Seeking Wisdom: From Darwin to Munger by Peter Bevelin

Summary

Through real life examples, many of them centered around Warren Buffett and Charlie Munger, Peter Bevelin helps the reader learn how to think better, make fewer poor decisions understand ourselves and others better. Discusses mental models, human fallibilities, heuristics, instincts, human psychology, biology and more.

Key Takeaways

Main goal is to understand why people behave the way they do. “This book focuses on how our thoughts are influenced, why we make misjudgments and tools to improve our thinking. If we understand what influences us, we might avoid certain traps and understand why others act like they do. And if we learn and understand what works and doesn’t work and find some framework for reasoning, we will make better judgments. We can’t eliminate mistakes, but we can prevent those that can really hurt us.”
Learn from other’s mistakes
Learn the big ideas that underlie reality and develop good thinking habits (namely, objectivity)
This book is a compilation of what Bevelin has learned from reading some of the works of the world’s best thinkers
Book is broken down into 4 parts – what influences our thinking, examples of psychological reasons for misjudgments, reasons for misjudgments caused by both psychology and a lack of considering some basic ideas from physics and mathematics and lastly describes tools for better thinking

What I got out of it

Seriously good read if you’re at all interested in understanding how and why we make decisions (both bad and good) and how we can go about improving our thought processes and tools. Fantastic read and couldn’t recommend more highly

Part 1 – What Influences Our Thinking?

Brain communicates through neurochemicals and genes are the recipe for how we are made
Behavior is influenced by genetic and environmental factors
The flexibility of the brain is amazing as it can change due to our thoughts and experiences
Mental state (situation and experience) and physical state are intimately connected – beliefs have biological consequences, both good and bad
World is not fixed but evolving – evolution has no goal
Pain (punishment) and reward (pleasure) have evolutionary benefits with pain avoidance being our primary driver
Hunter-gatherer environments have formed our basic nature – competitive, access to limited resources, many dangers, self-interest, ostracism = death
Cooperation leads to trust, especially amongst relatives
Fear is our most basic emotion and it guides almost everything we do. Repeated exposure lessens instinctual reactions
Novelty is always sought out
Reputation, reciprocation and fairness are big human motivators
Very painful to lose anything, especially status, once obtained. Higher status linked to higher health and well being
People learn their behavior from their culture
Assume people will act in their self-interest
Don’t blindly imitate/trust others – think rationally and form your own opinions

Part 2 – The Psychology of Misjudgments

Outlines 28 reasons for misjudgment. These are never exclusive or independent of each other. Many of these echo similar sentiments to Cialdini’s Influence
1. Bias from mere association
2. Underestimating the power of rewards and punishment
3. Underestimating bias from own self-interest and incentives
4. Self-serving bias
5. Self-deception and denial
6. Bias from consistency tendency (only see things that confirm our already formed beliefs)
7. Bias from deprival syndrome (strongly reacting when something is taken away)
8. Status quo bias and do-nothing syndrome
9. Impatience
10. Bias from envy and jealousy
11. Distortion by contrast comparison
12. Bias from anchoring
13. Over-influence by vivid or the most recent information
14. Omission and abstract blindness
15. Bias from reciprocation tendency
16. Bias from over-influence by liking tendency
17. Bias from over-influence by social proof
18. Bias from over-influence by authority
19. Sensemaking
20. Reason-respecting
21. Believing first and doubting later
22. Memory limitations
23. Do-something syndrome
24. Mental confusion from say-something syndrome
25. Emotional arousal
26. Mental confusion from stress
27. mental confusion from physical/psychological pain, the influence of chemicals or diseases
28. Bias from over-influence by the combined effect of many psychological tendencies working tougher
Behavior can’t be seen as rational/irrational alone – must have context
People can take bad news, but we don’t like it late
Evaluate things, people and situations by their own merits
Past experiences are often context dependent. Just because some stimulus caused you earlier pain, doesn’t mean that is still the case today
Create a negative emotion if you want to end a certain behavior
Good consequences don’t necessarily mean you made a good decision and bad consequences don’t necessarily mean you made a bad one
Frequent rewards, even if smaller, feels better than one large reward
The more “precise” people’s projections about the future are, the more wary you should be
Munger looks for a handful of things in people – integrity, intelligence, experience and dedication
Recognize your limits. How well do you know what you don’t know/ Don’t let your ego determine what you should do
Bad news that is true is better than good news that is false
People associate being wrong as a threat to their self-interest
Labeling technique – when somebody labels you, whether you agree or not, you are more likely to comply and behave in ways consistent with that label
Avoid ideology at all costs
“There is nothing wrong with changing a plan when the situation has changed.” – Seneca
Base decisions on current situations and future consequences
Don’t fall in love with any particular point of view
Know your goals and options
Remember that people respond to immediate crisis and threats
People favor routine behavior over innovative behavior and similarly, people feel worse when they fail as a result of taking action than when they fail from doing nothing
Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action
People give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future
“We envy those who are near us in time, place, age or reputation.” – Aristotle
“The best way to avoid envy is the deserve the success you get.” – Aristotle
How we value things depends on what we compare them with
Sometimes it is the small, invisible changes that harm us the most
Accurate information is better than dramatic information. Back up vivid stories with facts and numbers
We see only what we have names for
Always look for alternative explanations
We see available information. We don’t see what isn’t reported. Missing information doesn’t draw our attention
A favor or gift is most effective when it is personal, significant and unexpected
Always try to see situations and people from their POV
People tend to like their kin, romantic partners and people similar to them more as well as those who are physically attractive. We also like and trust anything familiar
Concentrate on the issue and what you want to achieve
The vast majority of people would rather be wrong in a group than right in isolation
“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 is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.” – Ralph Waldo Emerson
When all are accountable, nobody is accountable
Being famous doesn’t give anybody special expertise – beware ads with celebrity endorsements
“We don’t like uncertainty. We have a need to understand and make sense of events. We refuse to accept the unknown. We don’t like the unpredictability and meaninglessness. We therefore seek explanations for why things happen. Especially if they are novel, puzzling or frightening. By finding patterns and causal relationships we get comfort and learn for the future.”
- Consider how other possible outcomes might have happened. Don’t underestimate chance
Any reason, no matter how flimsy, often helps persuade others
5 W’s – A rule for communication – must tell who was going to do what, where, when and why.
Memory is very selective and fallible – keep records of important events
Don’t confuse activity with results. There is no reason to do a good job with something you shouldn’t do in the first place
“Wise men talk because they have something to say; fools, because they have to say something.” – Plato
Awareness of ignorance is the beginning of wisdom
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
Understand your emotions and their influence on your behavior. Ask – Is there a reason behind my action?
Hold off on important decisions when you have just gone through an emotional experience
Cooling-off periods help us think things through
Stress increases our suggestibility
Stress is neither good nor bad in itself. It depends on the situation and our interpretation
“I’ve suffered a great many catastrophes in my life. Most of them never happened.” – Mark Twain
People tend to overestimate personal characteristics and motives when we explain the behavior of others and underestimate situational factors like social pressure, roles or things over which there are no control
The less knowledgeable we are about an issue, the more influenced we are by how it is framed
Advice from Munger – can learn to make fewer mistakes than others and how to fix your mistakes faster when you do make them. Were the factors that really govern the interests involved, rationally considered and 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 mis function. And, take all the main models from psychology and use them as a checklist in reviewing outcomes in complex systems

Part 3 – The Physics and mathematics of Misjudgments

9 Causes of Misjudgment/Mistakes
1. Systems Thinking
  - Failing to consider that actions have both intended and unintended consequences. Includes failing to consider secondary and higher order consequences and inevitable implications
  - Failing to consider the likely reactions of others
  - Overestimating predictive ability or using unknowable factors in making predictions
2. Scale and limits
  - Failing to consider that changes in size or time influence form, function and behavior
  - Failing to consider breakpoints, critical thresholds or limits
  - Failing to consider constraints – system’s performance constrained by its weakest link
3. Causes
  - Not understanding what causes desired results
  - Believing cause resembles its effect – a big effect must have a big, complicated cause
  - Underestimating the influence of randomness in good or bad outcomes
  - Mistaking an effect for its cause
  - Attributing an outcome to a single cause when there are multiple
  - Mistaking correlation for cause
  - Drawing conclusions about causes from selective data
  - Invert, always invert! – look at problems backwards
4. Numbers and their meaning
  - Looking at isolated numbers – failing to consider relationships and magnitudes. Not differentiating between absolute and relative risk
  - Underestimating the effect of exponential growth
  - Underestimating the time value of money
5. Probabilities and number of possible outcomes
  - Underestimating the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events
  - Underestimating the chance of common but not publicized events
  - Believing one can control the outcome of events where chance is involved
  - Judging financial decisions by evaluating gains and losses instead of final state of wealth and personal value
  - Failing to consider the consequences of being wrong
6. Scenarios
  - Overestimating the probability of scenarios where all of a series of steps must be achieved for a wanted outcome. Also, underestimating the opportunities for failure and what normally happens in similar situations
  - Underestimating the probability of system failure
  - Not adding a factor of safety for known and unknown risks
  - Invest a lot of time into researching and understanding your mistakes
7. Coincidences and miracles
  - Underestimating that surprises and improbable events happen, somewhere, sometime to someone, if they have enough opportunities (large enough or time) to happen
  - Looking for meaning, searching for causes and making up patterns for chance events, especially events that have emotional implications
  - Failing to consider cases involving the absence of a cause or effect
8. Reliability of case evidence
  - Overweighing individual case evidence and under-weighing the prior probability considering the base rate or evidence from many similar cases, random match, false positive or false negative and failing to consider relevant comparison population
9. Misrepresentative evidence
  - Failing to consider changes in factors, context or conditions when using past evidence to predict likely future outcomes. Not searching for explanations to why past outcome happened, what is required to make past record continue and what forces change it
  - Overestimating evidence from a single case or small or unrepresentative samples
  - Underestimating the influence of chance in performance (success and failure)
  - Only seeing positive outcomes and paying little or no attention to negative outcomes and prior probabilities
  - Failing to consider variability of outcomes and their frequency
  - Failing to consider regression – in any series of events where chance is involved unique outcomes tends to regress back to the average outcome
  - Postmortems – Record your mistakes! Instead of forgetting about them, they should be highlighted
    - What was my original reason for doing something?
    - What were my assumptions?
    - How did reality work out relative to my original guess? What worked and what didn’t?
    - What worked well? What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?

Part 4 – Guidelines to Better Thinking

This section helps provide tools which create a foundation for rational thinking
12 Tools for rational thinking
1. Models of reality
  - A model is an idea that helps us better understand how the world works. Helps explain “why” and predict “how” people are likely to behave in certain situations
  - Ask yourself, “Is there anything I can do to make my whole mental process work better? And I [Munger] would say that the habit of mastering multiple models which underlie reality is the best thing you can do…It’s just so much fun – and it works so well.”
  - A valuable model produces meaningful explanations and predictions of likely future consequences where the cost of being wrong is high
  - Considering many ideas help us achieve a holistic view. No single discipline has all the answers – need to consider mathematics, physics, chemistry, engineering, biology, psychology and rank and use them in order of their reliability
  - Must understand how different ideas interact and combine
  - Can build your own mental models by looking around you and asking why things are happening (or why things are not happening).
2. Meaning
  - Truly understand something when “without using the new word which you have just learned, try to rephrase what you have just learned in your own language.”
  - Meaning of words, events, causes, implications, purpose, reason, usefulness
  - “Never express yourself more clearly than you are able to think.” – Niels Bohr
  - Use ideas and terms people understand, that they are familiar with and can relate to
  - We shouldn’t engage in false precision
3. Simplification
  - “If something is too hard, we move on to something else. What could be more simple than that?” – Charlie Munger
  - Make problems easier to solve. Eliminate everything except the essentials – break down a problem into its components but look at the problem holistically – first dispose of the easy questions
  - Make fewer but better decisions
  - Dealing with what’s important forces us to prioritize. There are only a few decisions of real importance. Don’t bother trying to get too much information of no use to explain or predict
  - Deal with the situations in live by knowing what to avoid. Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it
  - Shifting mental attention between tasks hugely inefficient. Actions and decisions are simpler when we focus on one thing at a time
  - Some important things we can’t know. Other things we can know but they are not important
  - Activity does not correlate with achievement
4. Rules and filters
  - Gain more success from avoiding stupid decisions rather than making brilliant ones
  - Filters help us prioritize and figure out what makes sense. When we know what we want, we need criteria to evaluate alternatives. Try to use as few criteria as necessary to make your judgment. Then rank them in order of their importance and use them as filters
  - More information does not mean you are better off
  - Warren Buffet uses 4 criteria as filters
    - Can I understand it? If it passes this filter then,
      - Understanding for Buffett means thinking that he will have a reasonable probability of being able to assess where the business will be in 10 years
    - Does it look like it has some kind of sustainable advantage? If it passes this filter,
    - Is the management composed of able and honest people? If it passes this filter,
    - Is the price right? If it passes this filter, we write a check
  - Elimination – look for certain things that narrow down the possibilities
  - Checklist procedures – help reduce the chances of harm (pair with Gawande’s The Checklist Manifesto)
    - Should think about – different issues need different checklists, a checklist must include each critical item necessary for “safety” and avoiding “accidents” so we don’t need to rely on memory for items to be checked, readily usable and easy to use, agree with reality
    - Avoid excessive reliance on checklists as this can lead to a false sense of security
5. Goals
  - How can we make the right decision if we don’t know what we want to achieve? Even if we don’t know what we want, we often know what we don’t want, meaning that our goal can be to avoid certain things
  - Goals should be – clearly defined, focused on results, concrete, realistic and logical, measurable, tailored to individual needs and subject to change
  - Goals need target dates and controls stations measuring the degree to which the goal is achieved
  - Always ask – What end result do I want? What causes that? What factors have a major impact on the outcome? What single factor has the most impact? Do I have the variable(s) needed for the goal to be achieved? What is the best way to achieve my goal? Have I considered what other effects my actions will have that will influence the final outcome?
6. Alternatives
  - Opportunity cost – every minute we choose to spend on one thing is a minute unavailable to spend on other things. Every dollar we invest is a dollar unavailable for other available investments
  - When we decide whether to change something, we should measure it against the best of what we already have
7. Consequences
  - Consider secondary and long-term effects of an action
  - Whenever we install a policy, take an action or evaluate statements, we must trace the consequences – remember four key things:
    - Pay attention to the whole system, direct and indirect effects
    - Consequences have implications or more consequences, some which may be unwanted. We can’t estimate all possible consequences but there is at least one unwanted consequence we should look out for,
    - Consider the effects of feedback, time, scale, repetition, critical thresholds and limits
    - Different alternatives have different consequences in terms of costs and benefits. Estimate the net effects over time and how desirable these are compared to what we want to achieve
8. Quantification
  - How can you evaluate if a decision is intelligent or not if you can’t measure it against a relevant and important yardstick?
  - We need to understand what is behind the numbers
    - Buffett says that return on beginning equity capital is the most appropriate measure of single-year managerial performance
9. Evidence
  - Evidence helps us prove what is likely to happen or likely to be true or false. Evidence comes from facts, observations, experiences, comparisons and experiments
  - Occam’s Razor – if we face two possible explanations which make the same predictions, the one based on the least number of unproven assumptions is preferable, until more evidence comes along
  - Past record is the single best guide
  - The following questions help decide if past evidence is representative of the future – observation (will past/present behavior continue?), explanation (why did it happen in the past or why does it happen now?), predictability (how representative is the past/present evidence for what is likely to happen in the future?), continuation and change (what is required to make the past/present record continue or to achieve the goal?), certainty and consequences (how certain am I?)
  - Falsify and disprove – a single piece of evidence against something will show that it is false
  - Look for evidence that disproves your explanation and don’t spend time on already disproved ideas or arguments or those that can’t be disproved
  - Engage in self-criticism and question your assumptions
  - Find your mistakes early and correct them quickly before they cause harm
  - The mental habit of thinking backward forces objectivity – because one way to think a thing through backward is by taking your initial assumption and say, “let’s try and disprove it.” That is not what most people do with their initial assumption. They try and confirm it.
10. Backward thinking
  - Avoid what causes the opposite of what you want to achieve and thinking backwards can help determine what these actions are
    - Should also make explicitly clear what we want to achieve
  - “Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools do not imitate the successes of the wise.” – Cato
11. Risk
  - Reflect on what can go wrong and ask what may cause this to turn into a catastrophe?
  - Being wrong causes both an actual loss and an opportunity cost
  - To protect us from all unknowns that lie ahead we can either avoid certain situations, make decisions that work for a wide range of outcomes, have backups or a huge margin of safety
12. Attitudes
  - “Life is long if we know how to use it.” – Seneca
  - Know what you want and don’t want
  - Determine your abilities and limitations. Need to know what we don’t know or are not capable of knowing and avoid those areas
  - Ask – what is my nature? what motivates me? what is my tolerance for pain and risk? what has given me happiness in the past? what are my talents and skills? what are my limitations?
  - Be honest – act with integrity and individuality
  - Trusting people is efficient
  - Act as an exemplar
  - Treat people fairly – must be lovable
  - Don’t take life too seriously – have perspective, a positive attitude, enthusiasm and do what you enjoy
  - Have reasonable expectations – expect adversity
  - Live in the present – don’t emphasize the destination so much that you miss the journey. Stay in the present and enjoy life today
  - Be curious and open minded and always ask “why?”

Appendix

Munger Harvard School Commencement Speech 1986

Avoid drugs, envy, resentment, being unreliable, not learning from other’s mistakes, not standing on shoulders of giants, giving up, not looking at problems from different POVs, only reading/paying attention to information that confirms your own beliefs
Be objective
“Disraeli…learned to give up vengeance as a motivation for action, but he did retain some outlet for resentment by putting the names of people who wronged him on a piece of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in nothing the way the world had taken his enemies down without his assistance.”

Wisdom from Charles Munger and Warren Buffett

Appeal to other people’s interests over your own
Institutional imperative – tendency to resist change, make less than optimal capital deployment decisions, support foolish initiatives and imitate the actions of peer companies
Board of directors have few incentives (unless large owners) to replace CEO
Type of people to work with – need intellectual honesty and business owners must care who they sell to
Need role models early on
Emulate what you admire in others but also be aware of what you don’t like
Know your circle of competence
Use all available mental models, not just what you’re comfortable with
Scale extremely important – efficiencies, information (recognition), psychology (fit in), and in some industries leads to monopolies and specialization
- Disadvantages of scale – specialization often leads to bureaucracy
On what something really means – ask “and then what?” to truly get at somethings core
There is a certain natural tendency to overlook anything that is simple and important
Avoid commodity businesses
Deal only with great people and you will avoid 99% of life’s headaches