Seeking Wisdom is a book about the misjudgments we make and how we can improve our thinking. As role models the book presents the investors Charles Munger and Warren Buffett and their thinking and decision making at Berkshire Hathaway.
My impressions on Seeking Wisdom are mixed. On the one hand the book is packed with a lot of useful information and many, many quotes from wise people. And I found it interesting what Warren Buffett and Charles Munger had to say about the different topics. But on the other hand the book was tedious to read due to the lack of fluidity.
The best way to learn what, how and why things work is to learn from others. Charles Munger says, "I believe in the discipline of mastering the best that other people have figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart."
What influences our thinking?
Our anatomy sets the limits for our behavior
To do what we do today demands the proper anatomical foundation. To fly we need wings. To walk we need legs, to see we need eyes, and to think we need a brain. Our anatomy, physiology and biochemistry are the fundamental bases for our behavior.
It is our brain, its anatomy, physiology and biochemistry and how these parts function that set the limits for how we think. But since our brain's parts also interact with our body's anatomy, physiology and biochemistry, we must see brain and body together. They are part of the same system – us.
What we think and feel depends on chemical reactions. And these chemical reactions are a function of how our neurons connect. What determines how these neurons connect and their patterns? Our genes and life experiences, situational or environmental conditions, and a degree of randomness.
Our genes determine if we inherit a particular characteristic but it is the environment that causes our genes to make proteins that produce certain "response tendencies". So our behavior emerges from the mutually dependent activity of genetic and environmental factors.
Experiences are the reason that all individuals are unique. There are no individuals with exactly the same upbringing, nutrition, education, social stamping, physical, social and cultural setting. This creates different convictions, habits, values and character. People behave differently because differences in their environment cause different life experiences.
It's not just what happens to us that counts – it's what we think happens to us. We convert our expectations to a biochemical reality meaning that our mental state and physical well-being are connected.
Evolution selected the connections that produce useful behavior for survival and reproduction
Any slight variation in traits that gives an individual an advantage in competing with other individuals of the same or different species or in adapting to changes in their environment increases the chance that the individual will survive, reproduce, and pass along its characteristics to the next generation.
When organisms undergo selection, some characteristic may be carried along that wasn't selected. Even if some trait didn't provide an advantage it could still be carried along as long as it isn't harmful, i.e. doesn't negatively influence survival and reproduction. But a situation may arise in the future when that trait can become useful.
Bacteria are immensely adaptable. Expose them to antibiotics long enough, they adapt and find a way to survive. This also means that the more we use antibiotics, the faster resistance spreads.
We are driven by our need to avoid pain (and punishment) and a desire to gain pleasure (and reward). Evolution has made any behavior that helps us survive and reproduce feel pleasurable or rewarding. Behavior that is bad for us feels painful or punishing. Feelings of pain and pleasure are a useful guide to what is good or bad for us.
Our aversion to pain also encourages a certain human behavior: to take the most rewarding view of events. We interpret choices and events in ways that make us feel better. We often prefer to hear supporting reasons for our beliefs; think of ourselves as more talented than others, and make the best of bad situations.
Essentially what we do today is a function of what worked in the past. We adapt to our environment by learning from the consequences of our actions.
Adaptive behavior for survival and reproduction
One basic trait that all individuals share is self-interest. We are interested in protecting our close family and ourselves. Why? Since natural selection is about survival and reproduction, and individuals either survive or die and reproduce or not, it makes sense that individuals are predisposed to act in ways that enhance their own prospects for survival and reproduction.
Only behavior that is selfish or for the mutual good is in an individual's self-interest and therefore favored by natural selection. Some behavior may under certain conditions look like altruism but can often be explained by self-benefit. Social recognition, prestige, fear of social disapproval, shame, relief from distress, avoidance of guilt, a better after-life or social expectations are some reasons behind "altruistic" acts.
Cooperation only works if you and your partner can trust each other.
Failure to detect threats is often more costly than false alarms.
If pain and pleasure are guides to the behavior that leads to survival and reproduction, fear is our biological warning signal for avoiding pain. Fear warns us of potential harm and keeps us from acting in self-destructive ways.
The degree of fear we feel depends on our interpretation of the threat and our perception of control. The more helpless and vulnerable we feel, the stronger our emotion for fear becomes.
Human society is not only shaped by the evolution of genes, but also by cultural evolution. Practices, methods, tools, myths, ethics, and social norms that are important in the evolution of our behavior. Customs that we learn from the experience of our parents and others – either by teaching or observation.
The psychology of misjudgments
Misjudgments explained by psychology
The more emotional, confused, uncertain, insecure, excited, distracted, tired or stressed we are, the easier we make mistakes.
Behavior that seems irrational may be fully rational from the individual's point of view. There is always some background within which behavior makes sense. Behavior can't be seen as rational or irrational independent of context.
Psychological reasons for mistakes
We automatically feel pleasure or pain when we connect a stimulus – a thing, situation or individual – with an experience we've had in the past or with values or preferences we are born with.
People can influence us by associating a product, service, person, investment, or a situation with something we like. Many times we buy products, enter relationships, and invest our money merely because we associate them with positive things.
Whether we like someone is influenced by the events with which an individual is associated. Bad news isn't welcome. We tend to dislike people who tell us what we don't want to hear even when they didn't cause the bad news i.e., kill the messenger. This gives people an incentive to avoid giving bad news.
Give people what they desire (or take away something undesirable) and their behavior will repeat. Give them something undesirable (or take away what they desire) and their behavior will stop.
[...] if we reward what we don't want, we get it.
After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse – even in cases where success or failure was merely a result of chance. Good consequences don't necessarily mean we made a good decision, and bad consequences don't necessarily mean we made a bad decision.
Since our experiences seem longer when broken into segments, we like to have pleasurable experiences broken into segments but painful ones combined.
Praise is more effective in changing behavior than punishment. It is better to encourage what is right than to criticize what is wrong.
Don't over-learn from your own or others bad or good experiences. The same action under other conditions may cause different consequences.
People who are rewarded for doing stupid things continue to do them. From their frame of reference, they acted logically based on how they were rewarded.
Since the risk of losing is more motivating than the chance of gaining, we stand a better chance changing people if we appeal to their fear of losing something they value – job, reputation, status, money, control, etc. It is often better to avoid situations where we need to change people.
Don't automatically trust people who have something at stake from your decision. Ask: What are the interests? Who benefits?
We can't all be better than average.
[...] when we are successful (independent if by chance or not), we credit our own character or ability. [...] When we fail, we blame external circumstances or bad luck. When others are successful, we tend to credit their success to luck and blame their failures on foolishness.
The more we know or think we know about a subject, the less willing we are to use other ideas. Instead, we tend to solve a problem in a way that agrees with our area of expertise.
We have to see the world as it is. Not for what it was or for what we want it to be. Refusing to look at unpleasant facts doesn't make them disappear. Bad news that is true is better than good news that is wrong.
The more time, money, effort or pain we invest, the more we feel the need to continue, and the more highly we value something – whether or not it is right.
Merely because you've spent money or time on some project or investment doesn't mean you must continue to spend it in the future. Time, effort, and money spent are gone. Decisions should be based on where you want to be. Not where you've been.
We want and value more what is scarce or unique. We want what is (or threatens to be) less available. The less available it is, the more we desire it.
The more emotional a decision is or the more choices we have, the more we prefer the status quo.
We are more bothered by harm that comes from action than harm that comes from inaction. We feel worse when we fail as a result of taking action than when we fail from doing nothing.
Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action.
Consider both the short and long-term consequences of a decision. Weigh present good/bad against future good/bad. Short-term suffering may lead to long term pleasure.
As long as you achieve your goals, it shouldn't matter if someone else does better.
[...] how we value things depends on what we compare them with.
The same thing may appear attractive when compared to less attractive things and unattractive when compared to more attractive things.
The present price of a stock in relation to some past quote doesn't mean anything. The underlying business value is what matters.
We are easily influenced when we are told stories because we relate to stories better than to logic or fact. We love to be entertained.
We often overestimate events that are unlikely to happen merely because they receive attention in the news.
We base what is likely to happen on what we see. Not on what we don't see. We don't see what could have happened. We see the winners because they are vocal or visible and get media coverage. We don't see the quiet losers.
We see the available information. We don't see what isn't reported. Missing information doesn't draw our attention. We tend not to think about other possibilities, alternatives, explanations, outcomes or attributes.
We behave like others do and don't speak the truth or openly question people for fear of the consequences. We don't want to be the person who stands out.
The people we don't like are the ones we perceive as dissimilar to us, people we are in competition with, those we perceive as threatening, or people that are self-absorbed, complaining, greedy, etc.
We are social animals, influenced by what we see other people doing and believing. We believe that others know more than we do.
We feel more comfortable as part of a majority. It acts as a protection from criticism. If we are wrong and everybody else is too, we get less blame.
Groups don't encourage differences of opinion. If a member of the group disagrees, he may be seen as disloyal. Unanimity is better than independent thought.
What is popular is not always right. If you don't like what others people are doing, don't do it.
In hindsight, everything seems obvious. But we should look at earlier decisions in the context of their own time. Perhaps the actions made sense at the time. We don't know what uncertainties, conditions, or situational factors faced the decision-maker. Good decision-making can lead to bad outcomes and vice versa.
We underestimate the influence of chance. We want to find reasons for all kind of events – random or not. And if we don't find any, we construct them.
We love stories and story-telling. Good stories and drama get our attention. They give meaning to events. We rationalize decisions and justify choices by telling ourselves comforting stories.
Ask why, ask why, and ask why again. The third why often gets down to the real issue.
Don't confuse activity with results. There is no reason to do a good job with something you shouldn't do in the first place.
The less control we perceive we have over our lives, the easier we fall victim to stress. The more stress we experience, the more we tend to make decisions that are short-term.
If a problem can be solved, there is no need to worry. The thing to do is to correct it. If a situation can't be solved, we shouldn't worry about that either. We can't do anything about it.
People may change their behavior merely because they are being observed.
We treat people like we expect them to be. If we expect people to be bad, we treat them in a certain way, which may cause them to behave badly.
The physics and mathematics of misjudgments
Every action has consequences. Both intended and unintended. No matter how carefully we plan, we can't anticipate everything. Often we fail to consider what other events are likely to occur as a result of some action.
Good thinking is better than good intentions.
Try to optimize the whole and not a system's individual parts. Think through what other variables may change when we alter a factor in a system.
When thinking through consequences, consider what other people are likely to do. Since our interests may conflict with others, the final outcome of our decision often depends on what others will do. What other people do may depend on what they think we will do, their available choices, interests, and how they are thinking – including their misjudgments.
That an event has happened many times before, doesn't mean that it will continue to happen. And just because an event has never happened before, doesn't mean it can't happen in the future.
Scale and limits
At a certain scale, a system reaches a critical mass or a limit where the behavior of the system may change dramatically. It may work better, worse, cease to work or change properties.
A small change may have no effect on a system until a critical threshold is reached.
People behavior may change when we change the scale of a group. What works well in a group of one size may not work at all in a group of another size.
Statistics show that the frequency of some events and attributes are inversely proportional to their size. Big or small things can happen but the bigger or more extreme they get, the less frequent they are.
When trying to improve the performance of a system, first find out the system's key constraint(s) – which may be physical (capacity, material, the market) or nonphysical (policies, rules, measurements) – and its cause and effect relationship with the system.
We believe that cause resembles its effect – for example, that large or important effects must have large causes or that complicated outcomes have complicated underlying reasons. But the size of an effect may not be proportional to its cause. Small things may break a large system.
When dealing with problems we must focus on what we want to achieve and make sure that we address the underlying cause and not act on symptoms that may look like causes.
We tend to assume that when two things happen together, that one causes the other. That a change in one variable is strongly correlated or followed by a change in another doesn't automatically mean that one causes the other. Some third factor may cause them both.
Numbers and their meaning
Something is only cheap or expensive in relation to something else.
Even a small number of steady growth leads eventually to doubling and redoubling.
Money paid in the future is worth less than money paid today. A dollar received today is worth more than a dollar received tomorrow. If we have a dollar today, we can invest it and earn interest making that dollar worth more than a dollar in the future.
Probabilities and number of possible outcomes
We tend to believe that the probability of an independent event is lowered when it has happened recently or that the probability is increased when it hasn't happened recently.
We can't only look at how likely an unwanted event is to happen. We must also rate the magnitude of its consequences.
We should never risk something we have and need for something we don't need.
A project is composed of a series of steps where all must be achieved for success. Each individual step has some probability of failure. We often underestimate the large number of things that may happen in the future or all opportunities for failure that may cause a project to go wrong.
The more variables we add to a system, and the more they interact, the more complicated we make it and the more opportunity the system has to fail.
Unlikely things happen if enough time passes.
Don't assign blame. Look for causes and preventive methods. Often it is better to prevent future errors by designing safety into systems than punishing individuals for past errors. Blame does little to improve safety or prevent others from making the same mistake.
Assume that accidents will happen and prepare for when people and technology don't work as planned. Systems should be designed to eliminate the probability of bad events or limit their consequences if they happen.
Coincidences and miracles
Reliability of case evidence
We need to consider changes in conditions before using past evidence to predict likely future outcomes.
What makes an individual successful in one environment does not guarantee success in another.
A small sample size has no predictive value. The smaller the sample is, the more statistical fluctuations and the more likely it is that we find chance events. We need a representative comparison group, large enough sample size, and long enough periods of time.
When we measure performance we must consider both the number of successes, the number of failures, and the size of the relevant comparison population they came from. The more people, involved in something where chance plays a role, the more likely it is that some people have great performances just by chance.
Guidelines to better thinking
Models of reality
The world is multidisciplinary. Physics doesn't explain everything; neither does biology or economics. [...] Since no single discipline has all the answers, we need to understand and use the big ideas from all the important disciplines – mathematics, physics, chemistry, engineering, biology, psychology, and rank and use them in order of their reliability.
One way of forcing us to learn models to better deal with reality is to open our eyes and look at the things we see around us and ask "why" things are happening (or why things are not happening).
Knowledge is only valuable if it's useful and something is only useful if we understand what it means.
When describing something, tell it as it is and use words that people understand, and in terms of ideas with which they are familiar.
Be problem-oriented. Not method-oriented. Use whatever works. Why? Because the result is what matters, not the method we use to arrive at it.
More information doesn't equal more knowledge or better decisions.
Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it.
Rules and filters
Doing something according to pre-established rules, filters and checklists often makes more sense than doing something out of pure emotion. But we can't have too many rules, filters or items without thinking. We must always understand what we're trying to accomplish.
One filter that can be used to measure choices against each other is our own personal opportunity cost. Our time and money are limited. If we make a decision to do one thing we are deciding not to do some other available thing.
If we decide to spend money today instead of investing for the future we give up the opportunity to spend more in the future.
Don't overweigh what can be counted and underweigh what cannot.
If we face two possible explanations which make the same predictions, the one based on the least number of unproven assumptions is preferable, until more evidence comes along.
A single piece of evidence in favor of a statement does not prove its truth – it only supports it. But a single piece of evidence against it will show that it is false.
Often we learn more from understanding why something doesn't work than from why it does.
We need to look at the downside when we invest.
If the decision is important, we should largely ignore what has happened in the past and focus on the consequences of being wrong.
The worse the consequence of being wrong, the less inclined we must be to take a specific action or the more evidence we need in favor of something.
Be nice to people and if they are not nice to you – don't be nasty – just avoid them in the future.
If we don't hope for much, reality often beats our expectations. If we always expect the best or have unreal expectations, we are often disappointed.