Our Tendency to Misjudge

Humans pride themselves on being rational creatures, capable of weighing evidence and making sound decisions. Yet, as history and experience keep reminding us, we are prone to repeated errors of judgment.

No one explained this better than Charlie Munger, vice-chairman of Berkshire Hathaway and long-time business partner of Warren Buffett.

Munger, widely regarded as one of the greatest investors and thinkers of the modern era, was not just a financier but also a deep student of human behaviour. He used insights from psychology and behavioural economics to build a "latticework of mental models" for better decision-making, particularly in investing.

Munger argued that most mistakes in judgment come not from ignorance of facts but from psychological tendencies that subtly distort how we interpret the world.

He identified 25 psychological biases and tendencies, compiled in his book "Poor Charlie's Almanack," to understand and avoid common patterns of human misjudgment. 

In his famous talk, “The Psychology of Human Misjudgment”, he explains several of these “misjudgments.”

By understanding them, we can become more aware of our blind spots, improve our decisions, and avoid traps that have cost individuals and organisations dearly.

1. Reward and Punishment Superresponse

We respond strongly to incentives; so strongly that they can overwhelm our better judgment. Incentives are often more potent than moral reasoning.

Example: Wells Fargo employees opened millions of fake accounts to meet sales targets, driven by the rewards structure.

Similarly, children who are promised ice cream for cleaning their rooms rush to complete the task, showing how incentives shape behaviour, sometimes destructively.

2. Liking / Loving Tendency

We tend to favour people we like, sometimes ignoring evidence against them. Affection blinds us to flaws.

Example: Steve Jobs inspired fierce loyalty at Apple despite his harshness because people admired his vision. Manycustomers buy from a friendly salesperson on a smaller scale, even if the deal isn’t the best.

3. Disliking / Hating Tendency

The reverse is also true: if we dislike someone, we’re quick to see their faults and discount their strengths.

Example: In politics, voters often reject good policies simply because they come from the “other side.” A neighbour who once offended us may suddenly seem irritating in everything they do.

4. Doubt-Avoidance Tendency

When confronted with uncertainty, our brains rush to closure. We would rather make a bad decision than sit with potential ambiguity.

Example: After 9/11, many Americans drove long distances instead of flying.  They did so, even though driving was statistically more dangerous. The need for certainty led to poor risk assessment.

5. Inconsistency-Avoidance Tendency

We crave internal consistency. Once we’ve taken a position, we resist changing our minds even when compelling new evidence suggests we should reconsider.

Example: Kodak clung to film technology despite the rise of digital photography. Their refusal to “flip-flop” led to collapse. People often stay in failing relationships because “we’ve already come this far.”

6. Curiosity Tendency

As humans, we are wired to explore and ask questions. Curiosity fuels our innovation but can also distract us from what truly matters.

Example: Elon Musk’s ventures into space, cars, and AI reflect the power of curiosity. On the other hand, hours lost scrolling through social media demonstrate how curiosity can undermine focus.

7. Kantian Fairness Tendency

We are deeply motivated by fairness. People will sometimes hurt themselves to punish unfairness.

Example: Employees disengage if they perceive pay inequity, even when their salaries are high. Children protest if they get fewer sweets than their peers, despite still receiving plenty.

8. Envy / Jealousy Tendency

Comparison is deeply human. Envy can drive both ambition and destructive behaviour.

Example: Social media thrives on envy, prompting people to compare vacations, lifestyles, and possessions. In business, rivals often overspend in bidding wars to “beat” competitors.

9. Reciprocation Tendency

The urge to return favours is nearly universal. Once we’ve received something, however small, we feel compelled to give back.

Example: Supermarkets hand out free samples, knowing many customers will feel obliged to buy. When someone treats you to lunch in friendship, you feel a subtle pressure to return the favour.

10. Influence-from-Mere-Association Tendency

We connect ideas and people by association, often unfairly.

Example: Coca-Cola associated its brand with the FIFA World Cup, embedding the drink with feelings of joy and celebration. Conversely, people sometimes dislike a messenger simply because they bring bad news.

11. Simple, Pain-Avoiding Psychological Denial

Sometimes reality is so painful that we deny it.

Example: During the 2008 financial crisis, many homeowners refused to accept that their properties had dropped in value, delaying necessary financial decisions. On a personal level, people often ignore medical symptoms out of fear, worsening their condition.

12. Excessive Self-Regard Tendency

We consistently overrate our abilities and importance.

Example: Surveys show most drivers believe they’re above average; a statistical impossibility. Amateur investors think they can “beat the market,” when most underperform simple index funds.

13. Over-Optimism Tendency

Optimism is valuable, but unchecked, it leads to unrealistic expectations.

Example: Startup founders frequently underestimate the time and resources needed to succeed. On a personal level, people buy gym memberships believing they’ll attend daily, only to stop after a few weeks.

14. Deprival-Superreaction Tendency

Losses sting more than equivalent gains please us. This “loss aversion” leads to irrational decisions.

Example: Investors cling to losing stocks to “get back to even” instead of cutting losses. People also keep unused possessions because they can’t bear the thought of giving them away.

15. Social-Proof Tendency

We look to others for cues on how to behave, often at the expense of our own judgment.

Example: The dot-com bubble saw investors pour money into profitless companies because “everyone else was doing it.” On a smaller scale, a crowded restaurant seems better than an empty one, regardless of food quality.

16. Contrast-Misreaction Tendency

We judge things not by their absolute value but relative to what came before.

Example: Realtors show buyers overpriced homes first, making moderately priced ones look like bargains. Retailers use“was $200, now $99” pricing tricks to create perceived value.

17. Stress-Influence Tendency

Under stress, our judgment degrades.

Example: Doctors under time pressure sometimes misdiagnose patients. In emergencies, people panic and stampede, worsening outcomes, when calm, orderly action would save lives.

18. Availability-Misweighing Tendency

We give more weight to vivid or recent information than to abstract data.

Example: Shark attacks dominate headlines and fuel fear, though car accidents kill far more people. In companies, leaders often focus on the last crisis rather than the most significant long-term threats.

19. Use-It-or-Lose-It Tendency

Skills atrophy if not practised.

Example: A computer programmer who doesn’t keep up with new coding languages quickly falls behind. Athletes who stop training lose fitness. Munger himself read daily, showing that knowledge compounds only if continually applied.

20. Drug-Misinfluence Tendency

Alcohol and drugs distort perception and decision-making.

Example: Countless careers have been wrecked by alcoholism, and even caffeine can push people into impulsive late-night decisions that backfire the next day.

21. Senescence-Misinfluence Tendency

Ageing affects judgment and adaptability.

Example: Warren Buffett gradually delegated responsibilities at Berkshire to younger managers, acknowledging natural limits. Families also see elderly relatives fall prey to scams due to cognitive decline.

22. Authority-Misinfluence Tendency

We often defer to authority figures, sometimes unthinkingly.

Example: The Milgram experiments showed ordinary people obeying instructions to administer “lethal” shocks. AtEnron, employees followed executives’ orders despite recognising absurd risks.

23. Twaddle Tendency

We have a weakness for nonsense.

Example: Fads like detox teas or crystal healing thrive despite no scientific support. People prefer comforting stories to inconvenient truths, making them easy prey for pseudoscience.

24. Reason-Respecting Tendency

We respond better when given reasons, even if they’re weak.

Example: Experiments showed people were likelier to let someone cut in line when the request included “because,” even if the explanation was meaningless. Leaders often frame orders with justifications to increase compliance.

25. Lollapalooza Tendency

The most dangerous errors occur when multiple biases combine and reinforce each other.

Example: The housing bubble was fueled by over-optimism (“real estate always rises”), social proof (“everyone’sbuying”), bad incentives (mortgage brokers chasing commissions), and denial (ignoring risks). Together, they caused financial catastrophe.

Why This Matters

Recognising these tendencies allows us to pause, reflect, and choose better.

While we cannot eliminate bias, we can reduce its grip by building awareness and surrounding ourselves with systems (checklists, diverse perspectives, and sound incentives) that guard against our blind spots.

In a world filled with information overload, conflicting signals, and constant decision-making, the discipline of understanding how we misjudge may be the most critical skill we can cultivate.

Until next time, remember that “it’s not brilliance that sets successful people apart, but avoiding a lot of dumb mistakes.”

Dion Le Roux

References

1. Cialdini, R. B. (2009). Influence: The Psychology of Persuasion. Harper Business.

2. Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.

3. Munger, C. T. (1995). The Psychology of Human Misjudgment. Talk at Harvard University.

4. Rawski, C. (2017). Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger. Stripe Press.

5. Thaler, R. H., & Sunstein, C. R. (2008). Nudge: Improving Decisions About Health, Wealth, and Happiness. Yale University Press.