In 1995, Harvard asked Charlie Munger to lecture students.
But he didn’t teach investing.
Munger warned these 10 mental flaws lurk in every business decision…
Our brains take shortcuts with every decision.
But here’s the worst part:
They trick us into believing the flaws are accurate.
So Munger’s brilliance?
He was obsessed with avoiding mental flaws in every decision that built Berkshire Hathaway.
So in Munger’s most famous lecture, he felt the ability to see (& avoid) these mental flaws was more critical than any investing advice he could give.
Here’s the 10 most critical mental flaws that Munger warned his Harvard students:
1) Overreaction to loss:
You over-emphasize loss instead of gain.
Don’t miss a big opportunity, just to avoid a small loss.
When you believe something you identify with it.
Any information you see that clashes with your beliefs will appear twisted. See information for what it is.
The simplest answers to complex situations go the most viral.
If others give you one response for why something happens, assume you’re missing information.
4) Twaddle Tendency:
People make things up as they go (to appear smarter than they are).
When someone gives you an explanation, assume some percent of it is made up.
5) Social-Proof Bias:
We tend to follow the crowd.
Just because an idea is popular doesn’t make it true.
6) Overoptimism Tendency:
We tend to have unrealistic optimism. This makes it hard for us to accurately judge risk.
Have a 3rd person judge your downside risk.
7) Reward and Punishment Superresponse:
We underestimate how much impact incentives have.
Before you work with others, understand how they’re incentivized.
8) Pain-Avoiding Psychological Denial:
We will skew reality when the truth is painful.
This protects our ego, but gives us poor information to make decisions.
When you associate an idea with something bad, you assume it’s bad.
Find useful lessons that others avoid.
10) Lollapalooza Tendency:
When multiple mental flaws work together you get extreme outcomes.
Look out for multiple flaws when others explain their logic.
Most people don’t know how much these mental flaws skew their decision-making.
But Munger built Berkshire because of how clearly he saw each choice.
Protect against these mental flaws into your decision-making and you’ll become a top 0.1% decision-maker like Munger.