’t perform well. So I went through life constantly practicing a multidisciplinary approach.

Now, there are dangers in it because it works so well. If you use it, you will frequently find when you’re with some expert from another discipline—maybe even an expert who is your employer, with a vast ability to harm you—that you know more than he does about fitting his specialty to the problem at hand.

You’ll sometimes see the correct answer when he’s missed it. That is a very dangerous position to be in. You can cause enormous offense by being right in a way that causes somebody else to lose face in his own discipline or hierarchy. I never found the perfect way to avoid harm from this serious problem.

Cicero is famous for saying that a man who doesn’t know what happened before he’s born goes through life like a child. That is a very correct idea. Cicero is right to ridicule somebody so foolish as not to know history.

You have to learn many things in such a way that they’re in a mental latticework in your head and you automatically use them the rest of your life. If many of you try that, I solemnly promise that one day most will correctly come

to think, “Somehow I’ve become one of the most effective people in my whole age cohort.”

Perhaps the two approaches seem logically the same thing. But those who have mastered algebra92 know that inversion will often and easily solve problems that otherwise resist solution. And in life, just as in algebra, inversion will help you solve problems that you can’t otherwise handle.

“Invert, always invert.” I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes.

Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard-to-find new stupidity in my own field when some large, important, easy-to-find stupidity was just over the fence in the other fellow’s professional territory?

Besides, I could already see that real-world problems didn’t neatly lie within territorial boundaries. They jumped right across.

seems obvious, to me at least, that the human brain must often operate counterproductively, just like the ant’s, from unavoidable oversimplicity in its mental process, albeit usually in trying to solve problems more difficult than those faced by ants that don’t have to design airplanes.

One such outcome is caused by a quantum effect in human perception. If stimulus is kept below a certain level, it does not get through.

A magician demonstrates this sort of contrast-based error in your nervous system when he removes your wristwatch without your feeling it. As he does this, he applies pressure of touch on your wrist that you would sense if it was the only pressure of touch you were experiencing. But he has concurrently applied other intense pressure of touch on your body, but not on your wrist, “swamping” the wrist pressure by creating a high-contrast touch pressure elsewhere. This high contrast takes the wrist pressure below perception.

Cognition is ordinarily situation-dependent, so that different situations often cause different conclusions, even when the same person is thinking in the same general subject area.

One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral suasion. They tried everything in the world without luck. And finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task.

Poor Richard’s Almanack: “If you would persuade, appeal to interest and not to reason.”

Perhaps the most important rule in management is “Get the incentives right.”

He also demonstrated that prompt rewards worked much better than delayed rewards in changing and maintaining behavior.

“To a man with only a hammer, every problem looks pretty much like a nail.”

One of the most important consequences of incentive superpower is what I call incentive-caused bias.

A man has an acculturated nature, making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants—a result he facilitates by rationalizing his bad behavior, like the salesmen at Xerox who harmed customers in order to maximize their sales commissions.

Widespread incentive-caused bias requires that one should often distrust or take with a grain of salt the advice of one’s professional adviser, even if he is an engineer. The general antidotes here are: 1) Especially fear professional advice when it is especially good for the adviser, 2) learn and use the basic elements of your adviser’s trade as you deal with your adviser, and 3) double-check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.

bad behavior is intensely habit-forming when it is rewarded. And so the cash register was a great moral instrument when it was created.

He had a little store, and his employees were stealing him blind, so that he never made any money. Then people sold him a couple of cash registers, and his store went to profit immediately. He promptly closed the store and went into the cash register business, creating what became the mighty National Cash Register company, one of the glories of its time.

The strong tendency of employees to rationalize bad conduct in order to get rewards requires many antidotes in addition to the good cash control promoted by Patterson.

My answer puts the most blame on the accountants and other senior people who created the accounting system. These people became the equivalent of an armored car cash-carrying service that suddenly decided to dispense with vehicles and have unarmed children hand-carry its customers’ cash through slums in open bushel baskets.

So incentive-caused bias is a huge, important thing, with highly important antidotes, like the cash register and a sound accounting system.

economists, speaking from the employer’s point of view, have long had a name for the natural results of incentive-caused bias: agency cost.

the name implies, economists have typically known that, just as grain is always lost to rats, employers always lose to employees who improperly think of themselves first. Employer-installed antidotes include tough internal audit systems and severe public punishment for identified miscreants, as well as misbehavior-preventing routines and such machines as cash registers.

Most capitalist owners in a vast web of free-market economic activity are selected for ability by surviving in a brutal competition with other owners and have a strong incentive to prevent all waste in operations within their ownership. After all, they live on the difference between their competitive prices and their overall costs, and their businesses will perish if costs exceed sales. Replace such owners by salaried employees of the state and you will normally get a substantial reduction in overall efficiency, as each employee who replaces an owner is subject to incentive-caused bias as he determines what service he will give in exchange for his salary and how much he will yield to peer pressure from many fellow employees who do not desire his creation of any strong performance model.

Another generalized consequence of incentive-caused bias is that man tends to game all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Anti-gaming features, therefore, constitute a huge and necessary part of almost all system design.

Also needed in system design is an admonition: Dread, and avoid as much you can, rewarding people for what can be easily faked.

Indeed, consultant PhD psychologists often urge business organizations to improve their reward systems by teaching executives to use “granny’s rule” to govern their own daily behavior.

Granny’s rule, to be specific, is the requirement that children eat their carrots before they get dessert.

The business version requires that executives force themselves daily to first do their unpleasant and necessary tasks before rewarding themselves by proceeding to their pleasant tasks. Given reward superpower, this practice is wise and sound. Moreover, the rule can also be used in the non-business part of life. The emphasis on daily use of this practice is not accidental. The consultants well know, after the teaching of Skinner, that prompt rewards work best.

Around the time of Caesar, there was a European tribe that, when the assembly horn blew, always killed the last warrior to reach his assigned place, and no one enjoyed fighting this tribe.

newly hatched baby goose is programmed, through the economy of its genetic program, to love and follow the first creature that is nice to it, which is almost always its mother.

Well, he will like and love being liked and loved. So many a courtship competition will be won by a person displaying exceptional devotion, and man will generally strive lifelong for the affection and approval of many people not related to him.

One very practical consequence of liking/loving tendency is that it acts as a conditioning device that makes the liker or lover tend to 1) ignore the faults of, and comply with the wishes of, the object of his affection; 2) favor people, products, and actions merely associated with the object of his affection, as we shall see when we

to influence-from-mere-association tendency; and 3) distort other facts to facilitate love. The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this feedback mode in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved.

Disliking / hating tendency also acts as a conditioning device that makes the disliker / hater tend to 1) ignore virtues in the object of dislike; 2) dislike people, products, and actions merely associated with the object of his dislike; and 3) distort other facts to facilitate hatred.

The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision.

It is easy to see how evolution would make animals, over the eons, drift toward such quick elimination of doubt.

So man’s doubt-avoidance tendency is quite consistent with the history of his ancient, nonhuman ancestors.

Of course, once one has recognized that man has a strong doubt-avoidance tendency, it is logical to believe that at least some leaps of religious faith are greatly boosted by this tendency.

what usually triggers doubt-avoidance tendency is some combination of 1) puzzlement and 2) stress.

Inconsistency-avoidance tendency

Few people can list a lot of bad habits that they have eliminated, and some people cannot identify even one of these. Instead, practically everyone has a great many bad habits he has long maintained despite their being known as bad.

The great rule that helps here is again from Franklin’s Poor Richard’s Almanack: “An ounce of prevention is worth a pound of cure.” What Franklin is here indicating, in part, is that inconsistency-avoidance tendency makes it much easier to prevent a habit than to change

it.

It is not entirely clear why evolution would program into man’s brain an anti-change mode alongside his tendency to quickly remove doubt. My guess is the anti-change mode was significantly caused by a combination of the following factors:

is easy to see that a quickly reached conclusion, triggered by doubt-avoidance tendency, when combined with a tendency to resist any change in that conclusion, will naturally cause a lot of errors in cognition for modern man.

We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves.

Instead, the new ideas were not accepted because they were inconsistent with old ideas in place.

What Keynes was reporting is that the human mind works a lot like the human egg. When one sperm gets into a human egg, there’s an automatic shut-off device that bars any other sperm from getting in. The human mind tends strongly toward

people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often reexamined or changed, even though there is plenty of good evidence that they are wrong.

Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, progress is made by a new generation that comes along, less brain-blocked by its previous conclusions.

One of the most successful users of an antidote to first-conclusion bias was Charles Darwin.

He trained himself, early, to intensively consider any evidence tending to disconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one.

The opposite of what Darwin did is now called confirmation bias, a term of opprobrium.

One corollary of inconsistency-avoidance tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. After all, it would be quite inconsistent behavior to make a large sacrifice for something that was no good. Thus civilization has invented many tough and solemn initiation ceremonies, often public in nature, that intensify new commitments made.

Tough initiation ceremonies can intensify bad conduct as well as good. The loyalty of the new made-man mafia member or of the military officer making the required blood oath of loyalty to Hitler was boosted through the triggering of inconsistency-avoidance tendency.

Few people demonstrated this process better than Ben Franklin. As he was rising from obscurity in Philadelphia and wanted the approval of some important man, Franklin would often maneuver that man into doing Franklin some unimportant favor, like lending Franklin a book.

Thereafter, the man would admire and trust Franklin more because a non-admired and non-trusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.

The practice of Franklin, whereunder he got approval from someone by maneuvering him into treating Franklin favorably, works viciously well in reverse.

When one is maneuvered into deliberately hurting some other person, one will tend to disapprove of or even hate that person.

In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge.

Curiosity, enhanced by the best of modern education—which is, by definition, a minority part in many places—much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.

And, as an obverse consequence of such fair-sharing conduct, much reactive hostility occurs when fair sharing is expected yet not provided.

A member of a species designed through evolutionary process to want often scarce food is going to be driven strongly toward getting food when it first sees food. This is going to occur often, and will tend to create some conflict when the food is seen in the possession of another member of the same species.

This is probably the evolutionary origin of the envy/jealousy tendency that lies so deep in human nature.

“It is not greed that drives the world but envy.”

The automatic tendency of humans to reciprocate both favors and disfavors has long been noticed as extreme, as it is in apes, monkeys, dogs, and many less cognitively gifted animals. The tendency clearly facilitates group cooperation for the benefit of members. In this respect, it mimics much genetic programming of the social insects.

What both human and ant history suggest is that 1) nature has no general algorithm making intraspecies, turn-the-other-cheek behavior a booster of species survival; 2) it is not clear that a country would have good prospects were it to abandon all reciprocate-disfavor tendency directed at outsiders; and 3) if turn-the-other-cheek behavior is a good idea for a country as it deals with outsiders, man’s culture is going to have to do a lot of heavy lifting because his genes won’t be of much help.

The standard antidote to one’s overactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, “You can always tell the man off tomorrow, if it is such a good idea.”

Of course, the tendency to reciprocate favor for favor is also very intense, so much so that it occasionally reverses the course of reciprocated hostility. Weird pauses in fighting have sometimes occurred right in the middle of wars, triggered by some minor courtesy or favor on the part of one side, followed by favor reciprocation from the other side, and so on, until fighting stopped for a considerable period. This

It is obvious that commercial trade, a fundamental cause of modern prosperity, is enormously facilitated by man’s innate tendency to reciprocate favors.

In trade, enlightened self-interest joining with reciprocation tendency results in constructive conduct. Daily interchange in marriage is also assisted by reciprocation tendency, without which marriage would lose much of its allure.

also joins inconsistency-avoidance tendency in helping cause 1) the fulfillment of promises made as part of a bargain, including loyalty promises in marriage ceremonies; and 2) correct behavior expected from persons serving as priests, shoemakers, physicians, and all

Now, the minor favor you receive from the salesman is less opposed by the threat of extra cost to you because someone else is paying the extra cost. Under such circumstances, the salesman is often able to maximize his advantage, particularly when the government is the purchaser.

Wise employers, therefore, try to oppose the reciprocate-favor tendencies of employees engaged in purchasing. The simplest antidote works best: Don’t let them accept any favors from vendors.

In a famous psychology experiment, Cialdini brilliantly demonstrated the power of compliance practitioners to mislead people by triggering their subconscious reciprocation tendency.

Carrying out this experiment, Cialdini caused his compliance practitioners to wander around his campus and ask strangers to supervise a bunch of juvenile delinquents on a trip to a zoo. Because this happened on a campus, one person in six out of a large sample actually agreed to do this. After accumulating this 1-in-6 statistic, Cialdini changed his procedure. His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for two years to the supervision of juvenile delinquents. This ridiculous request got him a 100 percent rejection rate. But the practitioner had a follow-up question: “Will you at least spend one afternoon taking juvenile delinquents to a zoo?” This raised Cialdini’s former acceptance rate of 1 in 6 to 1 in 2—a tripling.

What Cialdini’s compliance practitioners had done was make a small concession, which was reciprocated by a small concession from the other side. This subconscious reciprocation of a concession by Cialdini’s experimental subjects actually caused a much-increased percentage of them to end up irrationally agreeing to go to a zoo with juvenile delinquents.

Reciprocation tendency subtly causes many extreme and dangerous consequences, not just on rare occasions but pretty much all the time.

Overall, both inside and outside religions, it seems clear to me that reciprocation tendency’s constructive contributions to man far outweigh its destructive effects.

And the very best part of human life probably lies in relationships of affection wherein parties are more interested in pleasing than being pleased—a not-uncommon outcome in display of reciprocate-favor tendency.

creating a new habit, is directly triggered by rewards previously bestowed.

To avoid being misled by the mere association of some fact with past success, use this memory clue.

Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere. And there are plenty of mundane examples of results like those of Napoleon and Hitler. For instance, a man foolishly gambles in a casino and yet wins. This unlikely correlation causes him to try the casino again, or again and again, to his horrid detriment. Or a man gets lucky in an odds-against venture headed by an untalented friend. So influenced, he tries again what worked before—with terrible results.

The proper antidotes to being made such a patsy by past success are 1) to carefully examine each past success, looking for accidental, non-causative factors associated with such success that will tend to mislead as one appraises the odds implicit in a proposed new undertaking; and 2) to look for dangerous aspects of the new undertaking that were not present when past success occurred.

People disagree about how much blindness should accompany the association called love. In Poor Richard’s Almanack, Franklin counseled, “Keep your eyes wide open before marriage and half shut thereafter.” Perhaps this eyes-half-shut solution is about right, but I favor a tougher prescription: “See it like it is and love anyway.”

CBS, in its late heyday, was famous for the occurrence of Persian messenger syndrome because chairman Paley was hostile to people who brought him bad news. The result was that Paley lived in a cocoon of unreality from which he made one bad

deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter.

The proper antidote to creating Persian messenger syndrome and its bad effects, like those at CBS, is to develop, through exercise of will, a habit of welcoming bad news. At Berkshire,

there is a common injunction: “Always tell us the bad news promptly. It is only the good news that can wait.” It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.

In addition, the favor may trigger an envy-driven dislike for the person who was in so favorable a state that he could easily be a favor giver. Under such circumstances, the favor receiver, prompted partly by mere association of the favor giver with past pain, will not only dislike the man who helped him but also try to injure him.

Pete’s antidote is not to believe that, on average, 90-year-olds think as well as 40-year-olds, or that there are as many females as males among PhDs in math. Instead, just as he must learn that trend does not always correctly predict destiny, he must learn that the average dimension in some group will not reliably guide him to the dimension of some specific item. Otherwise, Pete will make many errors, like that of the fellow who drowned

Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn’t already own them.

There is a name in psychology for this over-appraise-your-own-possessions phenomenon: the endowment effect.

Therefore, some of the most useful members of our civilization are those who are willing to clean house when they find a mess under their ambit of control.

Let us consider some foolish gambling decisions. In lotteries, the play is much lower when numbers are distributed randomly than when the player picks his own number. This is quite irrational. The odds are almost exactly the same and much against the player. Because state lotteries take advantage of man’s irrational love of self-picked numbers, modern man buys more lottery tickets than he otherwise would have, with each purchase foolish. Intensify man’s love of his own conclusions by adding the possessory wallop from the endowment effect and you will find that a man who has already bought a pork-belly future on a commodity exchange now foolishly believes even more strongly than before in the merits of his speculative bet.

Excesses of self-regard often cause bad hiring decisions because employers grossly over-appraise the worth of their own conclusions that rely on impressions in face-to-face contact. The correct antidote to this sort of folly is to underweigh face-to-face impressions and overweigh the applicant’s past record.

There is a famous passage somewhere in Tolstoy that illuminates the power of excessive self-regard tendency. According to Tolstoy, the worst criminals don’t appraise themselves as all that bad. They come to believe either that 1) they didn’t commit their crimes or 2) considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became.

The second half of the Tolstoy effect, wherein the man makes excuses for his fixable poor performance instead of providing the fix, is enormously important. Because a majority of mankind will try to get along by making way too many unreasonable

excuses for fixable poor performance, it is very important to have personal and institutional antidotes limiting the ravages of such folly.

On the personal level, a man should try to face the two simple facts: 1) Fixable but unfixed bad performance is bad character and tends to create more of itself, causing more damage to the excuse-giver with each tolerated instance; and 2) in demanding places, like athletic teams and General Electric, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.

The main institutional antidotes to this part of the Tolstoy effect are

1) a fair, meritocratic, demanding culture, plus personnel handling methods that build up morale; and 2) severance of the worst offenders.

The father said, “Son, it would be better for you to simply take all you want and call yourself a thief every time you do it.”

Overoptimism tendency

One standard antidote to foolish optimism is trained, habitual use of the simple probability math of Fermat and Pascal, taught in my youth to high school sophomores.

That is, the loss seems to hurt much more than the gain seems to help. Moreover, if a man almost gets something he greatly wants and has it jerked away from him at the last moment, he will react much as if he had long owned the reward and had it jerked away.

A man ordinarily reacts with irrational intensity to even a small loss, or threatened loss, of property, love, friendship, dominated territory, opportunity, status, or any other valued thing.

When the vocal critic is a former believer, hostility is often boosted both by 1) a concept of betrayal that triggers additional deprival-superreaction tendency because a colleague is lost, and 2) fears that conflicting views will have extra persuasive power when they come from a former colleague.

inconsistency-avoidance tendency, plus 2) deprival-superreaction tendency.

antidote to intense, deliberate maintenance of groupthink is an extreme culture of courtesy, kept in place despite ideological differences, like the behavior of the justices now serving on the US Supreme Court. Another antidote is to deliberately

bring in able and articulate disbelievers of incumbent groupthink.

Deprival-superreaction tendency is also a huge contributor to ruin from the compulsion to gamble. First, it causes the gambler to have a passion to get even once he has suffered a loss, and the passion grows with the loss. Second, the most addictive forms of gambling provide a lot of near misses, and each one triggers deprival-superreaction tendency.

Deprival-superreaction tendency often does much damage to man in open-outcry auctions. The social proof that we will next consider tends to convince man that the last price from another bidder was reasonable, and then deprival-superreaction tendency prompts him strongly to top the last bid. The best antidote to being thus

triggered into paying foolish prices at open-outcry auctions is the simple Buffett practice: Don’t go to such auctions.

Some people may question my defining deprival-superreaction tendency to include reaction to profit barely missed, as in the well-documented responses of slot machine players. However, I believe that I haven’t defined the tendency as broadly as I should.

Some of this reaction is caused by rational calculation, and some is no doubt attributable to some combination of 1) reward superresponse, 2) status quo bias from inconsistency-avoidance tendency, and 3) the endowment effect from excessive self-regard tendency.

But I believe the single strongest irrational explanation is a form of deprival-superreaction tendency. Many of these shareholders simply can’t stand the idea of having their Berkshire Hathaway holdings smaller. Partly they dislike facing what they consider an impairment of identity, but mostly they fear missing out on future gains from stock sold or given away. Fifteen Social-proof tendency The otherwise complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done around him.

This makes it wise for parents to rely more on manipulating the quality of the peers than on exhortations to their own offspring.

Here, the answer is clear from many experiments: Triggering most readily occurs in the presence of puzzlement or stress, and particularly when both exist.

Because stress intensifies social-proof tendency, disreputable sales organizations—engaged, for instance, in such action as selling swampland to schoolteachers—manipulate targets into situations combining isolation and stress.

Because both bad and good behavior are made contagious by social-proof tendency, it is highly important that human societies 1) stop any bad behavior before it spreads and 2) foster and display all good behavior.

And therefore we often get Serpico syndrome, named to commemorate the state of a near-totally corrupt New York police division joined by Frank Serpico.

In social proof, 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.

Thus, the inaction of a great many bystanders led to the death of Kitty Genovese in a famous incident much discussed in introductory psychology courses.

Social-proof tendency often interacts in a perverse way with envy/jealousy and deprival-superreaction tendency.

Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

Contrast-misreaction tendency is routinely used to cause disadvantage for customers buying merchandise and services.

highly artificial price that is much higher than the price always sought, then advertise his standard price as a big reduction from his phony price.

Cognition, misled by tiny changes involving low contrast, will often miss a trend that is destiny. One of Ben Franklin’s best-remembered and most useful aphorisms is “A small leak will sink a great ship.” The utility of the aphorism is large precisely because the brain so often misses the functional equivalent of a small leak in a great ship.

He found that 1) he could classify dogs so as to predict how easily a particular dog would break down, 2) the dogs hardest to break down were also the hardest to return to their pre-breakdown state, 3) any dog could be broken down, and 4) he couldn’t reverse a breakdown except by reimposing stress.

Man’s imperfect, limited-capacity brain easily drifts into working with what’s easily available

to it.

The main antidote to miscues from availability-misweighing tendency often involve procedures, including the use of checklists, which are almost always helpful. Another antidote is to behave somewhat like Darwin did when he emphasized disconfirming evidence: What should be done is to especially emphasize factors that don’t produce reams of easily available numbers instead of drifting mostly or entirely into considering factors that do produce such numbers.

Still another antidote is to find and hire some skeptical, articulate people with far-reaching minds to act as advocates for notions that are opposite to the incumbent notions.

One consequence of this tendency is that extra-vivid evidence, being so memorable and thus more available in cognition, should often consciously be underweighed, while less vivid evidence should be overweighed.

An idea or a fact is not worth more merely because it is easily available to you.

All skills attenuate with disuse. I was a whiz at calculus until age 20, after which the skill was soon obliterated by total nonuse. The right antidote to such a loss is to make use of the functional equivalent of the aircraft simulator employed in pilot training. This allows a pilot to continuously practice all of the rarely used skills that he can’t afford to lose.

The hard rule of use-it-or-lose-it tendency tempers its harshness for the diligent. If a skill is raised to fluency, instead of merely being crammed in briefly to enable one to pass some test, then the skill 1) will be lost more slowly and 2) will come back faster when refreshed with new learning. These are not minor advantages, and a wise man engaged in learning some important skill will not stop until he is really fluent in it.

Continuous thinking and learning, done with joy, can somewhat help delay what is inevitable.

Living in dominance hierarchies as he does, like all his ancestors before him, man was born mostly to follow leaders, with only a few people doing the leading. And so, human society is formally organized into dominance hierarchies, with their culture augmenting the natural follow-the-leader tendency of man.

After Corporal Hitler had risen to dominate Germany, leading a bunch of believing Lutherans and Catholics into orgies of genocide and other mass destruction, one clever psychology professor, Stanley Milgram, decided to do an experiment to determine exactly how far authority figures could lead ordinary people into gross misbehavior.

In this experiment, a man posing as an authority figure, namely a professor governing a respectable experiment, was able to trick a great many ordinary people into giving what they had every reason to believe were massive electric shocks that inflicted heavy torture on innocent fellow citizens. This experiment did demonstrate a terrible result contributed to by authority-misinfluence tendency, but it also demonstrated extreme ignorance in the psychology professoriate right after World

War II.

This example shows how powerful is the tendency to go along with an authority figure and how it can turn one’s brain into mush.

Be careful whom you appoint to power, because a dominant authority figure will often be hard to remove, aided as he will be by authority-misinfluence tendency.

“The principal job of an academic administration is to keep the people who don’t matter from interfering with the work of the people who do.”

It makes man especially prone to learn well when a would-be teacher gives correct reasons for what is taught instead of simply laying out the desired belief ex cathedra with no reasons given.

Few practices, therefore, are wiser than not only thinking through reasons before giving

orders but also communicating these reasons to the recipient of the order.

You had to tell who was to do what, where, when, and why.

because Braun well knew that ideas got through best when the reasons for the ideas were meticulously laid out.

Unfortunately, reason-respecting tendency is so strong that even a person’s giving of meaningless or incorrect reasons will increase compliance with his orders and requests.