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Charlie Munger On Misjudgment – Day 9

|Includes: BRK.A, BRK.B, Daily Journal Corp. (S.C.) (DJCO)

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.

9. Nine: bias from contrast-caused distortions of sensation, perception and cognition.

Here, the great experiment that Cialdini does in his class is he takes three buckets of water:one's hot, one's cold and one's room temperature, and he has the student stick his left hand in the hot water and his right hand in the cold water. Then he has them remove the hands and put them both in the room temperature bucket, and of course with both hands in the same bucket of water, one seems hot, the other seems cold because the sensation apparatus of man is over-influenced by contrast. It has no absolute scale; it's got a contrast scale in it. And it's a scale with quantum effects in it too. It takes a certain percentage change before it's noticed.

Maybe you've had a magician remove your watch -- I certainly have -- without your noticing it. It's the same thing. He's taking advantage of contrast-type troubles in your sensory apparatus. But here the great truth is that cognition mimics sensation, and the cognition manipulators mimic the watch-removing magician. In other words, people are manipulating you all day long on this contrast phenomenon.

Cialdini cites the case of the real estate broker. And you've got the rube that's been transferred into your town, and the first thing you do is you take the rube out to two of the most awful, overpriced houses you've ever seen, and then you take the rube to some moderately overpriced house, and then you stick him. And it works pretty well, which is why the real estate salesmen do it. And it's always going to work.

And the accidents of life can do this to you, and it can ruin your life. In my generation, when women lived at home until they got married, I saw some perfectly terrible marriages made by highly desirable women because they lived in terrible homes. And I've seen some terrible second marriages which were made because they were slight improvements over an even worse first marriage. You think you're immune from these things, and you laugh, and I want to tell you, you aren't.

My favorite analogy I can't vouch for the accuracy of. I have this worthless friend I like to play bridge with, and he's a total intellectual amateur that lives on inherited money, but he told me once something I really enjoyed hearing. He said, "Charlie," he say, "If you throw a frog into very hot water, the frog will jump out, but if you put the frog in room temperature water and just slowly heat the water up, the frog will die there." Now I don't know whether that's true about a frog, but it's sure as hell true about many of the businessmen I know and there, again, it is the contrast phenomenon. But these are hot-shot, high-powered people. I mean these are not fools. If it comes to you in small pieces, you're likely to miss, so if you're going to be a person of good judgment, you have to do something about this warp in your head where it's so misled by mere contrast.