Seeking Wisdom by Peter Bevelin

Summary

The best book on decision making, learning how to think better, and better understanding ourselves (rationally) and others. Discusses our decision-making from different angles and includes useful questions to improve our decision-making and results in life.

Key Takeaways

• Mentioned various times: read as widely as possible to acquire mental models from different disciplines. This lets you approach problems from various angles, improves decision-making and reduces mistakes. See also: Herbert Simon.
• Behaviour is shaped by our state of mind, which is a function of our life experiences and specific situation.
  • What we think happens to us is what counts.
• Reputation, reciprocation and fairness are big human motivators.
• Assume people will act in their self-interest and don’t blindly imitate/trust others.
• We may still do dumb things in the future even if it causes pain because:
  • We don’t understand the cause.
  • Other behaviour is more painful.
• Create a negative emotion if you want to end a certain behaviour.
• You get what you reward for. Incentives reinforce behaviour.
• Changing behaviour: praise > punishment.
• Convince people by asking questions that illuminate consequences. Let them figure out the result themselves.
• Change people by appealing to their interests, not your own.
• How we value things depends on what we compare them with.
• People believe we have the same personality as those we associate with.
• Deal only with great people and you will avoid 99% of life’s headaches
• The majority of people would rather be wrong in a group than right in isolation.
• Our need for making sense makes us even believe in nonsense.
• Explain the why to others to increase the likelihood they comply.
• 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 answers we get depend on the questions we ask.
• Our behaviour can be influenced by the expectations of others.
• Systems adjust in response to feedback and are constrained by their weakest link.
• Invest a lot of time into researching and understanding your mistakes.
  • Do postmortems: see below for specific questions.
• Create one sentence explanations for big ideas.
• If something is too hard, move on to something simpler. Make problems easier to solve by removing everything except the essentials.
• Deal with the situations in life by knowing what to avoid. 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.
• How can we make the right decision if we don’t know what we want to achieve?
• Always ask: And then what?
• Have role models early on. Changing behaviour becomes more difficult later on.
• There is a certain natural tendency to overlook anything that is simple and important.

What I got out of it

Too many things to mention and will have to revisit these notes (and the book itself) in the future to truly internalize everything.

This book made me realize that if there is one skill we should improve to improve our lives, it’s our ability to make fewer bad decisions (and conversely more good decisions).

Seeking Wisdom is a great starting point and overall resource to improve our thoughts processes and tools. Cannot recommend it highly enough.

Summary notes

Bevelin: “This book focuses on how our thoughts are influenced, why we make misjudgments and tools to improve our thinking. If we understand what influences us, we might avoid certain traps and understand why others act as they do. And if we learn and understand what works and doesn’t work and find some framework for reasoning, we will make better judgments. We can’t eliminate mistakes, but we can prevent those that can really hurt us.”

Munger: “Master the best other people have ever figured out. I don’t believe in just sitting down and trying to dream it all up yourself. Nobody’s that smart.”

Darwin: “To improve my own thinking, I read books in biology, psychology, neuroscience, physics, and mathematics.”

The book has five parts:

1. What influences our thinking
2. Examples of psychological reasons for misjudgments
3. Reasons for misjudgments caused by both psychology and a lack of considering some basic ideas from physics and mathematics
4. Tools for better thinking
5. Appendix: Charlie Munger speech, quotes, checklists that eliminate biases

Part 1 – What Influences Our Thinking?

It’s our brain, its anatomy, physiology and biochemistry and how these parts function that set the limits for how we think and are the bases for our behaviour.
Since our brain and body interact, we must see them together.

The connections between neurons determine how we think and behave.

Dopamine is involved in the brain’s reward and motivation system, and in addiction.
Serotonin is linked with mood and emotion. Too much stress can lead to low levels of serotonin and low levels are associated with anxiety and depression.

Genes control brain chemistry but are turned on and off by the environment.
Gene expression – where and when they are turned on or off and for how long – is the key and depends on environmental conditions.

What is impressive about our brain is its flexibility: to take on new roles as conditions change and an ability to produce the same result in different ways.
Life experiences (and our environment) are the reason that all individuals are unique.

Behaviour is shaped by our state of mind, which is a function of our life experiences and specific situation.
Marcus Aurelius Antoninus: “Our life is what our thoughts make it.”

Our mental state and physical well-being are connected: we convert our expectations into a biochemical reality.
It’s not just what happens to us that counts – it’s what we think happens to us.
Example: the placebo effect.
Beliefs have biological consequences – both good and bad.

Mutation and natural selection are responsible for evolution and for how our brain evolved.
Darwin observed:

1. Competition and environmental change
   1. A limited amount of resources results in competition
   2. The environment changes over time and across regions, thus threatening the children’s survival and reproductive success
2. Individual variability (within a species)
3. The world is not fixed but evolving – species change, new ones arrive and others go extinct

Characteristics that are successful in one environment may be unsuccessful in another.

Sources of genetic variation:

• Mutation
• Genetic drift: random events cause gene frequencies to vary between generations
• Gene flow: the movement of genes in a species from one population to another as the result of interbreeding
• Symbiosis: cooperative interaction between different organisms that can produce genetic changes.
• Co-evolution or parallel evolution of two species
• Gene duplication or the accidental duplication of entire genes

We are driven by our need to avoid pain (and punishment) and a desire to gain pleasure (and reward).
Our brain is equipped to register pain more sensitively than any other emotion. We also remember negatively arousing stimuli better. As a result, our fear of loss is much greater than our desire to gain.
This aversion also encourages us to take the most rewarding view of events and to prefer reasons that support our beliefs.

We adapt to our environment by learning from the consequences of our actions.

Even though we are capable of logic, our brain operates by selection of pattern recognition.

Hunter-gatherer environments have formed our basic nature: competitive, access to limited resources, many dangers, self-interest, ostracism = death.

Cooperation leads to trust, especially amongst relatives, and is often in our best interest.
Talking encourages cooperation.

Fear is our most basic emotion and it guides almost everything we do. Repeated exposure lessens instinctual reactions.

We don’t like uncertainty or the unknown. We want to know how and why things happen and what is going to happen in the future. Understanding how an event happened helps us predict how it could happen again. That is why we always look for patterns and causal relationships among objects, actions, and situations.

The brain responds to novelty as the unknown is potentially rewarding.

Our brain is wired to perceive before it thinks – to use emotion before reason.
Limited time and knowledge in a dangerous and scarce environment made hasty generalisations and stereotyping vital for survival.

Reputation, reciprocation and fairness are big human motivators.

• A reputation for being reliable and trustworthy is important because how we acted in the past is the only guide to how we act in the future.
• We have a strong concern for fairness. We sometimes punish others at a cost to ourselves.
• One-shot encounters encourage selfishness.
• It pays to be nice when others are watching.

Very painful to lose anything, especially status, once obtained. Higher status is linked to higher health and well being.

Human society, and our individual behaviour, is shaped by cultural evolution.

Assume people will act in their self-interest.

Don’t blindly imitate/trust others – think rationally and form your own opinions.

Part 1 summary

• The forces that influence and set the limits for our judgments:
  • Genes
  • Life experiences
  • Present environment (context or circumstances) or the specific situation
  • Randomness
• The consequences of our actions reinforce certain behaviour.
• It’s not what happens to us that counts; it’s what we think happens.
• Our behaviour creates feedback from our environment. We may still do dumb things in the future even if it causes pain because:
  • We don’t understand the cause of our mistake
  • The pain is less painful than other behaviour

Part 2 – The Psychology of Misjudgments

The Pilot’s Checklist to Avoid Fooling Ourselves

28 reasons for misjudgment. These are never exclusive or independent of each other. Many of these echo similar sentiments to Cialdini’s Influence

1. Bias from mere association
2. Underestimating the power of rewards and punishment
3. Underestimating bias from own self-interest
4. Self-serving bias, over-optimism
5. Self-deception and denial, wishful thinking
6. Bias from consistency tendency (only see things that confirm our already formed beliefs)
7. Dias from deprival syndrome, endowment effect (strongly reacting when something is taken away)
8. Status quo bias and do-nothing syndrome
9. Impatience
10. Bias from Envy and Jealousy
11. Judging by comparison instead of absolute value
12. Bias from anchoring and adjustment
13. Recency / availability bias
14. Omission or abstract blindness, dogs that don’t bark
15. Bias from reciprocation tendency
16. Bias from over-influence by liking tendency
17. Bias from influence of social proof
18. Bias from influence of authority
19. Sensemaking, constructing explanations that fit an outcome
20. Reason respecting, complying because we’ve been given a reason
21. Believing first and doubting later
22. Memory limitations, influence by suggestion
23. Bias to just do something
24. Mental confusion from feeling a need to say something
25. Mental confusion from emotional arousal
26. Mental confusion from stress
27. Mental confusion from physical or psychological pain, influence of state
28. Bias from lollapalooza, many tendencies operating together

We automatically feel pleasure or pain when we connect a stimulus with an experience we’ve had in the past or with values or preferences we are born with. We move toward pleasure and away from pain. 
Association is stronger with events we have experienced often or which are easily remembered. 
The more vivid or dramatic an event is, the easier we remember it.

Others can influence us by associating a product, service, person, investment or a situation with something we like.

Persian Messenger Syndrom: 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.

We can take bad news, but we don’t like it late.

Past experiences are often context-dependent. Just because some stimulus caused you earlier pain, doesn’t mean that is still the case today.

Create a negative emotion if you want to end a certain behaviour.

The iron rule of nature: you get what you reward for.
Incentives act as reinforcers. People do what they perceive is in their best interest and are biased by incentives.
Tie incentives to performance and to the factors that determine the result you want to achieve. Make people share both the upside and downside.

Good consequences don’t necessarily mean we made a good decision, and bad consequences don’t necessarily mean we made a bad decision.
The automatic association to what worked in the past causes people to under-react to new conditions and circumstances.
Separate between skill and chance.

Frequent rewards, even if smaller, feel better than one large reward.
On the other hand, immediate losses are preferred over delayed ones.

Praise is more effective in changing behaviour than punishment.

It is often better to avoid situations where we need to change people; it is better when they act out of their own free will.
Benjamin Franklin: “Would you persuade, speak of interest not of reason.”

It is better to convince people by asking questions that illuminate consequences. This causes them to think for themselves and makes it more likely that they discover what’s in their best interest.
Blaise Pascal: “We are generally better persuaded by the reasons we discover ourselves than by those given to us by others.”

Don’t automatically trust people who have something at stake from your decision. 
Ask: What are the interests? Who benefits?
Understand people’s motivations.
People’s interests are not only financial; they could also be social or moral.

We overestimate the degree of control we have over events and underestimate chance.
We overestimate our ability to predict the future and put a higher probability on desired events over undesired ones.
Isaiah Berlin: “Man suffers much because he seeks too much, is foolishly ambitious and grotesquely overestimates his capacities.”

When we are successful, we credit our own character or ability.
When we fail, we blame external circumstances or bad luck.
This way we draw the wrong conclusions and don’t learn from our mistakes.
We also underestimate luck and randomness in outcomes.

Charlie Munger looks for a handful of things in people – integrity, intelligence, experience and dedication.
Consider people’s actual accomplishments and past behaviour over a long period of time rather than first impressions.

Dr. Albert Schweitzer: “An optimist is a person who sees a green light everywhere, while the pessimist sees only the red stoplight. The truly wise person is colourblind.”

Recognize your limits. How well do you know what you don’t know? Don’t let your ego determine what you should do.

Focus on what can go wrong and the consequences. Build in some margin of safety in our decisions.

Bad news that is true is better than good news that is wrong.

Once we’ve made a commitment, we want to remain consistent. We want to feel we’ve made the right choice. And the more we have invested in our behaviour the harder it is to change.
We are most consistent when we have made a public, effortful or voluntary commitment. The more public the decision, the less likely we will change it.
Written commitments are stronger than verbal ones as they require more effort.

Labelling technique – when somebody labels you, whether you agree or not, you are more likely to comply and behave in ways consistent with that label.

People seduce us financially, politically or sexually by making us first agree to a small request that we wouldn’t refuse. This way they create commitment.

We take responsibility for our behaviour in cases when we are internally motivated by satisfaction or interest, when we feel in control, and when we are free from incentives or outside pressure.

Base decisions on the present situation and future consequences.
Know your goals and options.

Be self-critical and unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions. Consider alternative outcomes, viewpoints and answers. Avoid ideology.

When something we like is (or threatens to be) taken away, we often value it higher.
We don’t like to lose the freedom to choose how to act or believe in what to have.
We want what we can’t have.
We want and value more what is scarce or unique.

We favour routine behaviour over innovative behaviour.
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 by taking action than when we fail by 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.
Once we know what to do, we should do it.

We give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future.

We evaluate our own situation by comparing what we have with what others have.
Aristotle: “Envy is pain at the good fortune of others. It is people similar to us we envy most.”

Envy is one of the fundamental causes of human suffering.
Aristotle: “The best way to avoid envy is to deserve the success you get.”

We judge stimuli by differences and changes and not absolute magnitudes.
Our ability to detect and react to changes in a stimulus decreases as its magnitude increases.

How we value things depends on what we compare them with.
We determine what is fair in reference to what we have been used to.

Accurate information is better than dramatic information. Back up vivid stories with facts and figures.
We are easily influenced by stories because we relate better to them than to logic or fact.
Recency bias: we give more weight to information we’ve seen, heard, read or experienced most recently.
We believe an event has increased in frequency because we see it more.
We make predictions by extrapolating recent trends and conditions.

We only see what we have names for.
We see available information and don’t see what is missing. Missing information doesn’t draw our attention.
Always look for alternative explanations.

A favour or gift is most effective when it is personal, significant, and unexpected.

Henry Ford: “If there is any one secret of success, it lies in the ability to get the other person’s point of view and see things from his angle as well as from your own.”

Give people what you want in return from them.
Confucius: “What you don’t want yourself, don’t do to others. Reward hostility with justice, and good deeds with good deeds.”

William James: “The deepest principle in human nature is the craving to be appreciated.”
People tend to like their kin, romantic partners and people similar to them more as well as those who are physically attractive. We also like and trust anything familiar.
We like people who compliment us – true or not – and make us feel special.
Asking a favour of someone is likely to increase that person’s liking for us.

People believe we have the same personality as those we associate with.
Credibility leads to trust.

The majority of people would rather be wrong in a group than right in isolation.
We have a strong desire for avoiding social disapproval, exclusion, humiliation, public shame and losing status. This leads to conformity.
Mutual friendship and loyalty override our motivation to seek alternative courses of action.
We want to avoid embarrassment.
Imitation, obedience to authority, and the fear of being different are forces that drive crowds.

When all are accountable, no one is accountable.

Ralph Waldo Emerson: “It is easy in the world to live after the world’s opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude.”

We tend to obey authority, especially when we are uncertain, supervised, or when people around us are doing the same. We are most easily influenced by credible authorities, those we see as both knowledgeable and trustworthy.

Anyone can call themselves an expert. Separate between real and false experts – beware celebrity endorsements.
Always consider the reliability, credibility, sensibility and bias of an authority.

We don’t like uncertainty. We have a need to understand and make sense of events. We refuse to accept the unknown. We don’t like unpredictability and meaninglessness. We, therefore, seek explanations for why things happen. Especially if they are novel, puzzling or frightening. By finding patterns and causal relationships we get comfort and learn for the future.
Look for alternative explanations and what normally happens.
Consider how other possible outcomes might have happened. Don’t underestimate chance.

We rationalize decisions and justify choices by telling ourselves comforting stories.
Our need for making sense makes us even believe in nonsense.

Rule for communication: 5W’s – tell who is going to do what, where, when and why.
Explaining the why helps people understand better, consider it more important, and make them more likely to comply.

The 7 Sins of Memory

1. Our memory weakens and deteriorates over time.
2. We are preoccupied with distracting issues and don’t focus on what needs remembering
3. We desperately search for information that we know we know
4. We assign memory to the wrong sources
5. Memories are implanted from leading questions, comments, or suggestions when retrieving
6. Our present knowledge influences how we remember our past
7. We recall disturbing events that we would prefer to eliminate from our minds altogether

Memory is very selective and fallible, so keep records of important events.
We learn better when information is tied to a vivid story.
Learning is also tied to mood.

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.

It is more important to do what is right than to simply do something.

Plato: “Wise men talk because they have something to say; fools, because they have to say something.”

Socrates: “Awareness of ignorance is the beginning of wisdom.”

A wise man controls his temper. He knows that anger causes mistakes.
When we have just gone through an emotional experience, we should hold off on important decisions.
The benefits of cooling-off periods force us to think things through.
Understand your emotions and their influence on your behaviour. 
Ask: is there a rational reason behind my action?

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.
Stress increases our suggestibility.
Stress is neither good nor bad in itself. It depends on the situation and our interpretation. It can be controlled by our attitudes.

Epictetus: “Happiness and freedom begin with a clear understanding of one principle: Some things are within our control, and some things are not.”

Mark Twain: “I’ve suffered a great many catastrophes in my life. Most of them never happened.”

We tend to overestimate personal characteristics and motives when we explain the behaviour of others. We underestimate situational factors like social pressure, roles or things over which there is no control.

We behave differently in different situations and we may change our behaviour simply because we are being observed.

The answers we get depend on the questions we ask.
How a choice is presented influences our preferences.

Our behaviour can be influenced by the expectations of others – teachers, coaches, etc.
We live up (or down) to what is expected of us.

Advice from Charlie Munger:

• You’ll continue to make mistakes in life, but you can learn to make fewer mistakes than other people – and how to fix your mistakes faster when you do make them.
• Two-track analysis: What are the factors that really govern the interests involved, rationally considered? What are the subconscious influences where the brain at a subconscious level is automatically doing these things – which by and large are useful, but which often misfunction.
• Take all the main models from psychology and use them as a checklist for reviewing outcomes in complex systems.

Part 3 – The Physics and Mathematics of Misjudgments

9 causes of misjudgments and mistakes:

1. Systems Thinking
   • Failing to consider that actions have both intended and unintended consequences. Includes failing to consider secondary and higher-order consequences and inevitable implications
   • Failing to consider the whole system in which actions and reactions take place, the important factors that make up the system, their relationships and the effects of changes on system outcome
   • Failing to consider the likely reactions of others
   • Overestimating predictive ability or using unknowable factors in making predictions

Good thinking is better than good intentions.

Systems adjust in response to feedback. Positive feedback amplifies an effect, while negative feedback dampens it.

2. Scale and limits
   • Failing to consider that changes in size or time influence form, function and behaviour
   • Failing to consider breakpoints, critical thresholds or limits
   • Failing to consider constraints – a system’s performance is constrained by its weakest link

3. Causes
   • Not understanding what causes desired results
   • Believing cause resembles its effect – a big effect must have a big, complicated cause
   • Underestimating the influence of randomness on good or bad outcomes
   • Mistaking an effect for its cause
   • Attributing an outcome to a single cause when there are multiple
   • Mistaking correlation for cause
   • Drawing conclusions about causes from selective data
   • Invert, always invert! – look at problems backwards

4. Numbers and their meaning
   • Looking at isolated numbers – failing to consider relationships and magnitudes. Not differentiating between absolute and relative risk
   • Underestimating the effect of exponential growth
   • Underestimating the time value of money

5. Probabilities and number of possible outcomes
   • Underestimating the number of possible outcomes for unwanted events. Includes underestimating the probability and severity of rare or extreme events
   • Underestimating the chance of common but not publicized events
   • Believing one can control the outcome of events where chance is involved
   • Judging financial decisions by evaluating gains and losses instead of the final state of wealth and personal value. Use expected value – probabilities and consequences – as a guide whenever appropriate.
   • Failing to consider the consequences of being wrong

6. Scenarios
   • Overestimating the probability of scenarios where all of a series of steps must be achieved for a wanted outcome. Also, underestimating the opportunities for failure and what normally happens in similar situations
   • Underestimating the probability of systems failure
   • Not adding a factor of safety for known and unknown risks
   • Invest a lot of time into researching and understanding your mistakes

7. Coincidences and miracles
   • Underestimating that surprises and improbable events happen, somewhere, sometime to someone, if they have enough opportunities (large enough or more time) to happen
   • Looking for meaning, searching for causes and making up patterns for chance events, especially events that have emotional implications
   • Failing to consider cases involving the absence of a cause or effect

8. Reliability of case evidence
   • Overweighing individual case evidence and under-weighing the prior probability considering the base rate or evidence from many similar cases, random match, false positive or false negative and failing to consider relevant comparison population

9. Misrepresentative evidence
   • Failing to consider changes in factors, context or conditions when using past evidence to predict likely future outcomes. Not searching for explanations as to why past an outcome happened, what is required to make a past record continue and what forces change it
   • Overestimating evidence from a single case or small or unrepresentative samples
   • Underestimating the influence of chance in performance (success and failure)
   • Survival bias: only seeing positive outcomes and paying little or no attention to negative outcomes and prior probabilities
   • Failing to consider the variability of outcomes and their frequency
   • Failing to consider regression – in any series of events where chance is involved unique outcomes tends to regress back to the average outcome. Not a natural law but a statistical tendency and may take a long time.

Postmortems – Record your mistakes! Instead of forgetting about them, they should be highlighted.

• What was my original reason for doing something?
• What did I know, what were my assumptions and what were my alternatives?
• How did reality work out relative to my original guess? What worked and what didn’t?
• Given the information that was available, should I have been able to predict what was going to happen?
• What worked well? What should I do differently? What did I fail to do? What did I miss? What must I learn? What must I stop doing?

Part 4 – Guidelines to Better Thinking

12 tools that provide a foundation for rational thinking.

1. Models of reality
   • A model is an idea that helps us better understand how the world works. Helps explain “why” and predict “how” people are likely to behave in certain situations, and help us avoid problems.
   • Ask yourself, “Is there anything I can do to make my whole mental process work better? And I [Munger] would say that the habit of mastering multiple models which underlie reality is the best thing you can do…It’s just so much fun – and it works so well.”
   • A valuable model produces meaningful explanations and predictions of likely future consequences where the cost of being wrong is high
   • Autocatalysis: A process in chemistry whereby once something gets going, it speeds up and keeps going on its own. This can’t go on forever, but it’s a useful model for finding ways where doing A can also get you B and C for a while.
   • Considering many ideas helps us achieve a holistic view. No single discipline has all the answers – need to consider mathematics, physics, chemistry, engineering, biology, psychology and rank and use them in order of their reliability
   • Must understand how different ideas interact and combine – within and across disciplines.
   • Have a full kit of tools, go through them in your mind checklist-style, you need to base them on fundamental truths in order to do the soundest reasoning.
   • You’ll also find functional equivalents between disciplines, the concept of viscosity in chemistry is very similar to stickiness in economics.
   • Create “one sentence explanations” for big ideas. From psychology: “We get what we reward for.” From physics: “Energy is neither created nor destroyed, only changed from one form to another.”
   • Can build your own mental models by looking around you and asking why things are happening (or why things are not happening).
   • Assume that the big ideas are true until learning otherwise. All knowledge is subject to change as new evidence arrives. This means we have to continuously learn and re-learn.
     
2. Meaning
   • Feynman test for understanding: “Without using the new word which you have just learned, try to rephrase what you have just learned in your own language. Without using the word “energy,” tell me what you know about the dog’s motion.”
   • Meaning of words, events, causes, implications, purpose, reason, usefulness
   • “Never express yourself more clearly than you are able to think.” – Niels Bohr
   • Use ideas and terms people understand, that they are familiar with and can relate to
   • Buffett: “I want to be conservative at all the levels – and then I want to have that significant margin of safety at the end.”
   • Buffett’s way of calculating a business’ worth: “You’d try to figure out what you were laying out currently and what you’re likely to get back over time, how certain you felt about getting it and how it compared to other alternatives.”
   • Buffett on pricing elasticity: “You can learn a lot about the durability of the economics of a business by observing the price behaviour…We’re evaluating the moat, the price elasticity that interacts with the moat in certain ways, the likelihood of unit demand changing in the future or management being either very bright with the cash that they develop or very stupid with it.”
   • Entropy: Measures how much energy is spread out in a process, or how widely spread out it becomes – at a specific temperature.
     
3. Simplification
   • “If something is too hard, we move on to something else. What could be more simple than that?” – Charlie Munger
   • Make problems easier to solve. Eliminate everything except the essentials – break down a problem into its components but look at the problem holistically – first dispose of the easy questions
   • Make fewer but better decisions
   • Dealing with what’s important forces us to prioritize. There are only a few decisions of real importance. Don’t bother trying to get too much information of no use to explain or predict.
   • Deal with the situations in life by knowing what to avoid. 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.
   • Shifting mental attention between tasks is hugely inefficient. Actions and decisions are simpler when we focus on one thing at a time.
   • Some important things we can’t know. Other things we can know but are not important.
   • Ask the right questions. Einstein: “The formulation of a problem is often more essential than its solution, which may be merely a matter of mathematical or experimental skill.”
   • Activity does not correlate with achievement.
   • Munger: “A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favourable, using resources available as a result of prudence and patience in the past.”
     
4. Rules and filters
   • Gain more success from avoiding stupid decisions rather than making brilliant ones
   • Filters help us prioritize and figure out what makes sense. When we know what we want, we need criteria to evaluate alternatives. Try to use as few criteria as necessary to make your judgment. Then rank them in order of their importance and use them as filters.
   • More information does not mean you are better off.
   • Warren Buffet uses 4 criteria as filters
     • Can I understand it? If it passes this filter then,
       • Meaning: thinking that we have a reasonable probability of being able to assess where the business will be in 10 years
     • Does it look like it has some kind of sustainable advantage? If it passes this filter,
     • Is the management composed of able and honest people? If it passes this filter,
     • Is the price right? If it passes this filter, we write a check
   • Elimination – look for certain things that narrow down the possibilities.
   • Checklist procedures help reduce the chances of harm
     • Should think about
       • Different issues need different checklists
       • A checklist must include each critical item necessary for “safety” and avoiding “accidents” so we don’t need to rely on memory for items to be checked
       • Readily usable and easy to use
       • Agree with reality
     • Avoid excessive reliance on checklists as this can lead to a false sense of security
       
5. Goals
   • How can we make the right decision if we don’t know what we want to achieve? Even if we don’t know what we want, we often know what we don’t want, meaning that our goal can be to avoid certain things.
   • Goals should be – clearly defined, focused on results, concrete, realistic and logical, measurable, tailored to individual needs and subject to change
   • Goals need target dates and controls stations measuring the degree to which the goal is achieved
   • Always ask – What end result do I want? What causes that? What factors have a major impact on the outcome? What single factor has the most impact? Do I have the variable(s) needed for the goal to be achieved? What is the best way to achieve my goal? Have I considered what other effects my actions will have that will influence the final outcome?
     
6. Alternatives
   • Opportunity cost – every minute we choose to spend on one thing is a minute unavailable to spend on other things. Every dollar we invest is a dollar unavailable for other available investments.
   • When we decide whether to change something, we should measure it against the best of what we already have.
     
7. Consequences
   • Always ask – And then what?
   • Consider secondary and long-term effects of an action
   • Whenever we install a policy, take an action or evaluate statements, we must trace the consequences – remember four key things:
     • Pay attention to the whole system, direct and indirect effects
     • Consequences have implications or more consequences, some of which may be unwanted. We can’t estimate all possible consequences but there is at least one unwanted consequence we should look out for,
     • Consider the effects of feedback, time, scale, repetition, critical thresholds and limits
     • Different alternatives have different consequences in terms of costs and benefits. Estimate the net effects over time and how desirable these are compared to what we want to achieve
       
8. Quantification
   • How can you evaluate if a decision is intelligent or not if you can’t measure it against a relevant and important yardstick?
   • Keynes: “Don’t overweigh what can be counted and underweight what cannot. Beware of false concreteness – often we believe that data based on figures with lots of decimal places are more accurate than words alone.”
   • Understand what is behind the numbers
     • Buffett says that return on beginning equity capital is the most appropriate measure of single-year managerial performance
       
9. Evidence
   • Evidence helps us prove what is likely to happen or likely to be true or false. Evidence comes from facts, observations, experiences, comparisons and experiments.
   • Occam’s Razor – 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.
   • Past record is the single best guide
   • The following questions help decide if past evidence is representative of the future
     • Observation (will past/present behavior continue?)
     • Explanation (why did it happen in the past or why does it happen now?)
     • Predictability (how representative is the past/present evidence for what is likely to happen in the future?)
     • Continuation and change (what is required to make the past/present record continue or to achieve the goal?)
     • Certainty and consequences (how certain am I?)
   • Falsify and disprove – a single piece of evidence against something will show that it is false
   • Look for evidence that disproves your explanation and don’t spend time on already disproved ideas or arguments or those that can’t be disproved
   • Engage in self-criticism and question your assumptions. Explain the opposite of your beliefs.
   • Munger: “The mental habit of thinking backward forces objectivity – because one way to think a thing through backward is by taking your initial assumption and say, “let’s try and disprove it.” That is not what most people do with their initial assumption. They try and confirm it.”
     
10. Backward thinking
    • Avoid what causes the opposite of what you want to achieve. Thinking backwards can help determine what these actions are.
      • Should also make explicitly clear what we want to achieve
    • When we tell people what to avoid, we should end with what we want them to achieve.
    • “Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools do not imitate the successes of the wise.” – Cato
      
11. Risk
    • Reflect on what can go wrong and ask what may cause this to turn into a catastrophe?
    • Being wrong causes both an actual loss and an opportunity cost
    • To protect us from all unknowns that lie ahead we can either avoid certain situations, make decisions that work for a wide range of outcomes, have backups or a huge margin of safety.
      
12. Attitudes (to a good life)
    • “Life is long if we know how to use it.” – Seneca
    • Know what you want and don’t want
    • Determine your abilities and limitations. We need to know what we don’t know or are not capable of knowing and avoid those areas.
    • Ask – what is my nature? what motivates me? what is my tolerance for pain and risk? what has given me happiness in the past? what are my talents and skills? what are my limitations?
    • Be honest – act with integrity and individuality
    • Trusting people is efficient
    • Act as an exemplar
    • Treat people fairly – to be loved is to be lovable
    • Don’t take life too seriously – have perspective, a positive attitude, enthusiasm and do what you enjoy
    • Have reasonable expectations – expect adversity
    • Live in the present – don’t emphasize the destination so much that you miss the journey. Stay in the present and enjoy life today
    • Be curious and open-minded and always ask “why?”

Appendix

Munger Harvard School Commencement Speech 1986

• Avoid drugs, envy, resentment, being unreliable, not learning from other’s mistakes, not learning from the best work done before yours, giving up, not looking at problems from different points of view, only reading/paying attention to information that confirms your own beliefs
• Be objective
• Jacobi: “Invert, always invert.”
• “Disraeli…learned to give up vengeance as a motivation for action, but he did retain some outlet for resentment by putting the names of people who wronged him on a piece of paper in a drawer. Then, from time to time, he reviewed these names and took pleasure in noting the way the world had taken his enemies down without his assistance.”

Wisdom from Charles Munger and Warren Buffett

• Change people by appealing to their interests, not your own.
• Institutional imperative – tendency to resist change, make less than optimal capital deployment decisions, support foolish initiatives and imitate the actions of peer companies
• Type of people to work with: need intellectual honesty, care who they sell to, and be truthful (to us and to themselves).
• Have role models early on. Changing behaviour becomes more difficult later on.
• Emulate what you admire in others but also be aware of what you don’t like.
• Know your circle of competence
• Use all available mental models, not just what you’re comfortable with
• Scale is extremely important – efficiencies, experience curve, information (recognition), psychology (herding), and in some industries leads to monopolies and specialization
  • Disadvantages of scale – specialization often leads to bureaucracy
• Munger on mental models: “You need the best 100 or so models from microeconomics, physiology, psychology, math, hard science, engineering, etc. All you’ve got to do is take the really big ideas and learn them early and well… but you have to learn the models so that they become part of your ever-using repertoire, not just facts that you bang back to a professor.
• On what something really means – ask “and then what?” to truly get at something’s core
• There is a certain natural tendency to overlook anything that is simple and important
• Avoid commodity businesses
• Deal only with great people and you will avoid 99% of life’s headaches
• Buffett on having capital around:
  • Does it make more sense to pay it out to the shareholders than to keep it within the company?
    • If we pay it out, is it better off to do it via repurchases or via dividend?
    • Test for whether to pay it out in dividends: can we create more than a dollar of value within the company with that dollar by retaining than paying it out?. Except, you never know the answer to that.
  • Should we repurchase stock?
  • If you have the capital and you think that you can create more than a dollar, how do you create the most value with the least (business) risk?
• Buffett: “The cost of every deal that we do is measured by the second-best deal that’s around at any given time – including doing more of some of the things we’re already in.”
• Buffett on the real risk of investing:
  • Does my aggregate after-tax receipts from an investment will, over my prospective holding period, give me at least as much purchasing power as I had to begin with, plus a modest rate of interest on that initial stake?
  • This cannot be calculated with precision, but judged with a degree of accuracy that is useful.
  • Evaluate based on these factors:
    • The certainty with which the long-term economic characteristics of the business can be evaluated
    • The certainty with which management can be evaluated, both its ability to realize the full potential of the business and to wisely employ its cash flows
    • The certainty with which management can be counted on to channel the rewards from the business to the shareholders rather than to itself
    • The purchase price of the business
    • The levels of taxation and inflation that will be experienced and that will determine the degree by which an investor’s purchasing power return is reduced from his gross return

---