📈🧠 In 1995, Charlie Munger, the renowned investor and Vice Chairman of Berkshire Hathaway, delivered a legendary lecture at Harvard not about investment strategies, but about the mental flaws that affect business decisions.
In this blog/podcast/video, we unravel Munger’s insightful guidance on avoiding cognitive biases and mental errors that can skew decision-making. Munger’s principles go beyond investing; they offer a blueprint for making smarter decisions in business and life.
🔍 What you’ll learn:
Overreaction to Loss: Understand why focusing too much on avoiding loss can lead to missing significant opportunities.
Inconsistency-Avoidance: How clinging to beliefs can blind you to vital information.
Availability-Misweighing: The dangers of oversimplifying complex situations.
Twaddle Tendency: Recognizing when information is fabricated or exaggerated.
Social-Proof Bias: The risk of following the crowd blindly.
Overoptimism Tendency: Managing unrealistic expectations and assessing risks accurately.
Reward and Punishment Superresponse: The underestimated influence of incentives in decision-making.
Pain-Avoiding Psychological Denial: The tendency to distort reality to protect the ego.
Influence-from-Association: Avoiding negative bias based on association.
Lollapalooza Tendency: Identifying when multiple mental flaws combine to create extreme outcomes.
Munger’s wisdom is a key to unlocking exceptional decision-making skills, as evidenced by his success with Berkshire Hathaway.
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Join us as we delve into each of these principles, providing real-world examples and actionable insights. Share your thoughts and experiences in the comments below! #CharlieMunger #InvestmentPrinciples #CognitiveBiases #BusinessWisdom #BerkshireHathaway”
So, back in 1995, Harvard University invited Charlie Munger to give a lecture to its students. Now, one might assume that Munger, being the Vice Chairman of Berkshire Hathaway and a highly respected figure in investing, would impart valuable insights on how to excel in the world of finance. But interestingly enough, Munger had a different approach. He focused on something far more important than investing advice – he delved into the realm of mental flaws that affect every single business decision we make.
See, our brains are fascinating organs that constantly take shortcuts when it comes to decision-making. It’s just the way we’re wired. But here’s the kicker – these shortcuts often lead us astray, tricking us into believing that our flawed thinking is actually accurate. So, what Munger recognized was that avoiding these mental flaws was the key to his success in building Berkshire Hathaway.
In Munger’s most famous lecture, he emphasized the significance of being able to see and, importantly, avoid these mental flaws. He believed that it was more critical than any specific investing advice he could give. So, what were these mental flaws that Munger warned his Harvard students about? Let’s dive into the ten most critical ones.
The first flaw is the overreaction to loss. We have a tendency to overemphasize loss rather than focusing on potential gains. Munger advised his students not to miss out on a big opportunity just because they wanted to avoid a small loss.
The second flaw is inconsistency-avoidance. When we hold a belief, we tend to identify with it strongly. As a result, any information that clashes with our beliefs appears twisted or distorted. Munger urged his students to see information for what it truly is, without letting their preexisting beliefs cloud their judgment.
Next up is availability-misweighing. Munger pointed out that the simplest answers to complex situations often become viral and widely accepted. However, just because others provide a single explanation for why something happens, it doesn’t mean that the whole picture has been revealed. Munger encouraged his students to assume that they could be missing important information whenever they are presented with only one response.
The fourth mental flaw is what Munger called the “twaddle tendency.” People have a knack for making things up as they go along, especially when they want to appear more intelligent than they actually are. Munger advised his students to be skeptical and assume that some percentage of any given explanation is simply fabricated.
Then there’s the social-proof bias. As humans, we often tend to follow the crowd and assume that popular ideas must be true. But Munger cautioned against this tendency, reminding his students that popularity doesn’t equate to accuracy. It’s important to think critically and not blindly follow the masses.
Moving on to the sixth flaw, Munger highlighted the overoptimism tendency. We humans have a tendency to be overly optimistic, which can cloud our judgment and make it difficult for us to accurately assess risks. Munger advised his students to seek a third-party perspective to evaluate the downside risks of their decisions.
The seventh mental flaw is what Munger termed the “reward and punishment superresponse.” Essentially, we underestimate the impact that incentives have on driving behavior. Before working with others, it’s crucial to understand their incentives and motivations.
Next up is the pain-avoiding psychological denial. When faced with an uncomfortable truth, we often skew our perception of reality to avoid the pain that accompanies it. While this may protect our ego in the short term, it ultimately hampers our decision-making process. Munger encouraged his students to confront uncomfortable truths head-on and base decisions on accurate information.
Influence-from-association is another mental flaw Munger highlighted. Essentially, when we associate an idea with something negative, we automatically assume that the idea itself is bad. Munger advised his students to look for valuable lessons even in ideas that others tend to avoid due to negative associations.
Lastly, there’s the lollapalooza tendency. When multiple mental flaws come into play together, they can amplify each other and lead to extreme outcomes. Munger urged his students to be vigilant for situations where multiple flaws might be at work, as they can significantly impact the logic behind decisions.
Now, here’s the thing – most people are not fully aware of just how much these mental flaws skew their decision-making processes. But Munger, with his exceptional ability to recognize and confront these flaws, was able to build Berkshire Hathaway into a powerhouse. So, the key takeaway here is to protect against these mental flaws in your own decision-making. By doing so, you can elevate yourself to the level of a top-notch decision-maker, just like Munger.
And with that, we’ve covered the ten critical mental flaws that Charlie Munger warned his Harvard students about. These flaws have the potential to significantly impact our decision-making, so it’s essential to be aware of them and actively work to counteract their influence.
Remember, decision-making is a multifaceted process, and understanding the common pitfalls can help us make better choices in both our personal and professional lives. So, take Munger’s wisdom to heart, and may your decision-making skills soar to new heights!
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The author brilliantly breaks down complex ideas into easily digestible nuggets of information. So, whether you’re a seasoned investor or just starting out, you’ll find immense value in this book. With each turn of the page, you’ll uncover a wealth of insights that will empower you to make informed decisions in the world of AI-driven investments.
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In this episode, we explored the importance of avoiding mental pitfalls in business decisions and recommended “AI Unraveled” as a comprehensive guide to AI investing. Thank you for joining us on the “Djamgatech Education” podcast, where we strive to ignite curiosity, foster lifelong learning, and keep you at the forefront of educational trends – so stay curious, stay informed, and stay tuned with Djamgatech Education!
Canada gave us the fall of BB in the late 2000s. Time for another tech company crash from Canada? submitted by /u/RevolutionaryBed1814 [link] [comments]
I have come across several posts on WSB where a member is puzzled as to why Options premium did not increase or decreased, despite favourable movement of the underlying [a stock]. So here's a cheat sheet: Options Premium are decided by Supply & Demand. Black Scholes Model [with its limitations like European options, no friction in market place etc] may only serve as a guide to pricing an Option. In the end it is the buyer or seller that determine the Option premium for a particular strike and expiry. Greeks serve to explain the premium of the Option in its basic consitutents. Remember, Option Greeks derive their respective values from Option premium and not vice versa. Here is a brief explanation of the Greeks, Theta: bascially a function of time to expiry. Long dated options experience slow theta decay and vice versa. Theta decay for a long option is a [steady] downward sloping line for almost 80% of the life of the Option. Theta decay increases significantly, and slope plunges precipitiously in last 20% of the life of the Option. Delta: change in price of Option per unit change in price of the underlying. Delta is 0.5 for at the money Option and increase as the spot price moves deeper in the money approaches max of 1.0 Conversely, Delta drops from 0.5 to 0.01 as spot price of underlying moves out of the money. Gamma: rate of change in Delta per unit change in the price of the underlying. Gamma is max for at the money option, ~1.00 and drops if spot price of the underlying moves in the money or out of the money. Vega: change in price of Option with per unit change in volatility. This is the most dangerous Greek as it is most unintuitive and may cause either a windfall of cash, or blow up an account. Volatility or Vega is difficult to explain and almost impossible to visualize. But to simplify, I imagine Vega as the balance of supply & demand or lack of balance of supply & demand for a Option [of the same stock and expiry] at different strike price. If the supply & demand are in balance for an Option [of a certain expiry] at a specific strike price, then the Volatility [Implied Volatility] may be in neighbourhood of its historical value. If the supply & demand are in imbalance then Implied Volatility (IV) may explode or implode. This is what generates windfall of cash or account blowout. IV crush is nothing but lack of buyer for a particular Option [for a given strike price and expiry]. In IV crush Option premium dives to almost zero. submitted by /u/Option_Closeout [link] [comments]
This has to be the craziest market ever. Many economic indicators are screaming recession but yet we are at all time highs. I have few points I would like to share. Jobs report has been revised down for 10 months straight, skipping December 2023. Even the latest job report of 175k was below expected. Many being part time jobs Yield curve 2yr/10yr has been inverted for 673 days, counting today. Yield curve 3month/10yr has been inverted for 561 days, counting today. Reverse repo has been falling but is at 475$ Billion - cushion to the system. Banks are underwater from low yield Treasuries and Commercial Real Estate. https://www.cnbc.com/2024/05/01/why-hundreds-of-us-banks-may-be-at-risk-of-failure.html Bullshit growth rate of GDP at 1.6% - probably be revised down. Fed has already over tightened but can't cut b/c of the inflation rate, and the inflation rate is not going to come down anytime soon. 1.6$ Trillion in Federal Deficit this year 7.6$ Trillion of Debt is maturing this year, U.S Treasury doesn't have that kind of money lying around so they are going to sell treasuries to pay off the principal of the ones that are maturing. Just like when a broke consumer pays one credit card off with another. The problem being the debt that is maturing was locked in at 1-1.5% but now it has to be given at 4-5% which adds to the cost to service all that debt. https://finance.yahoo.com/news/7-6-trillion-us-government-040643412.html Oracle of Omaha is holding on to the biggest stock pile of cash/cash equivalents ever - 188$ Billion Dollars So that means inflation is not coming down below 2% anytime soon yet the growth of the economy is slowing down - STAGFLATION and eventually a serious depression. The only real question is there has been Quantitative Easing that has happened 4 times. Fed's balance sheet was at 900$ Billion before it all started, it stands at 7.36$ Trillion - How high will it go this time when they inevitably print again to avoid the pain and kick the can down the road? submitted by /u/watifurdadpulledout [link] [comments]
400+ comments on my previous post. 399 calling me an idiot. - Record user traffic, Daily Active Uniques (“DAUq”) increased 37% to 82.7 million - Revenue increased 48% to $243.0 million, nearly doubling growth rate from prior quarter Everyone yelling "not profitable!" You know there are hundreds of companies that are not profitable that are worth 10X what reddit is worth right? Ever heard of the rule of 40? What am I going to do next? I'm holding Reddit until market cap hits at least 100 billion. It's not to late to invest. submitted by /u/Capable-Jicama2155 [link] [comments]
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