Charlie Munger gave a speech at Harvard Law School in 1995. Here’s some notes:
Irrationality is patterned and there was no theory to deal with it back in the day, but Munger created his own system of psychology, partly by casual reading, but largely by personal experiences
Economics is always behavioral, it’s fairly clear that all reality has to respect all other reality. Inconsistencies have to be resolved and if anything valid in psychology, economics has to recognize it and vice versa. People working on this fringe between economics and psychology are right there
DENIAL: Mothers of the most obvious criminals that man could ever diagnose, all think they are innocent. This is simple denial. When reality is too simple to bear, we distort it until it’s bearable
AGENCY COSTS: Psychological tendencies work largely on a subconscious level. Persian messenger syndrome still exists. CEO’s of companies still don’t want to hear the bad news.
Informational inefficiency: Normally when you raise prices, demand comes down, but sometimes it goes the other way.
Consistency and commitment tendency: What you think may change what you do, but perhaps even more importantly, what you do will change what you think. “You might say that everyone knows that, but let me tell you, they don’t”
SOCIAL PROOF: Henry Kaufman and Malcolm Gladwell have talked about this before and they gave an example of Kitty Genovese, where 50 people looked while she was slowly murdered. What happened was social proof. Big businesses get into waves of social proof. An oil company acquires a fertilizer company, everyone else sees it and takes it as proof and go on a shopping spree as well; following steps. The stock market is like that. The price on the market are just like that; they act as social proof, they reflect what other people think, and that is very powerful.
Elegance: There is a saying in mathematics that –“the true beauty of a proof lies in its elegance”. Some economists and mathematicians get so caught up in the math and the fact that it’s so elegant makes it hard to move away from. But as Keynes wrote –“Better to be roughly right than precisely wrong”. The models were precisely wrong
Contrast caused distortion: “If you throw a frog in hot water, it will jump out, but if you put it in room temperature water and just slowly turn the heat up, the frog will die there. “
