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Investing biases that will surprise you

Last week, I wrote about a speech that Charlie Munger, Warren Buffett’s vice-chairman at Berkshire Hathaway (NYSE: BRK-A, BRK-B) gave on the psychology of human misjudgement.

You can find the whole talk here, but last week I summarised the first nine biases that Munger outlined. As promised, here are the final nine.

10. Bias from deprival super-reaction syndrome

“Take the Munger dog, a lovely, harmless dog. The only way to get that dog to bite you is to try and take something out of its mouth after it was already there. If you’ve tried to do takeaways in labour negotiations, you’ll know that the human version of that dog is there in all of us. I have a neighbour, and his next-door neighbour put a little pine tree on it that was about three feet high, and it turned his 180 degree view of the harbour into 179 and three-quarters. Well they had a blood feud like the Hatfields and McCoys. People are really crazy about minor decrements down.”

11. Bias from envy and jealousy

“I’ve heard Warren [Buffett] say a half a dozen times, ‘It’s not greed that drives the world, but envy.’ And you go through the psychology survey courses, and you go to the index: envy, jealousy, in a 1,000-page book — it’s blank! There’s some blind spots in academia, but it’s an enormously powerful thing.”

12. Bias from chemical dependency

“We don’t have to talk about that. We’ve all seen so much of it. But it’s interesting how it’ll always cause this moral breakdown if there’s any need, and it always involves massive denial.”

13. Bias from misgambling compulsion

“You have a lottery where you get your number by lot, and then somebody draws a number by lot, it gets lousy play. You have a lottery where people get to pick their number, you get big play. People think if they have committed to it, it has to be good. The minute they’ve picked it themselves it gets an extra validity. After all, they thought it and they acted on it.”

14. Bias from liking distortion

“The tendency to especially like oneself, one’s own kind and one’s own idea structures, and the tendency to be especially susceptible to being misled by someone liked.”

15. Bias from the non-mathematical nature of the human brain

[I’m paraphrasing this one] A boss catches an employee stealing from the cash register. The employee says, “I’ve never done it before and I’ll never do it again.” What are the odds that they’ve never done it before? Very small. But you biasedly ignore that probability because you like them. Munger says: “In the history of the See’s Candy Company they always say, ‘I never did it before, and I’m never going to do it again.’ And we cashier them. It would be evil not to, because terrible behaviour spreads.”

16. Failure to obtain deserved influence caused by not properly explaining “why?”

“We all know people who’ve flunked, and they try and memorise and they try and spout back. It just doesn’t work. The brain doesn’t work that way. You’ve got to array facts on the theory structures answering the question ‘Why?’ If you don’t do that, you just cannot handle the world.”

17. Bias from stress-induced mental changes

“[Pavlov] had all these dogs in cages, which had all been conditioned into changed behaviours, and the great Leningrad flood came and it just went right up and the dog’s in a cage. And the dog had as much stress as you can imagine a dog ever having. The water receded in time to save some of the dogs, and Pavlov noted that they’d had a total reversal of their conditioned personality. And being the great scientist he was, he spent the rest of his life giving nervous breakdowns to dogs, and he learned a helluva lot that I regard as very interesting.”

18. Development and organisational confusion from say-something syndrome

“A honeybee goes out and finds the nectar and he comes back, he does a dance that communicates to the other bees where the nectar is, and they go out and get it. Well some scientist decided to do an experiment. He put the nectar straight up. Way up. Well, in a natural setting, there is no nectar where they’re all straight up, and the poor honeybee doesn’t have a genetic program that is adequate to handle what he now has to communicate. And you’d think the honeybee would come back to the hive and slip into a corner, but he doesn’t. He comes into the hive and does this incoherent dance. All my life I’ve been dealing with the human equivalent of that honeybee. It’s a very important part of human organisation so the noise and the reciprocation and so forth of all these people who have what I call say-something syndrome don’t really affect the decisions.”

If you can get a handle on these biases by learning to identify them in yourself and others, then acting accordingly, you’re almost certain to become a much better investor.

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A version of this article, written by Morgan Housel, originally appeared on fool.com.

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