Speech at Harvard University, estimated date: June 1995
Transcription, comments [in brackets] and minor editing by Whitney Tilson
Moderator:
...and they discovered extreme, obvious irrationality in many areas of the economy that they looked at. And they were a little bit troubled because nothing that they had learned in graduate school explained these patterns. Now I would hope that Mr. Munger spends a little bit more time around graduate schools today, because we've gotten now where he was 30 years ago, and we are trying to explain those patterns, and some of the people who are doing that will be speaking with you today.
So I think he thinks of his specialty as the Psychology of Human Misjudgment, and part of this human misjudgment, of course, comes from worrying about the types of fads and social pressures that Henry Kaufman talked to us about. I think it's significant that Berkshire Hathaway is not headquartered in New York, or even in Los Angeles or San Francisco, but rather in the heart of the country in Nebraska.
When he referred to this problem of human misjudgment, he identified two significant problems, and I'm sure that there are many more, but when he said, "By not relying on this, and not understanding this, it was costing me a lot of money," and I presume that some of you are here in the theory that maybe it's costing you even a somewhat lesser amount of money. And the second point that Mr. Munger made was it was reducing...not understanding human misjudgment was reducing my ability to help everything I loved. Well I hope he loves you, and I'm sure he'll help you. Thank you. [Applause]
Munger:
Although I am very interested in the subject of human misjudgment -- and lord knows I've created a good bit of it -- I don't think I've created my full statistical share, and I think that one of the reasons was I tried to do something about this terrible ignorance I left the Harvard Law School with.
When I saw this patterned ! irrationality, which was so extreme, and I had no theory or anything to deal with it, but I could see that it was extreme, and I could see that it was patterned, I just started to create my own system of psychology, partly by casual reading, but largely from personal experience, and I used that pattern to help me get through life. Fairly late in life I stumbled into this book, Influence, by a psychologist named Bob Cialdini, who became a super-tenured hotshot on a 2,000-person faculty at a very young age. And he wrote this book, which has now sold 300-odd thousand copies, which is remarkable for somebody. Well, it's an academic book aimed at a popular audience that filled in a lot of holes in my crude system. In those holes it filled in, I thought I had a system that was a good-working tool, and I'd like to share that one with you.
And I came here because behavioral economics. How could economics not be behavioral? If it isn't behavioral, what the hell is it? And I think it's fairly clear that all reality has to respect all other reality. If you come to inconsistencies, they have to be resolved, and so if
there's anything valid in psychology, economics has to recognize it, and vice versa. So I think the people that are working on this fringe between economics and psychology are absolutely right to be
there, and I think there's been plenty wrong over the years.
Well let me romp through as much of this list as I have time to get through:
24 Standard Causes of Human Misjudgment.
1. First: Under-recognition of the power of what psychologists call 'reinforcement' and economists call 'incentives.'
Well you can say, "Everybody knows that." Well I think I've been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I've underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.
One of my favorite cases about the power of incentives is the Fede! ral Expre! ss case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can't be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, 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 to go back to Xerox because he couldn't understand how their better, new machine was selling so poorly in relation to their older and inferior machine. Of course when he got there he found out that the commission arrangement with the salesmen gave a tremendous incentive to the inferior machine.
And here at Harvard, in the shadow of B.F. Skinner -- there was a man who really was into reinforcement as a powerful thought, and, you know, Skinner's lost his reputation in a lot of places, but if you were to analyze the entire history of experimental science at Harvard, he'd be in the top handful. His experiments were very ingenious, the results were counter- intuitive, and they were important. It is not given to experimental science to do better. What gummed up Skinner's reputation is that he developed a case of what I always call man-with-a-hammer syndrome: to the man with a hammer, every problem tends to look pretty much like a nail. And Skinner had one of the more extreme cases in the history of Academia, and this syndrome doesn't exempt bright people. It's just a man with a hammer...and Skinner is an extreme example of that. And later, as I go down my list, let's go back and try and figure out why people, like Skinner, get man-with-a-hammer syndrome.
Incidentally, when I was at the Harvard Law School there was a professor, naturally at Yal! e, who wa! s derisively discussed at Harvard, and they used to say, "Poor old Blanchard. He thinks declaratory judgments will cure cancer." And that's the way Skinner got. And not only that, he was literary, and he scorned opponents who had any different way of thinking or thought anything else was important. This is not a way to make a lasting reputation if the other people turn out to also be doing something important.
2. My second factor is simple psychological denial.
This first really hit me between the eyes when a friend of our family had a super-athlete, super-student son who flew off a carrier in the north Atlantic and never came back, and his mother, who was a very sane woman, just never believed that he was dead. And, of course, if you turn on the television, you'll find the mothers of the most obvious criminals that man could ever diagnose, and they all think their sons are innocent. That's simple psychological denial. The reality is too painful to bear, so you just distort it until it's bearable. We all do that to some extent, and it's a common psychological misjudgment that causes terrible problems.
3. Third: incentive-cause bias, both in one's own mind and that of ones trusted advisor, where it creates what economists call 'agency costs.'
Here, my early experience was a doctor who sent bushel baskets full of normal gall bladders down to the pathology lab in the leading hospital in Lincoln, Nebraska. And with that quality control for which community hospitals are famous, about five years after he should've been removed from the staff, he was. And one of the old doctors who participated in the removal was also a family friend, and I asked him: I said, "Tell me, did he think, 'Here's a way for me to exercise my talents'" -- this guy was very skilled technically-- "'and make a high living by doing a few maiming's and murders every year, along with some frauds?'" And he said, "Hell no, Charlie. He thought that the gall bladder was the sou! rce of al! l medical evil, and if you really love your patients, you couldn't get that organ out rapidly enough."
Now that's an extreme case, but in lesser strength, it's present in every profession and in every human being. And it causes perfectly terrible behavior. If you take sales presentations and brokers of commercial real estate and businesses... I'm 70 years old, I've never seen one I thought was even within hailing distance of objective truth. If you want to talk about the power of incentives and the power of rationalized, terrible behavior: after the Defense Department had had enough experience with cost-plus percentage of cost contracts, the reaction of our republic was to make it a crime for the federal government to write one, and not only a crime, but a felony.
And by the way, the government's right, but a lot of the way the world is run, including most law firms and a lot of other places, they've still got a cost-plus percentage of cost system. And human nature, with its version of what I call 'incentive-caused bias,' causes this terrible abuse. And many of the people who are doing it you would be glad to have married into your family compared to what you're otherwise going to get. [Laughter]
Now there are huge implications from the fact that the human mind is put together this way, and that is that people who create things like cash registers, which make most [dishonest] behavior hard, are some of the effective saints of our civilization. And the cash register was a great moral instrument when it was created. And Patterson knew that, by the way. He had a little store, and the people were stealing him blind and never made any money, and people sold him a couple of cash registers and it went to profit immediately. And, of course, he closed the store and went into the cash register business...
And so this is a huge, important thing. If you read the psychology texts, you will find that if they're 1,000 pages long, there's one sentence. Somehow incentive! -caused b! ias has escaped the standard survey course in psychology.
4. Fourth, and this is a superpower in error-causing psychological tendency: bias from consistency and commitment tendency, including the tendency to avoid or promptly resolve cognitive dissonance. Includes the self-confirmation tendency of all conclusions, particularly expressed conclusions, and with a special persistence for conclusions that are hard-won.
Well what I'm saying here is that the human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can't get in. The human mind has a big tendency of the same sort. And here again, it doesn't just catch ordinary mortals; it catches the deans of physics. According to Max Planck, the really innovative, important new physics was never really accepted by the old guard. Instead a new guard came along that was less brain-blocked by its previous conclusions. And if Max Planck's crowd had this consistency and commitment tendency that kept their old inclusions intact in spite of disconfirming evidence, you can imagine what the crowd that you and I are part of behaves like.
And of course, if you make a public disclosure of your conclusion, you're pounding it into your own head. Many of these students that are screaming at us, you know, they aren't convincing us, but they're forming mental change for themselves, because what they're shouting out [is] what they're pounding in. And I think educational institutions that create a climate where too much of that goes on are...in a fundamental sense, they're irresponsible institutions. It's very important to not put your brain in chains too young by what you shout out.
And all these things like painful qualifying and initiation rituals pound in your commitments and your ideas. The Chinese brainwashing system, which was for war prisoners, was way better than anybody else's. They maneuvered people into making tiny little commitments and declar! ations, a! nd then they'd slowly build. That worked way better than torture.
5. Fifth: bias from Pavlovian association, misconstruing past correlation as a reliable basis for decision-making.
I never took a course in psychology, or economics either for that matter, but I did learn about Pavlov in high school biology. And the way they taught it, you know, so the dog salivated when the bell rang. So what? Nobody made the least effort to tie that to the wide world. Well the truth of the matter is that Pavlovian association is an enormously powerful psychological force in the daily life of all of us. And, indeed, in economics we wouldn't have money without the role of so-called secondary reinforcement, which is a pure psychological phenomenon demonstrated in the laboratory.
Practically...I'd say 3/4 of advertising works on pure Pavlov. Think how association, pure association, works. Take Coca-Cola company (we're the biggest share-holder). They want to be associated with every wonderful image: heroics in the Olympics, wonderful music, you name it. They don't want to be associated with presidents' funerals and so- forth. When have you seen a Coca-Cola ad...and the association really works.
And all these psychological tendencies work largely or entirely on a subconscious level, which makes them very insidious. Now you've got Persian messenger syndrome. The Persians really did kill the messenger who brought the bad news. You think that is dead? I mean you should've seen Bill Paley in his last 20 years. [Paley was the former owner, chairman and CEO of CBS; his bio is at [www.kcmetro.cc.mo.us]] He didn't hear one damn thing he didn't want to hear. People knew that it was bad for the messenger to bring Bill Paley things he didn't want to hear. Well that means that the leader gets in a cocoon of unreality, and this is a great big enterprise, and boy, did he make some dumb decisions in the last 20 years.
And now the Persian messenger syndrome is alive and well. I saw, some ye! ars ago, ! Arco and Exxon arguing over a few hundred millions of ambiguity in their North Slope treaties before a superior court judge in Texas, with armies of lawyers and experts on each side. Now this is a Mad Hatter's tea party: two engineering-style companies can't resolve some ambiguity without spending tens of millions of dollars in some Texas superior court? In my opinion what happens is that nobody wants to bring the bad news to the executives up the line. But here's a few hundred million dollars you thought you had that you don't. And it's much safer to act like the Persian messenger who goes away to hide rather than bring home the news of the battle lost.
Talking about economics, you get a very interesting phenomenon that I've seen over and over again in a long life. You've got two products; suppose they're complex, technical products. Now you'd think, under the laws of economics, that if product A costs X, if product Y costs X minus something, it will sell better than if it sells at X plus something, but that's not so. In many cases when you raise the price of the alternative products, it'll get a larger market share than it would when you make it lower than your competitor's product. That's because the bell, a Pavlovian bell -- I mean ordinarily there's a correlation between price and value -- then you have an information inefficiency. And so when you raise the price, the sales go up relative to your competitor. That happens again and again and again. It's a pure Pavlovian phenomenon. You can say, "Well, the economists have figured this sort of thing out when they started talking about information inefficiencies," but that was fairly late in economics that they found such an obvious thing. And, of course, most of them don't ask what causes the information inefficiencies.
Well one of the things that causes it is pure old Pavlov and his dog. Now you've got bios from Skinnerian association: operant conditioning, you know, where you give the dog a reward an! d pound i! n the behavior that preceded the dog's getting the award. And, of course, Skinner was able to create superstitious pigeons by having the rewards come by accident with certain occurrences, and, of course, we all know people who are the human equivalents of superstitious pigeons. That's a very powerful phenomenon. And, of course, operant conditioning really works. I mean the people in the center who think that operant conditioning is important are very much right, it's just that Skinner overdid it a little.
Where you see in business just perfectly horrible results from psychologically-rooted tendencies is in accounting. If you take Westinghouse, which blew, what, two or three billion dollars pre-tax at least loaning developers to build hotels, and virtually 100% loans? Now you say any idiot knows that if there's one thing you don't like it's a developer, and another you don't like it's a hotel. And to make a 100% loan to a developer who's going to build a hotel... [Laughter] But this guy, he probably was an engineer or something, and he didn't take psychology any more than I did, and he got out there in the hands of these salesmen operating under their version of incentive-caused bias, where any damned way of getting Westinghouse to do it was considered normal business, and they just blew it.
That would never have been possible if the accounting system hadn't been such but for the initial phase of every transaction it showed wonderful financial results. So people who have loose accounting standards are just inviting perfectly horrible behavior in other people. And it's a sin, it's an absolute sin. If you carry bushel baskets full of money through the ghetto, and made it easy to steal, that would be a considerable human sin, because you'd be causing a lot of bad behavior, and the bad behavior would spread. Similarly an institution that gets sloppy accounting commits a real human sin, and it's also a dumb way to do business, as Westinghouse has so wonderfully proved! .
O! ddly enough nobody mentions, at least nobody I've seen, what happened with Joe Jett and Kidder Peabody. The truth of the matter is the accounting system was such that by punching a few buttons, the Joe Jetts of the world could show profits, and profits that showed up in things that resulted in rewards and esteem and every other thing... Well the Joe Jetts are always with us, and they're not really to blame, in my judgment at least. But that bastard who created that foolish accounting system who, so far as I know, has not been flayed alive, ought to be.
6. Sixth: bias from reciprocation tendency, including the tendency of one on a roll to act as other persons expect.
Well here, again, Cialdini does a magnificent job at this, and you're all going to be given a copy of Cialdini's book. And if you have half as much sense as I think you do, you will immediately order copies for all of your children and several of your friends. You will never make a better investment.
It is so easy to be a patsy for what he calls the compliance practitioners of this life. At any rate, reciprocation tendency is a very, very powerful phenomenon, and Cialdini demonstrated this by running around a campus, and he asked people to take juvenile delinquents to the zoo. And it was a campus, and so one in six actually agreed to do it. And after he'd accumulated a statistical output he went around on the same campus and he asked other people, he said, "Gee, would you devote two afternoons a week to taking juvenile delinquents somewhere and suffering greatly yourself to help them," and there he got 100% of the people to say no. But after he'd made the first request, he backed up a little, and he said, "Would you at least take them to the zoo one afternoon?" He raised the compliance rate from a third to a half. He got three times the success by just going through the little ask-for-a-lot-and-back-off.
Now if the human mind, on a subconscious level, can be manipulated that way and you don't kno! w it, I a! lways use the phrase, "You're like a one-legged man in an ass-kicking contest." I mean you are really giving a lot of quarter to the external world that you can't afford to give. And on this so-called role theory, where you tend to act in the way that other people expect, and that's reciprocation if you think about the way society is organized.
A guy named Zimbardo had people at Stanford divide into two pieces: one were the guards and the other were the prisoners, and they started acting out roles as people expected. He had to stop the experiment after about five days. He was getting into human misery and breakdown and pathological behavior. I mean it was...it was awesome. However, Zimbardo is greatly misinterpreted. It's not just reciprocation tendency and role theory that caused that, it's consistency and commitment tendency. Each person, as he acted as a guard or a prisoner, the action itself was pounding in the idea. [For more on this famous experiment, see [www.prisonexp.org].]
Wherever you turn, this consistency and commitment tendency is affecting you. In other words, what you think may change what you do, but perhaps even more important, what you do will change what you think. And you can say, "Everybody knows that." I want to tell you I didn't know it well enough early enough.
7. Seventh, now this is a lollapalooza, and Henry Kaufman wisely talked about this: bias from over-influence by social proof -- that is, the conclusions of others, particularly under conditions of natural uncertainty and stress.
And here, one of the cases the psychologists use is Kitty Genovese, where all these people -- I don't know, 50, 60, 70 of them -- just sort of sat and did nothing while she was slowly murdered. Now one of the explanations is that everybody looked at everybody else and nobody else was doing anything, and so there's automatic social proof that the right thing to do is nothing. That's not a good enough explanation for Kitty Genovese, in my judgment. T! hat's o! nly part of it. There are microeconomic ideas and gain/loss ratios and so forth that also come into play. I think time and time again, in reality, psychological notions and economic notions interplay, and the man who doesn't understand both is a damned fool.
Big-shot businessmen get into these waves of social proof. Do you remember some years ago when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company? And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa. I think they're all gone now, but it was a total disaster.
Now let's talk about efficient market theory, a wonderful economic doctrine that had a long vogue in spite of the experience of Berkshire Hathaway. In fact one of the economists who won -- he shared a Nobel Prize -- and as he looked at Berkshire Hathaway year after year, which people would throw in his face as saying maybe the market isn't quite as efficient as you think, he said, "Well, it's a two-sigma event." And then he said we were a three-sigma event. And then he said we were a four-sigma event. And he finally got up to six sigmas -- better to add a sigma than change a theory, just because the evidence comes in differently. [Laughter] And, of course, when this share of a Nobel Prize went into money management himself, he sank like a stone.
If you think about the doctrines I've talked about, namely, one, the power of reinforcement -- after all you do something and the market goes up and you get paid and rewarded and applauded and what have you, meaning a lot of reinforcement, if you make a bet on a market and the market goes with you. Also, there's social proof. I mean the prices on the market are the ultimate form of social proof, reflecting what other people think, and so the combination is very powerful. Why would you ex! pect gene! ral market levels to always be totally efficient, say even in 1973-74 at the pit, or in 1972 or whatever it was when the Nifty 50 were in their heyday? If these psychological notions are correct, you would expect some waves of irrationality, which carry general levels, so they're inconsistent with reason.
8. Nine [he means eight]: what made these economists love the efficient market theory is the math was so elegant.
And after all, math was what they'd learned to do. To the man with a hammer, every problem tends to look pretty much like a nail. The alternative truth was a little messy, and they'd forgotten the great economists Keynes, whom I think said, "Better to be roughly right than precisely wrong."
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 you! r town, a! nd 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 [laughter], 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.
10. Bias from over-influence by authority.
Well here, the Milgrim experiment, as it's called -- I think there have been 1,600 psychological papers written about Milgrim. And he had a person posing as an authority figure trick ordinary people into giving what they had every reason to expect was heavy tort! ure by el! ectric shock to perfectly innocent fellow citizens. And he was trying to show why Hitler succeeded and a few other things, and so this really caught the fancy of the world. Partly it's so politically correct, and over-influence by authority...
You'll like this one: You get a pilot and a co-pilot. The pilot is the authority figure. They don't do this in airplanes, but they've done it in simulators. They have the pilot do something where the co-pilot, who's been trained in simulators a long time -- he knows he's not to allow the plane to crash -- they have the pilot to do something where an idiot co-pilot would know the plane was going to crash, but the pilot's doing it, and the co-pilot is sitting there, and the pilot is the authority figure. 25% of the time the plane crashes. I mean this is a very powerful psychological tendency. It's not quite as powerful as some people think, and I'll get to that later.
11. Eleven: bias from deprival super-reaction syndrome, including bias caused by present or threatened scarcity, including threatened removal of something almost possessed, but never possessed.
Here I took the Munger dog, a lovely, harmless dog. The only way to get that dog to bite you is to try and take something out of its mouth after it was already there. And you know, if you've tried to do takeaways in labor negotiations, you'll know that the human version of that dog is there in all of us. And I have a neighbor, a predecessor who had a little island around the house, and his next door neighbor put a little pine tree on it that was about three feet high, and it turned his 180 degree view of the harbor into 179 3/4. Well they had a blood feud like the Hatfields and McCoys, and it went on and on and on...
I mean people are really crazy about minor decrements down. And then, if you act on them, then you get into reciprocation tendency, because you don't just reciprocate affection, you reciprocate animosity, and the whole thing can escalate. And so huge ins! anities c! an come from just subconsciously over-weighing the importance of what you're losing or almost getting and not getting.
And the extreme business case here was New Coke. Coca-Cola has the most valuable trademark in the world. We're the major shareholder -- I think we understand that trademark. Coke has armies of brilliant engineers, lawyers, psychologists, advertising executives and so forth, and they had a trademark on a flavor, and they'd spent the better part of 100 years getting people to believe that trademark had all these intangible values too. And people associate it with a flavor. And so they were going to tell people not that it was improved, because you can't improve a flavor. A flavor is a matter of taste. I mean you may improve a detergent or something, but don't think you're going to make a major change in a flavor. So they got this huge deprival super-reaction syndrome.
Pepsi was within weeks of coming out with old Coke in a Pepsi bottle, which would've been the biggest fiasco in modern times. Perfect insanity. And by the way, both Goizuetta [Coke's CEO at the time] and Keough [an influential former president and director of the company] are just wonderful about it. I mean they just joke. Keough always says, "I must've been away on vacation." He participated in every single decision -- he's a wonderful guy. And by the way, Goizuetta is a wonderful, smart guy -- an engineer. Smart people make these terrible boners. How can you not understand deprival super-reaction syndrome? But people do not react symmetrically to loss and gain. Well maybe a great bridge player like Zeckhauser does, but that's a trained response. Ordinary people, subconsciously affected by their inborn tendencies...
12. Bias from envy/jealousy.
Well envy/jealousy made, what, two out of the Ten Commandments? Those of you who have raised siblings you know about envy, or tried to run a law firm or investment bank or even a faculty? I've heard Warren say a half a dozen times, �! �It's n! ot greed that drives the world, but envy."
Here again, you go through the psychology survey courses, and you go to the index: envy/jealousy, 1,000-page book, it's blank. There's some blind spots in academia, but it's an enormously powerful thing, and it operates, to a considerable extent, on the subconscious level. Anybody who doesn't understand it is taking on defects he shouldn't have.
13. Bias from chemical dependency.
Well, we don't have to talk about that. We've all seen so much of it, but it's interesting how it'll always cause this moral breakdown if there's any need, and it always involves massive denial. See it just aggravates what we talked about earlier in the aviator case, the tendency to distort reality so that it's endurable.
14. Bias from mis-gambling compulsion.
Well here, Skinner made the only explanation you'll find in the standard psychology survey course. He, of course, created a variable reinforcement rate for his pigeons and his mice, and he found that that would pound in the behavior better than any other enforcement pattern. And he says, "Ah ha! I've explained why gambling is such a powerful, addictive force in this civilization." I think that is, to a very considerable extent, true, but being Skinner, he seemed to think that was the only explanation, but the truth of the matter is that the devisors of these modern machines and techniques know a lot of things that Skinner didn't know.
For instance, a lottery. You have a lottery where you get your number by lot, and then somebody draws a number by lot, it gets lousy play. You have a lottery where people get to pick their number, you get big play. Again, it's this consistency and commitment thing. People think if they have committed to it, it has to be good. The minute they've picked it themselves it gets an extra validity. After all, they thought it and they acted on it.
Then if you take the slot machines, you get bar, bar, walnut. And it happens again! and agai! n and again. You get all these near misses. Well that's deprival super-reaction syndrome, and boy do the people who create the machines understand human psychology. And for the high IQ-crowd they've got poker machines where you make choices. So you can play blackjack, so to speak, with the machine. It's wonderful what we've done with our computers to ruin the civilization.
But at any rate, mis-gambling compulsion is a very, very powerful and important thing. Look at what's happening to our country: every Indian has a reservation, every river town, and look at the people who are ruined by it with the aid of their stock brokers and others. And again, if you look in the standard textbook of psychology you'll find practically nothing on it except maybe one sentence talking about Skinner's rats. That is not an adequate coverage of the subject.
About the author:I am working towards the CPA & CFA designations, and would love to manage an investment partnership in the future. I am a self taught investor through Warren Buffett, Charlie Munger, Ben Graham, Peter Lynch, Joel Greenblatt, David Einhorn, Seth Klarman, Howard Marks, Phillip Fisher and Thornton O'Glove. My focus is a bottoms up Value-GARP strategy with a mix of top down contrarianism.
"When you find yourself on the side of the majority, it is time to pause and reflect." - Mark Twain
Visit Tannor Pilatzke's Website
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