I’ve said it before: “Investing – particularly successful investing – is hard.”  There’s a lot going on in a person’s brain when it comes to making investment decisions: fear, uncertainty, doubt, expectations, and even things like guilt, shame, and pride.

Charlie Munger — attorney, investor, multi-billionaire, and Warren Buffett’s business partner — noticed some common tendencies in human psychology which, for better or for worse, subconsciously affect how we make decisions.  In Munger’s famous 1995 speech, “The Psychology of Human Misjudgment,” Munger describes 25 biases or tendencies which he came up with to keep his own decisions in check.

Regardless of things like age, background, or even level of education, we all fall prey to the same set of subconscious cognitive biases.  The best we can do is be aware of them and try to make decisions outside of their influence.

Even without a financial background, these cognitive biases can serve as a checklist the next time you’re faced with a tough decision.  I’ll cover 6 biases in this article, but if you want to read all 25, order a copy of Poor Charlie’s Almanack, a collection of Munger’s speeches and public commentary compiled by Peter Kaufman.  You can also find Munger’s 1995 speech on Youtube.

Deprival Super-Reaction Tendency

One thing Charlie noticed is that people prefer avoiding losses over acquiring gains.  To help you wrap your head around this bias, think about it like this: which would produce a stronger reaction — finding $20 in the street or losing $20 out of your wallet?  Most of us have a stronger reaction toward LOSING something we already own.

The idea of losing money can cause an investor to make impulsive decisions without doing proper due diligence.  In more liquid investments like the stock market, the tendency would be to sell in order to avoid the loss.  While I am no longer a stock market investor (unlike Munger!), I do know that this is typically the wrong decision if you want to see long-term results.

If you feel the tendency to jump ship because of nerves or the fear of experiencing a small or momentary loss, it might be best to either get more information or ride it out.

Munger says (and I agree) that it’s best to think long-term, and that the person who isn’t prepared to ride out one or two big losses a couple times a century “deserves the mediocre results he’s going to get.”  And we know that he and Buffett do their due diligence and hold onto investments for a long, long time.

Excessive Self-Regard Tendency

This bias usually has a couple things going on.  First, we overestimate our skills, which leads to overestimating the competency of our decisions, which leads to overestimating the value of our investments or assets.  While confidence is needed in investing, excessive self-regard results in people thinking they’re better at picking stocks or investments than they actually are.  When the investments end up not producing a return, people can’t see the role their poor decision-making played in their own misfortune.  See what happens when this bias overlaps with the next.

“Excessive self-regard” combined with “social proof” is a dangerous combination that keeps investors insulated from what’s really going on.

Social Proof Tendency

We tend to seek out people who think the same way we do, and we want to do something just because someone else has done it, rather than for its own merit or because we’ve done the research.  This can lead to an unhealthy herd mentality. Here’s what Charlie has to say about excessive social proof:

“Big-shot businessmen get into these waves of social proof.  Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company?  And there was no damned reason for all these oil companies to buy fertilizer companies, but they didn’t know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa.  I think they’re all gone now, but it was a total disaster.”

When you combine Excessive Self-Regard with Social Proof, you end up with a group of people, blind to their own inflated egos, sitting around congratulating each other on how smart and great they are, while blaming everyone and everything else for their losses. 

We saw this happen during the dot-com and housing bubbles.  Investors were boasting about the great investments they had made, congratulating themselves for being so smart and rich, while stock prices were completely disconnected.  As we know, this “disconnect” resulted in huge losses for many hard-working people.

Consistency Avoidance Tendency

Being creatures of habit, most of us are reluctant to change, but change is inevitable.  Markets change, businesses change, life changes.  To counteract this, you must be able to be objective, notice when something is no longer working, and adapt to circumstances by pivoting in a different direction.

Fortunately, our buy and hold fund is not correlated with the stock market, so it isn’t affected by market trends. However, that doesn’t mean we don’t often deal with change.  When we started the fund, we planned on helping people become homeowners, just as we did with our first fund, ROI Strategies.  We couldn’t find enough people who qualified, so we had to pivot and change to our buy and hold model we have today.  Still, every day, we have to remain vigilant at checking how the portfolio is faring across the different geographical markets, prepared to make changes as necessary to preserve investor returns.  We hire and fire team members, implement new systems, and pull out of markets that don’t meet our strict criteria. It is a never-ending process of change and improvement.

Envy/Jealousy Tendency

This bias is interesting and can be summed up in a quote from Munger: “Someone will always be getting richer faster than you.  This is not a tragedy.”

It might seem like jealousy is out of place in an article on investing, but here’s the deal: It’s easy to be envious of investors who seem to be doing better than you are.  But envy can lead to impulsive behavior, resulting in some pretty dumb decisions.  Instead, take time to evaluate the nature of the investment and be honest about what’s important to you—right now.  Everyone is different, and timing is crucial.  Don’t make your decision based on FOMO (Fear of Missing Out).  What seems like a good investment for someone else could be horrible for you.

Twaddle Tendency

It’s a funny word, but “twaddle” basically means B.S.  Some people will talk around subjects, especially ones they don’t understand, trying to fill in the blanks and make themselves seem knowledgeable.  If you find yourself talking about a subject you thought (or wish) you knew more about than you do, stop for a minute and say, “I don’t know.”

Charlie says we can counteract this tendency by “knowing the edge of our competency” and by practicing humility.  This isn’t always easy, particularly if you’re in a position of authority, but in my experience, people will respect you more for admitting there’s something you don’t know, instead of trying to B.S. them with a bad answer or pressuring them into a decision.

” I find that all you have to do to get ahead in life is to be non-idiotic and live a long time.” — Charlie Munger

I’ll close with this simple but insightful comment from Munger on twaddle:

“I don’t have any wonderful insights that other people don’t have.  I just slightly more consistently than others have avoided idiocy.  Other people are trying to be smarter.  All I’m trying to be is non-idiotic.  I find that all you have to do to get ahead in life is to be non-idiotic and live a long time.”