Poor Charlie’s Almanack is a collection of speeches, essays, and insights from Charlie Munger. Drawing on decades of experience, Munger distills principles that extend beyond investing. Whether applied to investing, leadership, or personal growth, his philosophy follows a common thread: clarity of thought must precede clarity of action.

• ON DECISION-MAKING: Munger offers a practical framework for navigating complexity by spotting hidden opportunities and avoiding costly mistakes.
  • Munger believes in using multiple mental models (about 100 in number) to interpret the world. These models, drawn from disciplines such as mathematics, engineering, physics, psychology, and biology, create a latticework that provides context and insights.
    • "Once you have the ideas, of course, you must continuously practice their use."
    • Examples: redundancy and backup system models from engineering; the compound interest model from mathematics; the breakpoint, tipping moment, and autocatalysis models from physics and chemistry; the modern Darwinian synthesis model from biology; and cognitive misjudgment models from psychology.
  • Munger warns against “physics envy”, the tendency to reduce complex systems (like economics) to rigid, one-size-fits-all formulas.
    • 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.
    • Some important principles include: “Mimicking the herd invites regression to the mean”, “Above all, never fool yourself, and remember that you are the easiest person to fool.”
    • Misconception: But you may think, “My foundation, at least, will be above average. It is well endowed, hires the best, and considers all investment issues at length and with objective professionalism.” And to this I respond that an excess of what seems like professionalism will often hurt you horribly, precisely because the careful procedures themselves often lead to overconfidence in their outcome.
    • "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."
    • "Modern education often does much damage when young students are taught dubious political notions and then enthusiastically push these notions on the rest of us. The pushing seldom convinces others. But as students pound into their mental habits what they are pushing out, the students are often permanently damaged. Educational institutions that create a climate where much of this goes on are, I think, irresponsible. It is important not to thus put one’s brain in chains before one has come anywhere near his full potentiality as a rational person."
    • Most professors solve this problem, in effect, by assuming “If I can’t demonstrate it with my experiments, then it doesn’t exist.”
  • Instead of just asking, “How do I succeed?”, Munger advises asking, “What causes failure?” and systematically avoiding those pitfalls. This prevents preventable mistakes, which is often more effective than chasing perfection.
    • “Quickly eliminate the big universe of what not to do; follow up with a fluent, multidisciplinary attack on what remains; then act decisively when, and only when, the right circumstances appear.”
  • Munger emphasizes self-mastery as the foundation of sound decision-making. He does not rely on consensus but instead objectively measures his own knowledge, experience, and reasoning.
  • Munger encourages using multiple disciplines (psychology, biology, economics, etc.) to analyze problems from different perspectives. He compares this to Darwin’s method—solving problems incrementally, with curious persistence.
    • "I’m afraid that’s the way it is. If there are 20 factors and they interact some, you’ll just have to learn to handle it, because that’s the way the world is. But you won’t find it that hard if you go at it Darwin-like, step-by-step, with curious persistence. You’ll be amazed at how good you can get."
    • NOTE: He also has a checklist in the book that he applies to both thinking in general and to investing in particular. It may be a valuable reference before you engage in either.
• PROGRESSION OF VALUE CREATION. Munger outlines three levels of impact to make a tangible difference.
  • "To the extent you become a person who thinks correctly, you can add great value. To the extent you’ve learned it so well that you have enough confidence to intervene where it takes a little courage, you can add great value. And to the extent that you can prevent or stop some asininity that would otherwise destroy your firm, your client, or something that you care about, you can add great value."
  • "You 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."
• MUNGER’S INVESTING PHILOSOPHY
  
  • Munger advocates concentrated, long-term investing rather than frequent trading based on temporary undervaluation.
    • "Avoid the complexity of repeated decision-making: We’re partial to putting out large amounts of money where we won’t have to make another decision. If you buy something because it’s undervalued, then you have to think about selling it when it approaches your calculation of its intrinsic value. That’s hard. But if you can buy a few great companies, then you can sit on your ass. That’s a good thing."
      • IMPORTANT: More decisions don’t always lead to better outcomes. Also see: Pardox of Choice (Barry Schwartz)
    • "Compounding and reduced friction: There are huge advantages for an individual to get into a position where you make a few great investments and just sit on your ass: You’re paying less to brokers. You’re listening to less nonsense."
  • Munger’s core belief is that a great business at a fair price is better than a fair business at a great price. While traditional value investors focus on undervalued stocks, Munger prioritizes durable competitive advantages and high-quality management.
    • His guiding investment principle: “A great business at a fair price is superior to a fair business at a great price.”
    • "So the trick is getting into better businesses. And that involves all of these advantages of scale that you could consider momentum effects."
    • "You get into a great business that also has a great manager, because management matters. For example, it’s made a hell of a difference to General Electric that Jack Welch came in instead of the guy who took over Westinghouse—one hell of a difference."
  • Inspired by Buffett’s “20-slot rule”, Munger emphasizes disciplined decision-making.
    • Warren Buffett’s 20-slot rule: If you were allowed only 20 lifetime investment decisions, you would choose more carefully and be more patient.
  • Munger challenges the Efficient Market Hypothesis (EMH), drawing an analogy to the pari-mutuel betting system. In horse racing, despite high transaction fees, some bettors lose significantly more than others—suggesting inefficiencies exist. Similarly, the stock market presents mispricings that skilled investors can exploit.
    • "And to me it’s obviously right, based on experience not only from the pari mutuel system but everywhere else. 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. And instead of waiting for a near cinch and loading up, they apparently ascribe to the theory that if they work a little harder or hire more business school students, they’ll come to know everything about everything all the time. To me, that’s totally insane."
    • "It was always clear to me that the stock market couldn’t be perfectly efficient, because as a teenager I’d been to the racetrack in Omaha, where they had the pari-mutuel system. And it was quite obvious to me that if the house take, the croupier’s take, was 17 percent, some people consistently lost a lot less than 17 percent of all their bets and other people consistently lost more than 17 percent of all their bets. So the pari-mutuel system in Omaha had no perfect efficiency. And so I didn’t accept the argument that the stock market was always perfectly efficient in creating rational prices."
• BUSINESS STRATEGY. Munger mentioned several anecdotes to illustrate opportunities and potholes to look out for when evaluating businesses.
  • The Prizefighter Approach: Pick a niche where you can dominate before expanding to larger markets:
    • Examples:
      • Sam Walton built Walmart by first defeating small-town merchants, leveraging a superior system, before challenging industry giants.
      • Amazon’s Early Strategy: Started with books (a fragmented, easy-to-dominate industry) before expanding into larger markets.
      • Tesla’s Entry Strategy: Instead of competing directly with mass-market automakers, it first dominated the high-end EV niche before moving into broader markets.
  • The Capital Investment Illusion: Companies often overestimate cost savings from new technology without considering market effects (e.g., price competition, margin erosion). This is a common analytical blind spot—projections often assume that all savings translate into profit, ignoring competitive price pressures.
    • “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.”
    • Examples:
      • Retail Price Wars: When one store invests in cost-cutting automation, competitors follow, and price reductions erase profitability gains.
      • Airline Industry: New fuel-efficient planes lower costs, but if all airlines adopt them, ticket prices drop instead of profit margins increasing.
    • QUESTION: Are commodity markets—characterized by homogenous products and price sensitivity—especially susceptible to Capital Investment Illusion?
    • IMPORTANT: Do not conflate nominal efficiency gains with strategic advantage. While technology offer transient advantages, their rapid demoncratization ensures that savings are quickly converted into consumer surplus rather than sustained profits.
• LIFE PRINCIPLES. Munger offers his hard-earned wisdom on living a meaningful, successful life.
  • Munger emphasizes that living with integrity means aligning your actions with your values. He distills this into practical rules:
    • Don’t sell anything you wouldn’t buy yourself.
    • Don’t work for anyone you don’t respect and admire.
    • Work only with people you enjoy.
    • Discharge your duties faithfully and well.
  • Munger acknowledges that life can be brutally hard, and he offers three strategies for resilience:
    • "Have low expectations. Have a sense of humor. Surround yourself with the love of friends and family."
  • Munger emphasizes that continuous learning is essential for wisdom and success. He believes that knowledge is best borrowed from others rather than being reinvented from scratch.
    • “Spend each day trying to be a little wiser than you were when you woke up.”
      • "Yeah, I’m passionate about wisdom. I’m passionate about accuracy and some kinds of curiosity."
      • "Acquisition of wisdom is a moral duty."
    • Munger rejects the idea of reinventing the wheel—instead, he advocates for mastering the best knowledge others have already discovered.
      • "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."
      • "No less a figure than Einstein said that one of the four causes of his achievement was self-criticism, ranking right up there alongside curiosity, concentration, and perseverance."
      • "Here I’m following a key idea of the greatest lawyer of antiquity, Marcus Tullius Cicero. 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."
      • "There’s no love that’s so right as admiration-based love, and such love should include the instructive dead."
  • Munger argues that persistent effort, rather than raw talent or sudden breakthroughs, is the key to success. He emphasizes incremental progress—moving forward one inch at a time—as the true driver of achievement.
    • “Slug it out one inch at a time, day by day, and at the end of the day—if you live long enough—like most people, you will get out of life what you deserve. “
    • “Step-by-step you get ahead, but not necessarily in fast spurts. But you build discipline by preparing for fast spurts.”
  • Munger emphasizes adaptability as a key to success. He warns against emotional attachment to past decisions, which can lead to bad choices, especially when circumstances change. The ability to cut losses and move on—rather than stubbornly holding onto a failing strategy—is critical.
    • "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."
    • And deprival-superreaction syndrome also comes in: You’re going to lose the whole thing if you don’t put in a little more. People go broke that way because they can’t stop, rethink, and say, “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.”
    • OBSERVATION: The sunk cost fallacy causes people to irrationally invest more in failing endeavors, thinking past investments justify further spending.
  • Munger emphasizes that success comes from focusing on fundamentals and executing them rigorously. Many people overlook simple principles because they seem too basic to be valuable. However, the real differentiator is not just knowing these fundamentals but committing to them fully.
    • “This simple idea may appear too obvious to be useful, but there is an old two-part rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously.”
      • RELATED: Also see Occam’s Razor—simpler explanations should generally be preferred over more complex ones when both account for observed phenomena.
    • The prudential rule is that underlying the old Warner & Swasey advertisement for machine tools: “The man who needs a new machine tool and hasn’t bought it is already paying for it.” The Warner & Swasey rule also applies, I believe, to thinking tools. If you don’t have the right thinking tools, you and the people you seek to help are already suffering from your easily removable ignorance.
  • Munger argues that mental discipline is just as crucial as raw intelligence. Success is not only about intellect but also about resilience, emotional control, and the ability to avoid destructive thought patterns. He references Stoic philosophy, particularly Epictetus, to support this idea. The Stoics believed that external circumstances don’t define us—our reactions do.
    • Self-pity solves nothing and only makes things worse.
      • “Generally speaking, envy, resentment, revenge, and self-pity are disastrous modes of thought. Self-pity can get pretty close to paranoia. Paranoia is one of the very hardest things to reverse. You do not want to drift into self-pity.”
      • “Well, you can say that’s waggery, but I suggest it can be mental hygiene. Every time you find you’re drifting into self-pity, whatever the cause, even if your child is dying of cancer, self-pity is not going to help. Just give yourself one of my friend’s cards. Self-pity is always counterproductive. It’s the wrong way to think. And when you avoid it you get a great advantage over everybody else, or almost everybody else, because self-pity is a standard response. And you can train yourself out of it.”
    • "Another thing that I have found is that intense interest in any subject is indispensable if you’re really going to excel in it. I could force myself to be fairly good in a lot of things, but I couldn’t excel in anything in which I didn’t have an intense interest."
    • Another thing you have to do is have a lot of assiduity. I like that word because to me it means “Sit down on your ass until you do it.” I’ve had marvelous partners, full of assiduity, all my life. I think I got them partly because I tried to deserve them and partly because I was shrewd enough to select them, and partly there was some luck.
      • Munger admired two partners who formed a design-and-build construction team during the Great Depression with a simple agreement: equal partnership and shared responsibility. They committed to working 14-hour days, seven days a week, whenever they fell behind. Their dedication ensured success and earned them widespread respect. Munger believed that such straightforward, old-fashioned principles almost always lead to good outcomes.
    • Life often deals unfair blows—some recover, others don’t. Epictetus believed every setback is an opportunity to act well and learn. Instead of self-pity, he urged using adversity constructively—a philosophy that influenced leaders like Marcus Aurelius. His epitaph reflects his resilience: “Here lies Epictetus, a slave, maimed in body, the ultimate in poverty, and favored by the gods.”
  • Munger argues that character is just as important as skill in achieving success. He highlights reputation, ethical behavior, and reliability as lifelong assets that compound over time. The best way to get what you want isn’t manipulation or shortcuts—it’s to deserve it through integrity and competence.
    • “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.”
    • "One such value was prudence as the servant of duty. Grandfather Munger was a federal judge at a time when there were no pensions for widows of federal judges. So if he didn’t save from his income, my grandmother would become a destitute widow. And besides, net worth would enable him to serve others better. Being the kind of man he was, he underspent his income all his life and left his widow in comfortable circumstances."
  • Munger emphasizes the importance of knowing your own strengths and weaknesses. He warns against competing in areas where others have a natural advantage and you don’t. Instead, he advises focusing on where you have an edge—your “circle of competence”—to maximize your chances of success.
  • Munger argues that rigid beliefs limit rational thinking, making it harder to make good decisions. Instead of being locked into fixed beliefs, intellectual flexibility—the ability to update one’s thinking based on new information—is crucial for rational decision-making.
    • Keynes said, “It’s not bringing in the new ideas that’s so hard. It’s getting rid of the old ones.”
    • Munger warns about the dangers of rigid ideology (distortion, fixed mindset, overconfidence):
      • "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."
      • "Therefore, in a system of multiple models across multiple disciplines, I should add as an extra rule that you should be very wary of heavy ideology. You can have heavy ideology in favor of accuracy, diligence, and objectivity. But a heavy ideology that makes you absolutely sure that the minimum wage should be raised or that it shouldn’t, and it’s kind of a holy construct where you know you’re right, makes you a bit nuts."
  • Munger emphasizes inversion thinking—instead of only asking, “What should I do to succeed?”, it’s equally important to ask, “What should I avoid to prevent failure?” Here are some destructive habits to eliminate:
    • "What leads to failure in life? Some answers are obvious—sloth and unreliability. No matter your virtues, if you’re unreliable, you’ll fail quickly. Keeping commitments should be automatic. Avoid sloth and unreliability at all costs."
    • "Another common cause of failure is self-serving bias—the subconscious belief that you’re entitled to do as you please. This mindset leads to poor decisions, like overspending simply because you feel you deserve it."
• ON PSYCHOLOGY. Munger struggled to get rid of the most dysfunctional part of his psychological ignorance. It can’t be emphasized too much that issues of morality are deeply entwined with worldly wisdom considerations involving psychology. I find this useful in considering the “hidden” forces shaping choices.
  • About three centuries before the birth of Christ, Demosthenes said, “What a man wishes, that also will he believe.” Well, Demosthenes was right.
  • The correct persuasive technique in situations like that was given by Ben Franklin. He said, “If you would persuade, appeal to interest, not to reason.” The self-serving bias of man is extreme, and should have been used in attaining the correct outcome. So the general counsel should have said, “Look, this is likely to erupt into something that will destroy you, take away your money, take away your status, grossly impair your reputation. My recommendation will prevent a likely disaster from which you can’t recover.” That approach would have worked. You should often appeal to interest, not to reason, even when your motives are lofty.
  • Reward- and punishment-superresponse tendency: People alter their actions and justifications to align with incentives.
    • "Prompt rewards worked much better than delayed rewards in changing and maintaining behavior."
      • Example: Businesses use instant discounts or gamified loyalty programs because long-term rewards (e.g., retirement savings) are psychologically weaker motivators.
      • Granny’s rule: Children eat their carrots before they get dessert. It teaches delayed gratification, an essential skill for long-term success (e.g., the Marshmallow Test by Walter Mischel).
      • QUESTION: When and how do we use prompt rewards and delayed gratification to encourage good behavior?
    • People who see themselves as ethical can rationalize immoral actions when driven by strong incentives.
      • Incentives drive behavior more than logic or morality. The wrong incentives create systemic dysfunction.
        • Example: From all businesses, my favorite case on incentives is Federal Express. The heart and soul of its system, which creates the integrity of the product, is having all its airplanes come to one place in the middle of the night and shift all the packages from plane to plane. If there are delays, the whole operation can’t deliver a product full of integrity to Federal Express customers. And it was always screwed up. They could never get it done on time. They tried everything—moral suasion, threats, you name it. And nothing worked. Finally, somebody got the idea to pay all these people not so much an hour but so much a shift, and when it’s all done, they can all go home. Well, their problems cleared up overnight.
      • Truth is hard to accept when it conflicts with self-interest. However, the solution is possible—change the incentives.
        • “Hell no, Charlie. He thought that the gallbladder was the source of all medical evil, and if you really loved your patients, you couldn’t get that organ out rapidly enough.”
        • Example: Management consultants are criticized for recommending more consulting services, illustrating self-serving biases in advisory roles.
      • Design systems that are hard to cheat—otherwise, strong incentives will lead to rationalized misconduct and incentive-caused bias. Once bad behavior spreads, social proof reinforces it, and whistleblowers face retaliation (Serpico effect). Ignoring this invites systemic corruption.
      • QUESTION: How can we improve the principal-agent problem in advisory roles?
    • Munger emphasizes the need to carefully balance trade-offs in compensation design.
      • A commission-based sales force is efficient but ethically riskier, as employees prioritize closing deals over honesty.
      • Example: Wells Fargo’s banking scandal, where aggressive sales quotas led employees to create fake accounts.
      • “Dread, and avoid as much you can, rewarding people for what can be easily faked.”
      • Money isn’t the only driver—people change behavior for status, relationships, and social validation.
    • Punishments, of course, also strongly influence behavior and cognition, although not so flexibly and wonderfully as rewards.
  • Liking/loving tendency: Affection influences judgment.
    • Liking/loving tendency conditions people to 1) overlook flaws, comply with loved ones’ wishes, 2) favor associated people or products, and 3) distort facts to justify affection.
    • Examples: Use of celerbrity endorsements for product marketing, nepotism in hiring, attractiveness bias, halo effect.
  • Dislike/hating tendency: Negative emotions skew perception
    • Disliking/hating tendency conditions people to 1) overlook virtues, 2) reject anything associated with the disliked object, and 3) distort facts to justify hatred.
    • Example: “Politics is the art of marshaling hatreds.”
    • QUESTION: How can we encourage constructive discussions and reduce tribalistic thinking (ingroup-outgroup bias)?
    • QUESTION: How can we avoid self-radicalization and ideological bubbles online?
  • Doubt-avoidance tendency: Inclination to eliminate uncertainty quickly by making decisions, often prematurely.
    • When not under threat or urgency, people are less likely to rush decisions.
    • OBSERVATION: Festinger (1957) highlights that people rush to resolve uncertainty because doubt creates mental discomfort.
    • Example: Marketers exploit doubt-avoidance by creating urgency (e.g., “Limited-time offer! Act now!”).
    • QUESTION: How can misinformation be countered without triggering more psychological resistance?
  • Inconsistency-avoidance tendency: People resist changing their beliefs or behaviors, even when confronted with strong evidence that they are wrong.
    • Rushing to conclusions due to doubt-avoidance, combined with resistance to change, leads to frequent cognitive errors.
    • Many individuals accumulate fixed attitudes and ideas without questioning their validity over time.
    • People who make big sacrifices to adopt a new identity (e.g., religion, political activism) often become more extreme in their beliefs.
      • The tendency will often make man a patsy of manipulative compliance practitioners, who gain advantage from triggering his subconscious inconsistency-avoidance tendency.
    • Example: Guards who initially mistreat prisoners may justify their actions by intensifying their dislike for inmates, leading to escalating abuse.
      • Given the psychology-based hostility natural in prisons between guards and prisoners, an intense, continuous effort should be made to 1) prevent prisoner abuse from starting and 2) stop it instantly when it starts, because it will grow by feeding on itself, like a cluster of infectious disease.
    • People must actively challenge their beliefs and avoid intellectual stagnation to reach their full potential.
      • Darwin 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.
      • 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.
      • “It is important not to thus put one’s brain in chains before one has come anywhere near his full potentiality as a rational person.”
  • Curiosity tendency: a protective factor against cognitive biases
    • Many psychological tendencies lead to errors in thinking, but curiosity encourages exploration, questioning, and open-mindedness, reducing these errors.
    • The curious are also provided with much fun and wisdom long after formal education has ended.
    • OBSERVATION: Studies show that dopamine release is linked to curiosity-driven learning, making discovery intrinsically rewarding (Gruber et al., 2014).
    • QUESTION: To what extent does our modern education adopt curiosity-driven teaching (e.g., Socratic dialogue)?
  • Kantian fairness tendency: Kant was famous for his categorical imperative, a sort of golden rule that required humans to follow those behavior patterns that, if followed by all others, would make the surrounding human system work best for everybody.
    • “Treat others as you want to be treated.”
    • IMPORTANT: Universal moral rules create a functional society. How do you determine if something is wrong? Example: Lying is wrong because if everyone lied, trust would collapse, making communication useless.
    • Munger’s framing suggests that Kantian fairness isn’t just about morality—it’s about structuring human systems to work optimally for everyone.
      • QUESTION: Can societies create systems that incentivize fairness naturally?
  • Envy/jealousy tendency
    • Sibling jealousy is clearly very strong and usually greater in children than adults. It is often stronger than jealousy directed at strangers. Kantian fairness tendency probably contributes to this result.
      • Envy is heightened in close relationships (e.g., siblings) because comparisons are more direct and personal than with strangers.
      • The human desire for fairness creates expectations of equal treatment, making perceived favoritism feel more unjust.
    • “It is not greed that drives the world but envy.” People are motivated more by wanting what others have and less by wanting more.
  • Reciprocation tendency: human behavior where people instinctively return favors and hostilities.
    • This trait appears in both humans and animals, indicating its role in evolution for promoting cooperation and social bonds.
    • The best way to curb excessive hostility is to practice delaying reactions.
      • As my smart friend Tom Murphy so frequently says, “You can always tell the man off tomorrow, if it is such a good idea.”
      • QUESTION: Does delaying a reaction improve outcomes, or does it let resentment grow? See: “Retribution and Emotional Regulation: The Effects of Time Delay in Angry Economic Interactions.”
    • Watch for reciprocation risks in business—vendors’ small favors can subtly bias employees’ decisions.
      • Prohibit employees from accepting favors entirely.
    • Munger cited Robert Cialdini on how compliance experts exploit reciprocation.
      • For example, when a salesperson offers a small concession, the customer often feels compelled to reciprocate with a concession of their own—leading to an agreement.
    • The best part of life is relationships where people find joy in giving rather than receiving, a common effect of reciprocation.
    • Guilt may stem from an evolutionary conflict between reciprocation and the urge to maximize rewards.
    • QUESTION: What factors reinforce and suppress reciprocation? Reciprocity vs. Game Theory.
  • Influence-from-mere association tendency: a cognitive bias where people form connections between unrelated things simply because they were experienced together.
    • People form automatic associations based on past experiences, even when those associations lack a logical causal connection.
      • For instance, consider the case of many men who have been trained by their previous experience in life to believe that when several similar items are presented for purchase, the one with the highest price will have the highest quality.
      • With luxury goods, the process works with a special boost because buyers who pay high prices often gain extra status from thus demonstrating both their good taste and their ability to pay.
      • OBSERVATION: Luxury brands (e.g. Rolex, Hermès) reinforce this price-quality heuristic through scarcity, exclusivity, and storytelling.
    • Even trivial associations, if strategically designed, can significantly influence consumer behavior.
      • "Coke ads picture life as happier than reality."
      • NOTE: Also, consider cultural influence and conditioning.
    • Major miscalculations often stem from false associations with past success, personal preferences, or biases—especially a natural aversion to bad news.
      • To avoid being misled by past success: 1) identify any accidental factors that may have contributed to it but don’t guarantee future success,  2) assess new risks that weren’t present in previous successful ventures.
    • QUESTION: How can we ensure AI systems don’t fall into the same cognitive traps as humans when analyzing data?
  • Excessive self-regard tendency: a cognitive bias where people overestimate their abilities, judgments, and worth.
    • Bias in hiring decisions: Excessive self-regard leads to people to prefer those similar to themselves, which can create homogeneity in hiring.
      • Employers often overvalue face-to-face impressions rather than objective performance data.
      • “In my opinion, Hewlett-Packard faced just such a danger when it interviewed the articulate, dynamic Carly Fiorina in its search for a new CEO. I believe that 1) Hewlett-Packard made a bad decision when it chose Ms. Fiorina, and 2) this bad decision would not have been made if Hewlett-Packard had taken the methodological precautions it would have taken if it knew more psychology.”
      • QUESTION: What hiring best practices does industrial-organizational psychology recommend?
    • Munger highlights Tolstoy’s view on self-deception as an extension of excessive self-regard.
      • According to Tolstoy, the worst criminals don’t see themselves as bad. They either deny their crimes or justify them as inevitable given their hardships.
      • The second half of the Tolstoy effect is crucial—people make excuses for fixable failures instead of correcting them.
      • Unfixed, fixable failures reflect poor character and worsen over time, harming those who justify them.
      • High-performance environments like sports teams and General Electric discard those who make excuses instead of improving.
      • IMPORTANT: When actions and self-image conflict, people rationalize to reduce psychological discomfort rather than changing behavior.
      • QUESTION: Fixed mindset vs. growth mindset. Do people with a fixed mindset see failure as permanent rather than improvable?
    • Munger gave an example of a childhood lesson to demonstrate moral clarity and rejection of self-deception that may lead to larger moral failures in future.
      • I once heard of a child teaching method so effective that the child remembered the learning experience over 50 years later. The child later became dean of the USC School of Music, and then related to me what his father said when he saw his child taking candy from the stock of his employer with the excuse that he intended to replace it later. 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.”
      • OBSERVATION: Ethical behavior seems to be based on internal values rather than external consequences.
    • Overconfidence sometimes leads to success by driving persistence and ambition.
      • “Never underestimate the man who overestimates himself”
    • “Of all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy.”
    • OBSERVATION: Dunning-Kruger effect shows that those with least competence tend to overestimate their abilities the most. Another example of excessive self-regard tendency.
  • Overoptimism tendency: people believe what they want to be true rather than what is objectvely likely.
    • People shape their beliefs based on desires rather than facts, as also confirmed by cognitive psychology studies.
      • About three centuries before the birth of Christ, Demosthenes, the most famous Greek orator, said, “What a man wishes, that also will he believe.”
      • Example: WeWork collapse, Sydney Opera House cost overrun
    • Probability-based reasoning, as developed by Fermat and Pascal, helps counteract irrational optimism.
  • Deprival-supperreaction tendency: people experience strong emotional reactions to losses or perceived losses—often far stronger than their reactions to equivalent gains.
    • People often compare what is immediate or emotionally salient rather than what actually matters. And thus, they misframe problems.
      • OBSERVATION: DST fuels identity-driven beliefs, where people perceive losses as personal threats.
    • Groups perceive ideological defection as a form of loss, leading to greater hostility. This is due to:
      • Deprival-Superreaction Tendency – The group feels a “loss” of a colleague, intensifying their emotional reaction.
      • Persuasive Threat – Former insiders are often seen as more credible critics, increasing the perceived danger to the group’s beliefs.
    • Extreme ideological positions thrive because of psychological biases
      • Inconsistency-Avoidance Tendency – People avoid changing their beliefs because doing so would create cognitive dissonance.
      • Deprival-Superreaction Tendency – Any challenge to their beliefs feels like a personal loss, triggering emotional resistance.
    • EXAMPLE: Berkshire Hathaway shareholders who refuse to sell despite massive gains may be acting irrationally. Their behavior is influenced by multiple biases, including:
      • Reward Superresponse – People get addicted to past wins.
      • Inconsistency-avoidance – Avoiding change to stay consistent.
      • Endowment Effect – Overvaluing what they own.
      • Deprival-Superreaction Tendency – Feeling like selling means losing, even when it’s rational.
      • OBSERVATION: This is similar to neuroscience’s dopamine-driven reinforcement learning where it explains why people get addicted to “winning” and fear losing what they already have.
    • OBSERVATION: Daniel Kahneman and Amos Tversky’s Prospect Theory states that losses loom larger than gains.
  • Social proof tendency: human inclination to looks for others for cues on how to behave, especially in moments of uncertainty.
    • People default to following the crowd when they are confused or under pressure.
      • QUESTION: Is this similar herd mentality?
    • Society should prevent bad behavior before it spreads and amplify good behavior using social proof.
      • 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.
      • Not everyone so resists the social contagion of bad 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. He was then nearly murdered by gunfire because of his resistance to going along with the corruption in the division. Such corruption was being driven by social proof plus incentives, the combination that creates Serpico syndrome.
      • OBSERVATION: In some countries, corrupt police forces normalize bribery, making honesty seem like a foolish outlier behavior.
    • 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. It reinforces the bystander effect.
    • Social-proof tendency often interacts in a perverse way with envy/jealousy and deprival-superreaction tendency.
      • EXAMPLE: Social proof + Status-driven Spending to match perceived social expectations.
  • Contrast-misreaction tendency: people don’t evaluate things objectively—instead, they judge based on contrast with what they recently experienced.
    • People make decisions based on contrast rather than absolute quality.Without objective benchmarks, people settle for “less bad” rather than actively seeking “great.”
      • Large-scale damages often ruin lives, as when a wonderful woman with terrible parents marries a man who would be judged satisfactory only in comparison to her parents.
    • Sales tactics manufacture contrast to manipulate customers into making purchases. See: Anchoring.
      • The salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high. And boom, the broker often makes an easy sale.
      • To make an ordinary price seem low, the vendor will very frequently create a 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.
    • When negative change happens slowly, people fail to react until it’s too late.
      • The Boiling Frog Problem: A bridge-playing pal of mine once told me that a frog tossed into very hot water would jump out, but the same frog would end up dying if placed in room-temperature water that was later heated at a very slow rate. My few shreds of physiological knowledge make me doubt this account. But no matter, because many businesses die in just the manner claimed by my friend for the frog. Cognition, misled by tiny changes involving low contrast, will often miss a trend that is destiny.
    • Minor neglected problems can grow into massive failures. Also see: normalcy bias (small problems won’t escalate).
      • One of Ben Franklin’s best-remembered and most useful aphorisms is “A small leak will sink a great ship.”
  • Stress-influence tendency
    • Light stress can enhance performance, but heavy stress impairs it.
      • OBSERVATION: This aligns with the Yerkes-Dodson Law, which states that optimal performance occurs at moderate stress levels, while excessive stress causes breakdowns.
      • QUESTION: How can we create “goldilocks zones” of stress?
    • Extreme stress fundamentally alters behavior. Some individuals are more resilient to stress, but once they break, recovery is difficult. Once stress fundamentally alters cognition, it can sometimes only be reversed by reintroducing stress.
      • “As the waters of the flood came up and receded, many dogs reached a point where they had almost no airspace between their noses and the tops of their cages. This subjected them to maximum stress. Immediately thereafter, Pavlov noticed that many of the dogs were no longer behaving as they had. The dog that formerly had liked his trainer now disliked him, for example. This result reminds one of modern cognition reversals in which a person’s love of his parents suddenly becomes hate, as new love has been shifted suddenly to a cult.”
      • “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.”
  • Availability-misweighing tendency: people place too much weight on what comes to mind quickly, rather than evaluating information objectively.
    • Solutions:
      • Using checklists and structured analysis can prevent availability bias by forcing a systematic review of all factors.
      • Hiring skeptical thinkers to challenge dominant ideas prevents groupthink and blind reliance on easily available data.
    • Extra-vivid images influence decisions more than abstract data.
      • “The special strength of extra-vivid images in influencing the mind can be constructively used 1) in persuading someone else to reach a correct conclusion or 2) as a device for improving one’s own memory by attaching vivid images, one after the other, to many items one doesn’t want to forget.”
      • NOTE: The “Memory Palace” method uses vivid mental images to improve recall of complex information.
  • Use-it-or-lose-it tendency: skills and knowledge deteriorate if not practiced regularly.
    • The use-it-or-lose-it rule is less severe for the diligent. Fluency, rather than short-term cramming, slows skill loss and allows faster recovery when revisited.
      • NOTE: This aligns with the Ebbinghaus Forgetting Curve, which shows that memory fades exponentially without reinforcement.
      • We should regularly practice useful but rarely used skills, even outside our field, as a duty to self-improvement. Neglecting them leads to skill loss and narrow thinking (man-with-a-hammer tendency).
    • Solutions:
      • It is also essential for a thinking man to assemble his skills into a checklist that he routinely uses.
  • Authority-misinfluence tendency: people blindly follow authority figures, leading to serious errors.
    • Humans evolved in dominance hierarchies, where following a leader increased survival chances.
      • Blind obedience can be fatal, so training must emphasize critical thinking under authority.
      • Once an unfit leader gains power, they are often difficult to remove because of people’s inherent tendency to defer to authority.
      • Example: Milgram Experiment
      • IMPORTANT: Authority is shaped by appearance, reputation, social proof (unanimity), and gradual commitment
  • Twaddle tendency: people engage in meaningless chatter that can hinder productivity and clarity
    • The human brain prefers fluent speech over silence, even if the speech lacks substance. This is linked to “fluency bias”—people value what sounds smooth, even if it lacks depth.
      • IMPORTANT: Always examine the substance of what one speaks.
    • Just like the honeybee fails to communicate effectively when faced with an unnatural situation, humans also resort to nonsense when they lack proper frameworks to express their thoughts.
      • “Trouble from the honeybee version of twaddle was once demonstrated in an interesting experiment. A honeybee normally goes out and finds nectar and then comes back and does a dance that communicates to the other bees where the nectar is. The other bees then go out and get it. Well, some scientist—clever, like B. F. Skinner—decided to see how well a honeybee would do with a handicap. He put the nectar straight up. Way up. Well, in a natural setting, there is no nectar a long way straight up, and the poor honeybee doesn’t have a genetic program that is adequate to handle what she now has to communicate. You might guess that this honeybee would come back to the hive and slink into a corner, but she doesn’t. She comes into the hive and does an incoherent dance.”
    • Solutions:
      • Amazon’s “Write It Down” Culture: Amazon discourages pointless meetings by requiring clear, written memos before discussions.
      • Teaching Critical Thinking: Schools that focus on logic and reasoning skills produce students who express ideas clearly and avoid filler language.
  • Reason-respecting tendency: people are inclined to seek, respect, and respond to reasons—whether they are valid or not.
    • Explaining the “why” behind actions or knowledge enhances comprehension, retention, and execution.
      • Carl Braun’s Management Rule: Employees were required to explain the “why” behind instructions to ensure clarity and adherence.
    • “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.”
  • Lollapalooza tendency: an extreme outcome occurs when multiple biases or forces align, amplifying their impact beyond their individual effects.
    • When multiple forces act together, the result isn’t simply additive (2+2=4) but multiplicative or exponential (2+2=22). This explains why certain phenomena produce such extreme outcomes.
    • Several psychological tendencies often combine to create lollapalooza effects:
      • Social Proof: People tend to follow what others are doing
      • Commitment and Consistency: Once committed to an idea, people tend to remain consistent with that position
      • Reciprocity: The obligation to give back when something is received
      • Liking Bias: People are more easily influenced by those they like
      • Incentive Bias: People respond strongly to rewards and punishments
      • Confirmation Bias: The tendency to favor information that confirms existing beliefs
      • Fear of Missing Out (FOMO): Anxiety about missing potentially rewarding opportunities
      • Example: Subprime Mortgage Crisis (2007-08)
        • Incentive bias (lenders and brokers motivated by commissions)
        • Social proof (everyone buying houses)
        • Bandwagon effect (fear of missing the real estate boom)
• ON DEALING WITH DIFFICULT PEOPLE. Munger reflects on the moral and practical challenges of practicing law, emphasizing that many legal disputes arise from dealing with highly flawed individuals. This environment can make legal work frustrating and, at times, ethically challenging.
  • 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 rest was my own greed, but my success in serving greed partly allowed me to make easier the process of being honorable and sensible. Like Ben Franklin observed, “It’s hard for an empty sack to stand upright.”
  • "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."
  • QUESTION: To what extent does financial independence allow for ethical independence?
  • "Occasionally, you get into borderline stuff. For instance, suppose you’ve got a client who really wants to commit tax fraud. If he doesn’t push the tax law way beyond the line, he can’t stand it. He can’t shave in the morning if he thinks there’s been any cheating he could get by with that he hasn’t done. And there are people like that. They just feel they aren’t living aggressively enough."
  • You can approach that situation in either of two ways: You can say, “I just won’t work for him,” and duck it. Or you can say, “Well, the circumstances of my life require that I work for him. And what I’m doing for him doesn’t involve my cheating. Therefore, I’ll do it.” And if you see he wants to do something really stupid, it probably won’t work to tell him, “What you’re doing is bad. I have better morals than you.” That offends him. You’re young. He’s old. Therefore, instead of being persuaded, he’s more likely to react with “Who in the hell are you to establish the moral code of the whole world?” But instead, you can say to him, “You can’t do that without three other people beneath you knowing about it. Therefore, you’re making yourself subject to blackmail. You’re risking your reputation. You’re risking your family, your money,” etc. That is likely to work. And you’re telling him something that’s true.
  • "It would’ve been child’s play to get that job done right. All the general counsel had to do was to tell his boss, “John, this situation could ruin your life. You could lose your wealth. You could lose your reputation.” And it would have worked. CEOs don’t like the idea of being ruined, disgraced, and fired."
    • IMPORTANT: Appeal to interest, not reason.
• Munger presents a structured, multidisciplinary approach to problem-solving and achieving extreme success.
  • Decide big no-brainer questions first: Eliminate unnecessary complexity by tackling the most obvious, high-impact issues.
  • Express truth with math: Just as Galileo concluded that math reveals scientific reality, applying quantitative analysis uncovers truths obscured by intuition.
  • Inversion thinking: Instead of solely planning how to succeed, identify potential failure points and eliminate them.
  • Integrate multidisciplinary wisdom: The most practical wisdom comes from the foundational concepts across diverse disciplines.
  • Lollapalooza effects: Extreme outcomes often result from the combination and synergy of multiple factors.
    • Extreme maximization or minimization of one or two variables. Example, Costco or our furniture and appliance store.
    • Adding success factors so that a bigger combination drives success, often in nonlinear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often, results are not linear. You get a little bit more mass and you get a lollapalooza result.
    • An extreme of good performance over many factors. Example, Toyota or Les Schwab.
    • Catching and riding some sort of big wave. Example, Oracle. By the way, I cited Oracle before I knew that the Oracle CFO [Jeff Henley] was a big part of the proceedings here today.
• Final reflections:
  • I appreciate Munger’s rational approach to life. He demonstrates that success is less about predicting the future than developing the judgment to recognize and seize opportunity. Ultimately, the wisest course in life is to position ourselves well and minimize preventable mistakes.
  • The interplay between psychological principles and practical wisdom cannot be overstated. Yet, many either overlook or deliberately ignore this connection, often to their own disadvantage.
  • I also appreciate Munger’s framework for presenting business cases. His ideas are clear and accessible, yet their implications are profoundly rational and insightful.

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