After having heard about Charlie’s wisdom for years from various sources, I finally decided to pick up Poor Charlie’s Almanack after prompting from Shane Parrish of The Knowledge Project. Munger is indeed full of wisdom and seems to be one of the progenitors of using mental models as daily decision-making tools, which both Shane and I find immensely helpful. Charlie, for those who do not know, is Warren Buffett’s partner and quieter half at Berkshire Hathaway.
The real value in the book is in Charlie’s eleven talks, which all reside in Chapter Four. Enduring themes throughout include challenging the established wisdom, recognizing faults in psychology, using mental models to correct for them (especially the “lollapalooza” effect which he references many dozens of times), and to synthesize knowledge from different fields as a generalist rather than be pigeonholed into one way of thinking.
Charlie’s Investing Principles Checklist (pg 73):
- Risk – Measure risk, especially reputational. Be compensated for risk and avoid dealing with questionable characters.
- Independence – Objectivity requires independence of thought, don’t go just based on what others believe. Mimicking the herd gives regression to the mean.
- Preparation – Develop fluency in mental models (below)
- Intellectual humility – Know when you don’t know. Stay within a defined circle of competence. Identify disconfirming evidence.
- Analytic Rigor – Determine value apart from price, progress apart from activity, wealth apart from size. Be a business analyst, not a macroeconomic or market analyst.
- Allocation – Proper allocation of capital is an investors number one job. Put the money where it matters. Good ideas are rare, when the odds are in your favor, bet heavily.
- Patience – Avoid frictional costs and be patient for compound effects.
- Decisiveness – Be fearful when others are greedy, and greedy when others are fearful. Seize the opportunity when it comes. You win when opportunity meets the prepared mind.
- Change – Continually be willing to challenge your best-loved ideas.
- Focus – Remember your reputation and integrity are your most valuable assets—and can be lost in a heartbeat. Don’t overlook the obvious by drowning in minutiae.
How to Imitate Create Coca-Cola’s Success
- First, make a strong, legally protected trademark. So as to not be interchangeable with other company’s products as generics
- Second, grow from city-wide, to countrywide to worldwide. This means the product must have universal appeal
- Develop universal appeal with lollapalooza effects from psychological factors. We can do this by combining operant and Pavlovian conditioning.
- Operant conditioning by maximizing rewards of our beverage ingestion (taste good, feel good from caffeine, status as a fancier beverage, etc).
- Pavlovian conditioning by associating Coca-Cola with other positive things, like a happy life, beautiful women, etc. The name Coca-Cola itself os associated with sounding higher class than something like “Glotz’s Flavored Sugar Water.” It is carbonated to seem more like champagne or another expensive beverage.
- Take advantage of social-proof psychology. The more people we can get to drink our product the more people will imitate it.
- Let operant conditioning, Pavlovian conditioning, and social proof combine to create an autocatalytic reaction, where growth builds upon itself.
- Maximize efficiency in logistics by shipping condensed syrup and having bottling plants spread throughout. This saves on spending unnecessary money on shipping water and glass.
- Avoid mistakes; t’s not good enough to just do the right things. Changing the flavor too drastically could cause effects from loss-aversion, where customers feel like they’ve lost a beverage they liked. This could create animosity.
Charlie’s Twenty-Five Psychological Mental Models (pg 449). Some of which I’ve renamed or relabeled to be easier to understand or more in line with current psychological terminology.
- Incentive Superresponse – People are VERY likely to react to incentives of reward and punishment. Far more than one might imagine.
- Especially fear professional advice if the advice is good for the advisor
- Granny’s Rule: Eat your carrots before desert. You can help incentivize good behavior by setting the rule that you will only do what you want to do after you do what you need to do.
- Liking/Loving Tendency – People will react in defense of what they like and love. This in confluence with the Disliking/Hating Tendency creates tribalism.
- Disliking/Hating Tendency – People will react against what they dislike or hate. This in confluence with the Liking/Loving Tendency creates tribalism.
- Doubt-Avoidance Tendency – The brain of man is programmed to quickly remove doubt by reaching some decision. This likely helped evolutionarily where deciding to run, fight, etc was preferable to indecision. But it also means we become more certain than we ought to be given circumstances
- Reluctance to Change Tendency – “An ounce of prevention is worth a pound of cure.” Once you’ve adopted a habit it becomes difficult to do otherwise. This can also be good, as people are more consistent in their lives as priests, physicians, citizens, soldiers, spouses, etc.
- Curiosity Tendency – People can be curious about things. More so when these things affect them in some manner.
- Kantian Fairness Tendency – People respect Kant’s moral rule that we should act in the same way that would be best if we all acted that way. This is why people will get upset if you do not wait in line, or let people pass you on the road, etc.
- Envy Tendency – If you see someone of related status getting something you do not have, you are likely to become envious.
- Reciprocation Tendency – People tend to reciprocate favors with favors. This is why salesmen might often buy you coffee, as you will be more likely to feel the need to buy what they are selling. This becomes amplified when you are not paying with your own money (on behalf of your employer, taxpayers, etc).
- Associative Thinking – This is why you will see Coke advertised with happy pictures of reality and not sad scenes. People draw associations between products and other products, circumstances, feelings, etc.
- Pain-Avoiding Psychological Denial – People can choose to believe things that would be too painful to believe otherwise, such as the mother who believed her son was alive after he was sent to fight in WWII and never came back.
- Excessive Self-Regard Tendency – Ninety percent of drivers think they are better than the average. This also makes people especially prefer people like themselves (people are more likely to return found wallets when the owner resembles them).
- Overoptimism Tendency – This is why people buy lottery tickets. Nature did not give us a good mind for managing risk and people can expect the worst for themselves. I think this heuristic is incomplete as there are certainly people who feel the opposite.
- Endowment Effect – The value from a ten-dollar gain does not match the disvalue from a ten-dollar loss. People do not like things taken away from them. This folds into Danny Kahneman’s Prospect Theory.
- Social-Proof – The complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done from those around him.
- Contrast-Misreaction Tendency – People are more sensitive to contrasted values than to absolute values. This is why sales work. You might not normally value a pair of jeans at $100, but if they are a $300 pair on sale at $100, the contrast makes them more attractive as a deal.
- Stress-Influence Tendency – Light stress can improve performance. Heavy stress can cause depression. Pavlov found in an unethical study of inducing stress on dogs, that the dogs hardest to break down were also the hardest to return to their pre-breakdown state, and that he couldn’t reverse a breakdown without reimposing stress. Cults and other organizations can use initiation ceremonies as a form of stress-influence.
- Availability Heuristic – “When I’m not near the girl I love, I love the girl I’m near.” What you see is all there is. The brain cannot recall or know every relevant piece of material so what is available affects what one thinks.
- Use-it-or-lose-it Tendency – Exactly as it sounds. Use simulators to practice rarely used skills that should not be lost.
- Drug-Misinfluence Tendency – Also as it sounds. People abuse drugs.
- Senescence-Misinfluence Tendency – Old people cannot learn new skills as well, but they can be pretty good at maintaining old skills. Not sure why this is a psychological distortion worth mentioning.
- Authority-Misinfluence Tendency – AKA the Milgram experiments. We live in dominance hierarchies, and there is a natural follow-the-leader tendency, doubly so when the leader is seen as having adopted responsibility.
- Twaddle Tendency – Man tends to twaddle around and distract when serious work is being done. As in line with Pareto, 20% of people do 80% of the work. Keep the twaddlers at bay.
- Reason-Respecting Tendency – People respect reason.
- Lollapalooza Tendency – The tendency to get extreme consequences from confluences of psychological effects all acting in favor of a particular outcome. Imagine scenarios where many previous tendencies work together in one direction—you can get drastic results.
- Charlie’s opinion on extreme consequences about punishment in the Navy (as an example for broader purposes) was interesting and counter to what I previously thought. He supports that Commanding Officers get fired if a ship runs aground, even if they were sleeping and it was the fault of some other sailors. His opinion is that the benefit to the Navy of having Captain’s sweat blood to protect their ships outweighs the injustice of a few people getting fired. As long as they are still able to retire, accept pension, and not be imprisoned or something too drastic.