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Chris DeMuth Jr.
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Chris DeMuth Jr. is the founder of Rangeley Capital LLC. Rangeley is an investment firm that focuses on event driven, value-oriented investment opportunities. Prior to founding Rangeley Capital, Mr. DeMuth spent his career as a securities analyst for several hedge funds and proprietary trading... More
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  • Charlie Munger On Misjudgment – Day 17

    The following is a daily publication by section of a Munger speech at Harvard in which he explained patterned irrationality, much of which he learned from Robert Cialdini's Influence.

    I hope readers will contribute examples and opportunities in the comment section.

    17. Now we come to bias from over-influence by extra-vivid evidence.

    I'm at least $30 million poorer as I sit here giving this little talk because I once bought 300 shares of a stock and the guy called me back and said, "I've got 1,500 more," and I said, "Will you hold it for 15 minutes while I think about it?" And the CEO of this company -- I have seen a lot of vivid peculiarities in a long life, but this guy set a world record; I'm talking about the CEO -- and I just mis-weighed it. The truth of the matter was the situation was foolproof. He was soon going to be dead, and I turned down the extra 1,500 shares, and it's now cost me $30 million. And that's life in the big city. And it wasn't something where stock was generally available. So it's very easy to mis-weigh the vivid evidence, and Gutfreund did that when he looked into the man's eyes and forgave a colleague.

    Oct 09 9:11 AM | Link | 3 Comments
  • Doomsday Cult Financing

    It's the end of the world as we know it, and I feel fine

    Well, we are still here. Despite the doomsday cult prediction that the world would end yesterday (look for a great deal on the website url for, we must just keep buggering on. One might think that this failed prophecy would dampen enthusiasm for doomsday cults (and, come to think of it, for predictions), but there will be many more.

    Right about now, you are probably thinking what I am thinking: Doomsday Cults! How can I exploit this market opportunity for profit? My job is to connect consumers with the goods and services that they demand, not to judge. Judgement is another department and it will arrive yesterday, er, tomorrow, or another specific date to be disclosed.

    Happily, my friend Reed Kuhn is on the scene. He has offered to finance future such doomsday cults that want to be prepared for the many subsequent end days to come. In order to facilitate their preparation for the end of the world, he offered to pay 20% of NAV in cash for all of their net liquid assets. This offer of $0.20 on the $1.00 is a brilliant deal for cultists everywhere, who can use the cash to buy ads, etc., to promote their predictions. This is a value creating transaction between the prophets and a consortium of skeptics, debunkers, and evidence-followers. Besides the convenience of added liquidity in the end days, prophets can add to the fun with their knowledge that the consortium will be stuck with all of their worthless old gold, land, and securities when the world ends. The joke will be on them/us!

    One detail to consider is that this particular cult appears to be bearish on the US$ according to their video. So they may require a currency swap along with their doomsday finance package. Easily addressed.

    What does Reed get out of it? Only a reasonable rate of return if any cult fails to hit an end of the world milestone. What is his downside? He will have to deal with customer relations, which is a task that I do not envy. In terms of the expected value, while the absolute value of the end of the world would probably be suboptimal for Reed, his financing offer would not reduce the comparative value. So, he is probably not too worried about prophets. But he just might have to worry about my offering them 25%.

    Finally, lest anyone accuse me of optimism, let me finish by saying that it is an uncertain world and I am not taking the other side of the view that the world will end. In fact the world - or at least my world - might well end sometime soon as I have discussed in Preparing For A Market Collapse Part I, II and III. I just don't know when and when it comes to such confidently specific prophets, logic and reason are on the side of the skeptics.

    Oct 08 7:44 AM | Link | 3 Comments
  • Charlie Munger On Misjudgment – Day 16

    The following is a daily publication by section of a Munger speech at Harvard in which he explained patterned irrationality, much of which he learned from Robert Cialdini's Influence.

    I hope readers will contribute examples and opportunities in the comment section.

    16. Bias from the non-mathematical nature of the human brain in its natural state as it deal with probabilities employing crude heuristics, and is often misled by mere contrast, a tendency to overweigh conveniently available information and other psychologically misrouted thinking tendencies on this list.

    When the brain should be using the simple probability mathematics of Fermat and Pascal applied to all reasonably obtainable and correctly weighted items of information that are of value in predicting outcomes, the right way to think is the way Zeckhauser plays bridge. It's just that simple. And your brain doesn't naturally know how to think the way Zeckhauser knows how to play bridge. Now, you notice I put in that availability thing, and there I'm mimicking the very eminent psychologists Daniel Kahneman and Amos Tversky, who raised the idea of availability to a whole heuristic of misjudgment. And they are very substantially right.

    I mean ask the Coca-Cola Company (NYSE:KO), which has raised availability to a secular religion. If availability changes behavior, you will drink a helluva lot more Coke if it's always available. I mean availability does change behavior and cognition. Nonetheless, even though I recognize that and applaud Tversky and Kahneman, I don't like it for my personal system except as part of a greater sub-system, which is you've got to think the way Zeckhauser plays bridge. And it isn't just the lack of availability that distorts your judgment. All the things on this list distort judgment. And I want to train myself to kind of mentally run down the list instead of just jumping on availability. So that's why I state it the way I do.

    In a sense these psychological tendencies make things unavailable, because if you quickly jump to one thing, and then because you jumped to it the consistency and commitment tendency makes you lock in, boom, that's error number one. Or if something is very vivid, which I'm going to come to next, that will really pound in. And the reason that the thing that really matters is now unavailable and what's extra-vivid wins is, I mean, the extra-vividness creates the unavailability. So I think it's much better to have a whole list of things that would cause you to be less like Zeckhauser than it is just to jump on one factor.

    Here I think we should discuss John Gutfreund. This is a very interesting human example, which will be taught in every decent professional school for at least a full generation. Gutfreund has a trusted employee and it comes to light not through confession but by accident that the trusted employee has lied like hell to the government and manipulated the accounting system, and it was really equivalent to forgery. And the man immediately says, "I've never done it before, I'll never do it again. It was an isolated example." And of course it was obvious that he was trying to help the government as well as himself, because he thought the government had been dumb enough to pass a rule that he'd spoken against, and after all if the government's not going to pay attention to a bond trader at Salomon, what kind of a government can it be?

    At any rate, this guy has been part of a little clique that has made, well, way over a billion dollars for Salomon in the very recent past, and it's a little handful of people. And so there are a lot of psychological forces at work, and then you know the guy's wife, and he's right in front of you, and there's human sympathy, and he's sort of asking for your help, which encourages reciprocation, and there's all these psychological tendencies are working, plus the fact he's part of a group that had made a lot of money for you. At any rate, Gutfreund does not cashier the man, and of course he had done it before and he did do it again. Well now you look as though you almost wanted him to do it again. Or God knows what you look like, but it isn't good. And that simple decision destroyed Jim Gutfreund, and it's so easy to do.

    Now let's think it through like the bridge player, like Zeckhauser. You find an isolated example of a little old lady in the See's Candy Company, one of our subsidiaries, getting into the till. And what does she say? "I never did it before, I'll never do it again. This is going to ruin my life. Please help me." And you know her children and her friends, and she'd been around 30 years and standing behind the candy counter with swollen ankles. When you're an old lady it isn't that glorious a life. And you're rich and powerful and there she is: "I never did it before, I'll never do it again." Well how likely is it that she never did it before? If you're going to catch 10 embezzlements a year, what are the chances that any one of them -- applying what Tversky and Kahneman called baseline information -- will be somebody who only did it this once? And the people who have done it before and are going to do it again, what are they all going to say? Well in the history of the See's Candy Company they always say, "I never did it before, and I'm never going to do it again." And we cashier them. It would be evil not to, because terrible behavior spreads.

    Remember...what was it? Serpico? I mean you let that've got social proof, you've got incentive-caused bias, you've got a whole lot of psychological factors that will cause the evil behavior to spread, and pretty soon the whole damn...your place is rotten, the civilization is rotten. It's not the right way to behave. And I will admit that I have...when I knew the wife and children, I have paid severance pay when I fire somebody for taking a mistress on an extended foreign trip. It's not the adultery I mind, it's the embezzlement. But there, I wouldn't do it like Gutfreund did it, where they'd been cheating somebody else on my behalf. There I think you have to cashier. But if they're just stealing from you and you get rid of them, I don't think you need the last ounce of vengeance. In fact I don't think you need any vengeance. I don't think vengeance is much good.

    Oct 08 7:27 AM | Link | 2 Comments
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