I just finished the book that I’ll recommend to everyone this year.
It’s called Seeking Wisdom and author Peter Bevelin tries to cover exactly that:
How does one reach the state of “wisdom”?
The book is largely based on the philosophy of the second hand man of super-investor Warren Buffett, Charlie Munger.
His theory is that “the best way to achieve wisdom is to learn the big ideas that underlie reality. [...] Even people who aren’t geniuses can outthink the rest of mankind if they develop certain thinking habits.”
Buffett describes Charlie as the thinking machine behind the empire he built up at Berkshire Hathaway. Author Peter Bevelin talks of Munger as “a man whose simplicity and clarity of thinking is second to none.”
In short, I’d say that the book is about these things we know – or think we kind of know – but need to be reminded of every once in a while. We need to remind ourselves of these principles so we can actually use them to guide our thinking. Actually using the stuff we learn is the goal of information right?
If you’ve read and enjoyed the works of Daniel Kahneman (Thinking Fast And Slow), Nassim Nicholas Taleb (The Black Swan, Antifragile), Robert Sapolsky (Why Zebras Don’t Get Ulcers), Robert Cialdini (Influence), Stoic philosophy (Marcus Aurelius, Seneca, Epictetus),… you will definitely enjoy this book.
Munger on why it’s important to process and master second-hand information to guide your thinking:
“I 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.”
Below you find a summary of the list of 28 principles from behavioral psychology – mistakes, misjudgments, cognitive biases – you can use to improve your thinking, that were discussed in Seeking Wisdom.
1. Mere Association
We move towards stimuli we associate with pleasure an away from those we associate with pain.
We tend to dislike people who tell us what we don’t want to hear even when they didn’t cause the bad news, i.e. kill the messenger. This gives people an incentive to avoid giving bad news.
Individuals are neither good nor bad merely because we associate them with something positive or negative.
Encourage people to tell you bad news immediately.
Past experiences are often context dependent.
Create a negative emotion if you want to end a certain behavior. If you want someone to stop smoking, one way could be to show them what they stand to lose.
2. Reward And Punishment
“The iron rule of nature is: you get what you reward for.
If you want ants to come, you put sugar on the floor.”
– Charlie Munger
Give people what they desire (or take away something undesirable) and their behavior will repeat.
Give they something undesirable (or take away whay they desire) and their behavior will stop.
In the beginning, rewarding (or punishing) is most effective when it is administered without delay and each time the behavior is repeated.
Once behavior becomes learned, variable rewards strengthen the behavior.
“The chains of habit are too weak to be felt until they are too strong to be broken.”
– Samuel Johnson
After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse.
Good consequences don’t necessarily mean we made a good decision, and bad consequences don’t necessarily mean we made a bad decision.
This automatic association to what worked in the past causes people to under-react to new condition and circumstances.
Praise is more effective in changing behavior than punishment. It is better to encourage what is right than to criticize what is wrong.
Set examples: “We do not improve the man we hang: we improve others by him.” – Michel de Montaigne
“It is difficult to get a man to understand something when his salary depends upon him not understanding it.”
– Upton Sinclair
Warren Buffet on business goals:
Goals should be:
(1) tailored to the economics of the specific operating business
(3) directly related to daily activities
Reward individual performance and not effort or length in organization. Reward people after and not before performance.
Don’t let money be the only motivation. If we reward people for doing what they like to do anyway, we sometimes turn what they enjoy doing into work. The reward changes their perception.
The key is what a reward implies. A reward for our achievements makes us feel that we are good at something thereby increasing our motivation. But a reward that feels controlling and makes us feel that we are only doing it because we’re paid to do it, decreases the appeal. Blase Pascal said: “We are generally better persuaded by the reasons we discover ourselves than by those given to us by others.”
Have systems that make it hard for people to get away with undesirable behavior. Make undesirable behavior costly.
An example of a really responsible system is the system that the Romans used when they built an arch. The guy who created the arch stood under it as the scaffolding was removed. It’s like packing your own parachute.(Skin In The Game/Neck On The Line ~ Nassim Taleb)
3. Self-Interest And Incentives
People do what they perceive is in their best interest and are biased by incentives.
“My doctor gave me 6 months to live. When I told him I couldn’t pay the bill, he gave me 6 more months.”
– Walther Matthau
People who are rewarded for doing stupid things continue to do them.
Studies show that teachers help students cheat on standardized tests when their jobs or pay increases depend on the outcome of the tests.
“Whose bread I eat, his song I sing.”
– German proverb
How can we change people? Since the risk of losing is more motivating than the chance of gaining, we stand a better change changing people if we appeal to their fear of losing something they value – job, reputation, status, money, control, etc.
Changing people affects their motivation, feelings of responsibility, and tendency to reciprocate. It is better when people act out of their own free will.
Understand people’s motivations. Money, status, power, envy?
People’s interests are not only financial. They could also be social or moral. For example, public embarrassment, social exclusion, conscience, shame or guilt may cause people to stop some undesirable behavior.
“Do not train boys to learning by force and harshness, but lead them by what amuses them, so that they may better discover the bent of their minds.”
It is better to convince people by asking questions that illuminate consequences.
4. Self-Serving Tendencies And Optimism
We can’t all be better than average.
People tend to put higher probability on desired events than on undesired events.
Experiments show that when we are successful (independent by chance or not), we credit our own character or ability.
When we fail, we blame external circumstances or bad luck. When others are successful, we tend to credit their success to luck and blame their failures on foolishness.
“If the only tool you have is a hammer, you approach every problem as if it were a nail.”
– English proverb
Experts love to extrapolate their ideas from one field to all other fields. They define problems in ways that fit their tools rather than ways that agree with the underlying problem.
“An optimist is a person who sees a green light everywhere, while the pessimist sees only the red stoplight. The truly wise person is colorblind.”
– Dr. Albert Schweitzer
How well do you know what you don’t know?
“It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
– Charlie Munger
Focus on what can go wrong and the consequences. Know how you will handle things when they go wrong.
Consider people’s actual accomplishments and past behavior over a long period of time rather than first impressions.
5. Self-Deception And Denial
We deny and distort reality to feel more comfortable, especially when reality threatens our self-interest.
We believe something is true because it sounds believable or we want to believe it, especially with issues of love, health, religion, and death. This is one reason why people follow gurus. They encourage followers to trust their hearts and forget their heads.
When the cost of denial is worse than the benefit of facing reality, we must face reality.
The more we have invested in our behavior the harder it is to change.
We behave in ways that are consistent with how others see us. If people label us as talented, we try to appear talented whether or not it is true.
“What the human being is best at doing is interpreting all new information so that their prior conclusions remain intact.”
– Warren Buffett
We are most consistent when we have made a public, effortful or voluntary commitment. The more public a decision is, the less likely it is that we will change it.
In the low-ball technique, the salesperson gives the customer an incentive to enter into an agreement with the intention of changing the terms to the seller’s advantage.
In the labeling technique, people try to get us commited by first applying a label to our personality or values that is consistent with the behavior they want us to take.
Foot-in-the door technique:
How do people seduce us financially, politically or sexually? They makes us agree to a small request, so small no one would refuse.
When people get us to commit, we become responsible.
How do we get people to take inner responsibility for their actions? Make it voluntary. We take responsibility for our behavior in cases when we are interanlly motivated by satisfaction or interest, when we feel in control, and when we are free from incentives or outside pressure.
If we can get people commited in advance, they tend to live up to their commitment.
Be self-critical and unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions. Consider alternative outcomes, viewpoints, and answers. Have someone tell you when your thinking is wrong.
7. Deprival Syndrome
One reason why horse races, bingo and these things have always been so popular is because of all these near misses. Frequent near misses are like small reinforcements and make us want to try again and again.
“All these feelings. And it has no impact whatsoever.”
– Warren Buffett
We want and value more what is scarce and unique.
How do we create demand? Create competition.
Know your goals and options. Ask: Why do I want this?
“Captain Cook served sauerkraut to the officers, but not to the men. And then, finally he said, ‘Well, the men can have it one day a week.”
8. Status Quo And Do-Nothing Syndrome
Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action.
Remember what you want to achieve.
We are impatient in the short run and patient in the far away future.
Consider both the short and long-term consequences of a decision. Weigh present good/bad against future good/bad. Short-term suffering may lead to long term pleasure.
10. Envy And Jealousy
“Man will do many things to get himself loved;
he will do all things to get himself envied.”
– Mark Twain
It is people similar to us we envy most.
“There is nothing so disturbing to one’s well-being and judgment as to see a friend get rich”
– Charles P. Kindleberger
Studies show that how happy we are is partly determined by where we stand in relation to similar others.
As long as you achieve your goals, it shouldn’t matter if someone else does better.
Studies show that it matters whether we believe that others deserve their success.
“The best way to avoid envy is to deserve the success you get.”
11. Contrast Comparison
How we value things depends on what we compare them with.
Evaluate objects and people by themselves and not by their contrast.
“I always set low targets to exceed expectations.”
Consider choices from a zero base level and remember what you want to achieve.
Adjust information to reality.
13. Vividness And Recency
Information we receive directly, through our eyes or ears has more impact than information that may have more evidential value.
Information that moves us emotionally makes us pay greater attention to the event itself than to its magnitude. Statistics rarely spark our emotions. An individual face and name will.
Sometimes we believe an event has increased in frequency because we see it more. But the media may only cover it more.
We give too much weight to information we’ve seen, heard, read or experienced most recently.
Accurate infomation is better than dramatic information. Back up vivid stories with facts and numbers.
Ask: is it relevant?
14. Omission And Abstract Blindness
We often both choose and reject options that are of a more striking or complex nature over average ones.
Consider missing information. Know what you want to achieve.
Whenever someone does something for us we want to do something back.
We make a concession to people who have first made a concession to us.
People don’t want to feel indebted. We are disliked if we don’t allow people to give back what we’ve given them.
A favor or gift is more effective when it is personal, significant, and unexpected.
Give people what you want in return from them. Ask: Assuming others are like me, how would I like to be treated if the roles were reversed?
16. Liking And Social Acceptance
“The deepest principle in human nature is the craving to be appreciated.”
– William James
We like people who compliment us – true or not – and make us feel special.
“Talk to a man about himself and he will listen for hours.”
– Benjamin Disraeli
People believe we have the same personality as those we associate with.
Create an external common threat or an opportunity for mutual gain.
Asking a favor of someone is likely to increase that person’s liking for us.
“He that has once done you a kindness will be more ready to do you another, than he whom you yourself have obliged.”
– Benjamin Franklin
17. Social Proof
“If 40 million people say a foolish thing, it does not become a wise one.”
– Somerset Maugham
Since everybody else wants it, we assume there has to be a reason.
We trust testimonials from people that we see as similar to us.
“What the wise do in the beginning, fools do in the end.”
– Warren Buffett
“I’d rather be wrong in a group than right by myself.” (Sheeping)
We have a tendency to not act in situations where we are uncertain if there is danger and when we don’t feel individual responsibility. Also when we want to avoid embarrassment and when we’re among strangers. The more people, the more reduced we see our own responsibility.
A bystander to an emergency is unlikely to help when there are other people around.
When we are uncertain, we have a tendency to look at people around us to see how they react. If others don’t react, we interpret that as evidence that it is not an emergency.
Pluralistic ignorance: “Since nobody is concerned, nothing is wrong. It can’t be an emergency.”
Diffusion of responsibility: The more people there are, the less personal responsibility we feel.
So, how should we act if we are involved in an accident in a public place and need help? We should be specific. “You there, in the blue shirt. This is an emergency. Please help me!”
“Gentlemen, I take it we are all in complete agreement with the decision here. Then, I propose we postpone further discussion of this matter to give ourselves time to develop disagreement and perhaps gain some understanding of what the decision is all about.”
“The masses have never thirsted after truth. They turn aside from evidence that is not to their taste, preferring to deify error, if error secude them. Whoever can supply them with illusions is easily their master: whoever attempts to destroy their illusions is always their victim.”
– Gustave Le Bon (The Crowd)
Conditions of uncertainty and exclusive similarity strengthen the principle of social proof.
“It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own: but the great man/woman is he/she who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”
– Ralph Waldo Emerson
“Wish to everyone here for 2014: the preservation of the most important and most threatened human asset: MENTAL CLARITY.
#vianegativa” – Nassim Taleb’s new year’s resolution tweet
Disregard what others are doing and think for yourself. Ask: does this make sense?
“Have the courage of YOUR knowledge and experience.
If YOU have formed a conclusion from the facts and if YOU know YOUR judgment is sound, ACT ON IT.”
– Benjamin Graham
Seek out alternative points of view and encourage people to openly disagree. Appoint someone in the group to question things and point out risks and pitfalls.
When all are accountable, no one is accountable.
=> Be specific. You. Do. It.
Titles, possessions, rank, uniforms, or a nice suit and tie.
Experts are sometimes more convincing when we don’t understand them.
Blind obedience is sometimes a way to rationalize dumb actions.
Evaluate the truth of a statement on the basis of its underlying facts, without regard to the authority’s personal qualities or social status.
An authority may have an interest in persuading you to believe something that is in their interest. Always consider:
To insure their trustworthiness, authorities often mention weaknesses before strengths and prove information that seems contrary to their interests. This technique is often used by salesmen and negotiators.
By finding patterns and causal relationships we get comfort and learn from the future.
When trying to make sense of what has happened, we construct a plausible story or explanation that fits the autcome. But there are many ways an event or behavior can later be understood.
The danger of relying on case-based stories: Stories may be selected to prove something and may give us a delusional sense of clarity.
History is explained by what has survived into the historian’s present. Not all sources survive.
We seem to have a tendency for romanticizing past achievements.
We like it when people tell us what the future will look like. It reduces uncertainty.
A test is reliable if it gives about the same result when repeated assuming the test measures a characteristic that is stable over time.
In the 1980s, some businessmen bought some branded stereo speakers and packed them into a truck. They parked the truck behind a dorm at Harvard and started whispering “Pssst… Hey! You wanna buy some speakers?” They never said that the speakers were stolen but passersby assumed they were. They therefore had to be a bargain. The businessmen sold out in no time. Even if the speakers cost a little more than they did in the local store.
We love stories and story-telling. Good stories and drama get out attention. They give meaning to event. We rationalize decisions and justify choices by telling ourselves comforting stories. We use stories to understand, remember and make sense of events.
After an event a story is created so that the event makes sense.
“Excuse me, I have 5 pages. May I use the Xerox machine BECAUSE I have to make some copies.”
When people ask us for a favor we are more likely to comply if they give us a reason – even if we don’t understand the reason or it is wrong. Often it isn’t the reason itself that is important, but the way the reason is phrased. Sometimes the word “because,” without a sensible reason, is all that matters. We want explanations and the word “because” implies an explanation.
Even if they don’t understand the your reason, they’ll be more likely to comply.
If we don’t understand the meaning of an idea, we don’t use it.
We learn better if the use of ideas and patterns are illustrated through pictures and simple, clear and vivid real-life stories.
People can’t be persuaded by what they don’t understand.
Tell them so they understand WHY a specific action is needed, WHAT the expected objective is, and WHY you think the action is right.
21. Believe First And Doubt Later
We are not natural skeptics. We find it easy to believe, but difficult to doubt. Doubting is active and takes effort.
We first believe all information we understand an only afterwards and with effort do we evaluate, and if necessary, un-believe.
=> Un-believing takes effort.
The more distracted or pressured we are, the more likely we believe in something we normally would find dubious.
22. Memory Limitations
Emotional events are better remembered than unemotional ones. That is why we learn better if information is tied to a vivid story. Learning is also tied to mood. We learn better in a positive mood. That is why teaching should be performed in a way that creates powerful positive emotions among students.
Studies show that it is easy to get a witness to believe that they saw something when they didn’t. Merely let some time pass between their observation and the questioning. Then give them false or emotional information about the event.
Childhood memories are unreliable and influenced by fantasies and suggestions.
Keep records of important events.
=> Remember events right. Write stuff down.
23. Do-Something Syndrome
“Being busy all the time is a form of laziness.”
“Man finds nothing so intolerable as to be in a state of complete rest, without passions, without occupation, without diversion, without effort.”
– Blaise Pascal
“You will be civilized on the day you can spend a long period doing nothing, learning nothing, and improving nothing, without feeling the slightest amount of guilt.”
– Nassim Nicholas Taleb
Don’t confuse activity with results.
What do you want to accomplish?
“There is no use running if you’re on the wrong road.”
– Warren Buffett
24. Say-Something Syndrome
“If you have nothing to say, say nothing.”
– Mark Twain
“Awareness of ignorance is the beginning of wisdom.”
“I have often regretted my speech, never my silence.”
– Publilius Syrus
Studies show that when we are in a state of more rational calm, we underestimate how we will feel and act when we experience intense emotions.
When we feel sad, which often reflects helplessness and loss, we may want to change our circumstances so we feel better. This may cause us to overpay for something or buy things we don’t need.
When we make big decisions, we could compare our expected feelings with those of people who have similar experiences today. In that sense, we are not as unique as we think we are.
Ask: Is there a rational reason behind my action?
When we have just gone through an emotional experience, we should hold off on important decisions.
=> Sleep first. Then decide.
When we feel stress the concentration of cortisol rises in the bloodstream. One effect of cortisol is to suppress the workings of our immune system. This makes us more vulnerable to diseases. Stress also counteracts the production of insulin (the hormone that produces blood sugar), causing the process of repair to slow down. Studies show that emotional stress creates longer recovery times in our bodies and may be more harmful to our health than non-emotional stress like physical exercise.
=> Distress vs. Eustress
Studies show that people who perceive themselves to be in control over a stressful situation experience less stress.
Stress can be controlled by our attitudes.
“It is not stress that harms us but distress. We need challenges. Without stress there would be no life… Complete freedom from stress is death.”
– Dr. Hans Selye
“I’ve suffered a great many catastrophes in my life. Most of them never happened.”
– Mark Twain
27. Pain, Chemicals And Diseases
Drugs, stimulants, and depressants distort our senses.
28. Multiple Tendencies
“When you get two or three of these psychological principles operating together, then you really get irrationality on a tremendous scale.”
– Charles Munger
“Most social acts have to be understood in their setting, and lose meaning if isolated. No error in thinking about social facts is more serious than the failure to see their place and function.”
– Solomon Asch
Zimbardo prison experiment: Often when we are in a role, we tend to act as others expect.
“Don’t judge a man until you’ve walked two moons in his moccasins.”
– Indian proverb
People may change their behavior merely because they are being observed.
Anonymity can create destructive behavior.
We should view our assests in terms of their entirety. A dollar is a dollar independent of where it comes from.
We treat people like we expect them to be.
Assume that a new teacher is told that half of the class has high IQs and half low IQs. The teacher is given the names of the supposed intelligent kids and the supposed not so intelligent ones. In reality, someone has randomly selected the two groups. By the end of the year, the experimental premise will become a self-fulfilling prophecy.The kids the teach thought had high IQs will be doing better than the kids with supposedly low IQs. This has been demonstrated in studies of elementary school students. Teachers taught much better when they expected a lot from their students.
Some Final Advice From Charlie Munger
Follow these three pieces of advice from Charlie Munger:
(1) 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. In fact one trick in life 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. You’ve poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, “Now it has to work. If I put in just a little more, then it will work.”
(2) Two-track analysis:
First, what are the factors that really govern the interests involved, rationally considered?
Second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often misfunction.
One approach is rationality. The other is to evaluate the psychological factors that cause subconscious conclusions.
(3) Take all the main models from psychology and use them as a checklist.
“He who knows men is clever;
He who knows himself has insight;
He who conquers men has force;
He who conquers himself is truly strong.”
“The tradition of always looking for the answer in the most fundamental way available – that is a great tradition and it saves a lot of time in this world. You have to learn to have what people call ‘assiduity’. Well, I’ve always liked that word – because to me it means that you sit down on your ass until you’ve done it.”
– Charlie Munger