The Psychology of Human Misjudgement
A hero of mine died this past week. Charlie Munger, who famously said that his kids called him “a book with a couple legs sticking out,” passed away at 99.
So many of the frameworks used at Tacklebox come from Munger’s mental models — from trying to be “less dumb” instead of exceptionally smart, to removing rather than adding to make progress, to recognizing that all people are motivated first by envy, not greed.
There are few books more useful to entrepreneurs than this one.
His Magnum Opus is The Psychology of Misjudgement — here’s audio of him talking through the ideas less formally, and here’s the actual text. He goes through 25 tendencies humans have that we all ignore or mess up. Each will give you ideas about how to better connect with and understand your customers.
Here’s an excerpt on incentives.
One: Reward and Punishment — Super Response Tendency
I place this tendency first in my discussion because almost everyone think [they] fully [recognize] how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I’ve been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I’ve always underestimated that power. Never a year passes but I get some surprise that pushes a little further my appreciation of incentive super-power.
One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. And the system has no integrity for the customers if the night work shift can’t accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing.
They tried moral suasion. They tried everything in the world without luck. And, finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service but fault-free, rapid performance of a particular task. Maybe, this person thought, if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And, lo and behold, that solution worked.
Early in the history of Xerox, Joe Wilson, who was then in the government, had a similar experience. He had to go back to Xerox because he couldn’t understand why its new machine was selling so poorly in relation to its older and inferior machine. When he got back to Xerox, he found out that the commission arrangement with the salesmen gave a large and perverse incentive to push the inferior machine on customers, who deserved a better result.
And then there is the case of Mark Twain’s cat that, after a bad experience with a hot stove, never again sat on a hot stove, or a cold stove either.
We should also heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard’s Almanack: “If you would persuade, appeal to interest and not to reason.” This maxim is a wise guide to a great and simple precaution in life: Never, ever, think about something else when you should be thinking about the power of incentives. I once saw a very smart house counsel for a major investment bank lose his job, with no moral fault, because he ignored the lesson in this maxim of Franklin. This counsel failed to persuade his client because he told him his moral duty, as correctly conceived by the counsel, without also telling the client in vivid terms that he was very likely to be clobbered to smithereens if he didn’t behave as his counsel recommended. As a result, both client and counsel lost their careers.
We should also remember how a foolish and willful ignorance of the superpower of rewards caused Soviet communists to get their final result as described by one employee: “They pretend to pay us and we pretend to work.” Perhaps the most important rule in management is “Get the incentives right.”
Munger was funny and thoughtful and humble and learned a whole lot in his 99 years that can help us build better businesses.