Ten causes of leadership misjudgement

In a speech to Harvard University in 1995 Charlie Munger identified 24 standard causes of misjudgment.

Charlie Munger is an American business magnate, lawyer, investor, and philanthropist with a net worth of $1.1 billion. He is Vice-Chairman of Berkshire Hathaway Corporation, the investment corporation chaired by Warren Buffett.

By his own admission there are huge overlaps between many of these causes and in this brief post I try to pull them together – perhaps too neatly – into ten causes of leadership misjudgement:

The ten causes of leadership misjudgement:

1. Incentive Caused Bias

2. Psychological denial “brains in chains”

3. Pavlovian Association

4. Reciprocation

5. Social proof

6. Over-reliance on the numbers

7. Don’t mistake contrast for proof

8. Bias caused by threatened scarcity

9. Bias from envy

10. ‘Liking’ distortion

1. Incentive Caused Bias

Munger argues that there is a general under-recognition of the power of incentives.

In Munger’s examples it’s the reinforcement, or creation of negative behaviours through incentives, such as employees being perversely incentivised to promote a product that is worse than a new version. No matter how hard the argument is made about the superiority of the new product employees will still promote the older version to which they are financially attached.

2. Psychological denial “brains in chains”

This is simply when the truth is just too unbearable to accept, so we distort it until it is bearable.

This links with Munger’s notion of ‘Brains in Chains’ where people refuse to accept new ideas because they are dissonant with their existing ways of perceiving and understanding the world. We can think of examples of this throughout history, from the notions of flat earth and the sun orbiting the earth, to global warming.

In a way I encountered this very recently when working with a senior executive who explained how his colleagues would not accept a simple statement of fact – which he could prove, because to do so would be to challenge their very way of understanding their worlds. He described this as the refusal to engage with what he termed to be the ‘inconvenient truth’.

3. Pavlovian Association

Just because something worked in the past there is an expectation that it will work again in the future. The Pavlovian association bias is very difficult to ignore – especially if it resulted in a reward.

4. Reciprocation

This is tendency to act in the way that people expect, and connected with this is the phenomenon that the more you act a particular way then the more likely that your associated thinking will change to comply with that behaviour. Over time this creates a default set of behaviours and ways of thinking which become almost impossible from which to escape.

5. Social proof

If others think something then it must be correct and the more people that think that then the more ‘correct’ it must be.

6. Over-reliance on the numbers

We are taught from a young age that mathematics can produce the correct result. This leads us towards a tendency to look for the exact result as derived from the numbers. Munger quoted John Maynard Keynes “Better to be roughly right, than precisely wrong”.

7. Don’t mistake contrast for proof

Just because something is better than something else – does not make it ‘good’. Don’t use comparison between two things to form a judgment about quality.

8. Bias caused by threatened scarcity

We can be enormously influenced by the fear that something we almost possessed is about to be removed from us. For example, if I thought that someone else also coveted the house I was about to buy, then I would be prepared to spend much more than I realistically know that I can afford.

9. Bias from envy

Warren Buffet claims that it’s not greed which drives the world but ‘envy’. This is a huge influence on many leaders who are envious of the progress being made by others and will do anything to follow in their footsteps – even if the action that is being taken does not logically ‘stack up’.

10. ‘Liking’ distortion

There is a tendency to like oneself, one’s own kind, and one’s own idea structures. This leads to a tendency to be susceptible to being misled by some one who is ‘liked’ – as opposed to setting aside our preferences when making judgments.

 

The lollapalooza effects

Munger goes on to conclude his speech by stressing that where four or five of these psychological tendencies come together they from a Lollopalooza effect, i.e. they create a situation where misjudgment is more than likely to take place.