24 causes for human misjudgement
February 16th, 2010 • posts i've written
I stumbled across this transcript from Charlie Munger’s speech at Harvard Law in 1995 entitled, The Psychology of Human Misjudgement. Munger is Vice-Chairman of Berkshire Hathaway and a longtime believer in using mental models to understand critical business problems – Munger is a keen student of behavioral economics and dubbs it The Lollapalooza Effect when multiple biases act together to influence decision making.
From the speech, before Munger lists his 24 causes for human misjudgement,
And I came here because behavioral economics. How could economics not be behavioral? If it isn’t behavioral, what the hell is it? And I think it’s fairly clear that all reality has to respect all other reality. If you come to inconsistencies, they have to be resolved, and so if there’s anything valid in psychology, economics has to recognize it, and vice versa. So I think the people that are working on this fringe between economics and psychology are absolutely right to be there, and I think there’s been plenty wrong over the years.
That separation of economics and psychology reminds me of Grant’s paradox that business leaders are trained to ignore culture when making decisions.
Behavioral Psychology has been a hot topic for the last few years, though as hot topics are treated, it tends to get more lip service than brain power. Nonetheless, we’re growing intrigued by what a concept that helped destroy our economy (exhibit a: the housing bubble) can do to help us make better decisions. It’s a bit like watching your house burn down and saying, “but that fire can keep us warm, too.”
For more background on behavioral economics: (please chime in with more)
- The Marketplace of Perceptions from Harvard Magazine – Behavioral economics explains why we procrastinate, buy, borrow, and grab chocolate on the spur of the moment.
- What Really Affects Behavior – a great summation of behavioral economics, including a reading list, by Valeria Maltoni
- Why advertising needs behavioural economics – Rory Sutherland delves deep into the consumer’s psyche to find the subconscious economic drivers of action and choice.
- Nudge – an excellent blog written by Richard Thaler and Cass Sunstein
- Geary Behavioral Economics Blog
- Anomalies: The Ultimatum Game, by Richard H. Thaler, The Journal of Economic Perspectives
- Anomalies: The Endowment Effect, Loss Aversion, and Status Quo Bias, by Daniel Kahneman,Jack L. Knetsch, Richard H. Thaler, The Journal of Economic Perspectives
- Why not Wikipedia, too? The behavioral economics page and my favorite, a long list of cognitive biases.
Dan Ariely on our buggy moral code
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- grand truths about human behavior
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- dear FCC, here’s how to find $100 billion dollars
3 Responses (add your comment)
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I too had come across Sutherland’s post on behavioral economics.
I suppose it’s great to know about loss aversion and anchoring. But I wish there was something beyond theory. That is, a marketer that has taken an insight from behavioral economics and tactically executed against for a brand. Even a database of insight-examples would help (perhaps Thaler already has this, given his research in many public projects).
One example you left off isfrom David Ogilvy. He was the most structured of advertisers, creating advertisements as Thaler creates a nudge–based on pure hard behavioral data. He claims to have memorized hundreds of “tricks.” Most of his insights weren’t tested in a lab, but they’re valid nonetheless, and I’m sure I could connect most to a cognitive bias. His book has quite a few examples, and I’ve tried to archive them in my blog as well.
http://www.amazon.com/Ogilvy-Advertising-David/dp/039472903X
http://www.mdaniels.com/how-the-father-of-advertising-wrote-and-designed-advertising/
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Farnam Street is also a great place to start. They take a very Mungeresque view of the world.