The Psychology of Human Misjudgment: A Simplified Insight
Charlie Munger, the legendary investor and vice chairman of Berkshire Hathaway, was known not just for his financial wisdom but also for his deep understanding of human psychology. His famous talk, The Psychology of Human Misjudgment, explored why people make irrational decisions and how cognitive biases influence their judgment.
Munger first introduced these ideas in Poor Charlie’s Almanack and later expanded on them, adding new insights and refining his views. His work laid the foundation for what is now called behavioral finance—a field that examines how psychology affects financial decision-making.
One of Munger’s key lessons is that our brains are wired in ways that often lead to errors in judgment. He identified 25 cognitive biases that cause human misjudgment and explained how these biases affect individuals, businesses, investments, and even entire societies.
Why This Matters
Understanding these biases is crucial because they shape the way we think, act, and make decisions. Whether in business negotiations, investing, or everyday life, being aware of these tendencies can help us avoid costly mistakes and make more rational choices.
The 25 Psychological Tendencies That Lead to Misjudgment
1. Reward and Punishment Superresponse Tendency
Incentives are among the most powerful forces shaping human behavior. Munger begins his analysis here because we often underestimate how deeply rewards and punishments can skew decision-making.
Take, for example, the case of Federal Express, where management struggled to get night-shift workers to complete tasks on time. Traditional methods failed until they switched from hourly pay to pay-per-shift, allowing employees to go home early if tasks were completed. Productivity soared. Why? The structure of rewards changed behavior instantly.
This principle also underpins unethical behaviors. Salespeople might push inferior products simply because commissions incentivize them to do so. Doctors may overprescribe tests due to billing structures. Munger highlights this with chilling examples, including a surgeon who believed he was helping patients while performing unnecessary surgeries driven by financial incentives.
Avoidance Strategy: Always consider the incentive structure — both your own and others’. Use the maxim: “Show me the incentive and I will show you the outcome.” Design systems that minimize perverse incentives and maximize integrity.
2. Liking/Loving Tendency
We tend to favor, believe, and support people and things we like. This bias leads to irrational decisions, from hiring based on charm to investing in companies led by charismatic leaders regardless of fundamentals.
Munger uses the example of a likable person receiving favorable treatment in court or business negotiations. Even when facts point otherwise, the liking effect can distort judgment. This bias also leads us to ignore faults and make excuses for those we admire.
Avoidance Strategy: Separate the person from the message. Before making a decision, ask: “Would I still agree with this if someone I disliked had said it?” Train yourself to evaluate arguments on merit, not on the source.
3. Disliking/Hating Tendency
The inverse of the liking bias causes us to ignore valid arguments, facts, or proposals simply because they come from someone we dislike. This bias is especially dangerous in politics, negotiations, and team dynamics.
Munger recounts how people distort facts to confirm their hatred, such as spreading rumours after tragic events or blaming enemies without evidence. The more intense the dislike, the less objective we become.
Avoidance Strategy: Force yourself to listen to and consider the viewpoints of those you dislike. Use techniques like steelmanning — restating your opponent’s position in its strongest form — to maintain objectivity.
4. Doubt-Avoidance Tendency
Uncertainty is uncomfortable, and our brains are hardwired to seek closure. This bias leads to premature conclusions, especially under stress or in complex situations.
Historically, this trait helped early humans make fast decisions in dangerous environments. But in modern contexts, it can cause us to settle for easy but incorrect answers, especially in ambiguous situations like investments, legal judgments, or hiring decisions.
Avoidance Strategy: Practice deliberate delay in decision-making when possible. Embrace uncertainty as part of the process and look for more data. Adopt probabilistic thinking rather than binary conclusions.
5. Inconsistency-Avoidance Tendency
Humans resist changing beliefs and behaviors, even in the face of contradictory evidence. This cognitive inertia makes us cling to outdated habits, identities, and decisions.
Munger gives the example of Charles Darwin, who rigorously wrote down every piece of evidence that contradicted his theories. He knew our minds naturally ignore such evidence, and only conscious effort can counter it.
This tendency also explains why people stay in toxic jobs, relationships, or investments — because admitting they were wrong is too psychologically painful.
Avoidance Strategy: Regularly audit your beliefs. Use a journal or checklist to challenge longstanding views. Encourage dissent and adopt a practice of revisiting past decisions with a fresh eye. Like Darwin, actively seek disconfirming evidence.
6. Curiosity Tendency
Curiosity is an innate drive present in all mammals, but humans exhibit it in far more complex and sustained ways. Munger argues that curiosity is not only a cognitive asset but a defense against many of the cognitive biases that plague human judgment. It’s curiosity that prompts us to investigate further, question assumptions, and seek deeper truths.
Curiosity is also closely linked to innovation and scientific progress. Civilizations that encouraged open inquiry, like ancient Athens, made leaps in mathematics and philosophy, while others, like the Roman Empire, focused more on engineering than fundamental understanding.
Avoidance Strategy: Actively nurture your curiosity. Ask “why” more often. Read widely across disciplines to build a mental toolkit. Treat curiosity as a habit, not a trait—something that needs regular exercise and encouragement.
7. Kantian Fairness Tendency
Derived from philosopher Immanuel Kant’s categorical imperative, this tendency compels us to behave in ways that we believe would work if everyone did them. It’s a natural extension of the Golden Rule, and a cornerstone of moral reasoning.
Kantian fairness helps explain why most people wait in lines, follow traffic laws, or return found wallets. We value fairness and consistency in behavior not just as ethical imperatives but because they help societies function smoothly.
Avoidance Strategy: Use this tendency to your advantage by applying the “universal law” test—would this action still be good if everyone did it? Let fairness guide decisions, but watch for manipulation by people who play unfairly while exploiting your own sense of fairness.
8. Envy/Jealousy Tendency
Munger calls envy one of the most potent and under-discussed forces in human psychology. Unlike greed, envy is not about wanting more but about resenting others who have more. It is deeply rooted in our evolutionary need to compete for scarce resources.
It’s why people often experience dissatisfaction, not because they lack something, but because someone they know has more. Envy fuels sibling rivalries, workplace conflict, and even national policy debates.
Avoidance Strategy: Become aware of when envy arises and how irrational it can be. Practice gratitude. Keep your goals intrinsic and grounded in personal values rather than social comparison.
9. Reciprocation Tendency
This is the tendency to return favors and punish harms. It’s one of the oldest and most universal aspects of human behavior, present even in primates and dogs. Societies could not function without reciprocity—it underpins relationships, commerce, and culture.
Munger cites examples ranging from war truces triggered by small kindnesses to corporate corruption driven by small gifts. Even trivial favors like a cup of coffee can bias decision-making due to the subconscious pull to reciprocate.
Avoidance Strategy: Be cautious when receiving favors, especially in high-stakes settings like negotiations or vendor relations. As Sam Walton advised, don’t let purchasing agents accept even a hot dog from suppliers. Maintain clarity by separating goodwill from obligation.
10. Influence-from-Mere-Association Tendency
Humans often make decisions based on associations, even when those connections are irrational. Advertisers use attractive people, upbeat music, or luxury imagery not because they improve the product, but because those associations create favorable feelings.
This bias explains why we link high prices with quality or believe a politician is credible just because they appear with a beloved celebrity. Munger emphasizes how easily our brains are fooled by mere proximity to something we like or dislike.
Avoidance Strategy: Train yourself to recognize when irrelevant associations are influencing you. Ask: “What’s the actual merit of the product, argument, or person, regardless of who or what is around it?”
