SEEKING WISDOM
FROM DARWIN
TO MUNGER
PETER BEVELIN
CONTENTS
Part One One
Two
Three
Part Two One Two
Part Three One
Two
Three Four Five Six Seven Eight Nine
Part Four One
Two Three Four Five Six Seven Eight Nine Ten Eleven Twelve
WHAT INFLUENCES OUR THINKING
Our anatomy sets the limits for our behavior Evolution selected the connections that produce useful behavior for survival and reproduction Adaptive behavior for survival and reproduction
THE PSYCHOLOGY OF MISJUDGMENTS
Misjudgments explained by psychology Psychological reasons for mistakes
THE PHYSICS AND MATHEMATICS OF MISJUDGMENTS
Systems thinking Scale and limits Causes
Numbers and their meaning
Probabilities and number of possible outcomes Scenarios
Coincidences and miracles Reliability of case evidence Misrepresentative evidence
GUIDELINES TO BETTER THINKING
Models of reality Meaning Simplification Rules and filters Goals Alternatives Consequences Quantification Evidence
Backward thinking Risk
Attitudes
Charles T. Munger speech on prescriptions for guaranteed misery in life Wisdom from Charles T. Munger and Warren E. Buffett
Probability Checklists
To my two children, Victor and Sonia
SEEKING WISDOM
From Darwin to Munger
By Peter Bevelin Third Edition
Copyright© 2003, 2005, 2007 by Post Scriptum AB. All rights reserved.
For permission to use copyrighted material, grateful acknowledgment is made to
the copyright holders on next page, which is hereby made part ofthis copyright page. The author and publisher extend their apologies for any errors ofomissions and encourage any copyright owners inadvertently missed to contact them. Any errors, oversight or omissions will be corrected in subsequent editions.
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Some ofthe names, characters, places and incidents in this book are products of the author's imagination or are used fictitiously. Any resemblance to actual events, locales, or persons, living or dead, is entirely coincidental.
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- PERMISSION ACKNOWLEDGMENTS -
Excerpt from "Track record is everything." From Across the Board, October 1991. Copyright
© 1991 by Across the Board. Reprinted by permission of The Conference Board Review; all rights reserved.
Excerpts from Berkshire Hathaway Inc. Annual Reports and An Owner's Manual.
Copyright © 1977-2006 by Warren E. Buffett. Reprinted by permission of Warren E. Buffett; all rights reserved.
Excerpts from Darwin, C.R. 1871. lhe decent of man, and selecion in relation to sex.
London: John Murray, 1st edition. Volume 1. Copyright © 2002-2007 lhe Complete Work of Charles Darwin Online - University of Cambridge - CRASSH 17 Mill Lane - Cambridge; all rights reserved.
Excerpt from Forbes Magazine. "The not-so-silent partner" by Robert Lenzner and David
S. Fondiller, January 22, 1996. Copyright © 1996 by Forbes Inc. Reprinted by permission of Forbes Magazine© 2009 Forbes Media LLC; all rights reserved.
Excerpt from Cheating Monkeys and Citizen Bees: lhe Nature of Cooperation in Animals and
Humans, by Lee Dugatkin. Copyright © 1999 by Lee Dugatkin. Reprinted with the permission of The Free Press, a Division of Simon & Schuster, Inc.
Excerpt from Living Within Limits: Ecology, Economics, and Population Taboos, by Garrett Hardin. Copyright © 1995 by Oxford University Press, Inc. Reprinted by permission of Oxford University Press, Inc.; all rights reserved.
Excerpt from The Ostrich Factor: Our Population Myopia, by Garrett Hardin. Copyright
© 1999 by Oxford University Press, Inc. Reprinted by permission of Oxford University Press, Inc.; all rights reserved.
Excerpt from lhe Psychology ofSpeculation, by Henry Howard Harper. Copyright© 1966
by Fraser Publishing Company. Reprinted by permission of Fraser Publishing Company. Excerpt from "Speed, Simplicity, Self-Confidence: An Interview with Jack Welch."
Reprinted by permission of the Harvard Business Review. From "Speed, Simplicity, Self Confidence: An Interview with Jack Welch" by N. Tichy & R. Charan, Sept/Okt 1989. Copyright© 1989 by the Harvard Business School Publishing Corporation; all rights reserved. Excerpt from OfPermanent Value: lhe Story ofWarren Buffett, by Andy Kilpatrick. Copyright
© 2000 by Andrew Kilpatrick. Reprinted by permission of Andrew Kilpatrick; all rights reserved.
Charles T. Munger.
Excerpts from Outstanding Investor Digest (OID) are reprinted by permission from Outstanding Investor Digest, Inc. Copyright © 1986-2006; 295 Greenwich Street, Box 282, New York, NY 10007. All rights reserved. Telephone: (212) 925 3885. Website: www.oid.com. Excerpts from "What is science?" by Richard Feynman. Reprinted with permission from lhe Physics Teacher, Vol. 7, Issue 6, Page 313-320, 1969. Copyright © 1969, American
Association of Physics Teachers, all rights reserved.
Excerpt from transcript #105 of Adam Smith®'s Money Game. Copyright© 1998 by Adam Smith® Educational Productions Ltd. Reprinted by permission of Adam Smith® Educational Productions Ltd.; all rights reserved.
Excerpt from lhe lheory of Investment Value, by John Burr Williams. Copyright © 1938 by John Burr Williams Jr. and John Burr Williams Family Trust. Published in 1997 by Fraser Publishing Company. Reprinted by permission of John Burr Williams Jr. and John Burr Williams Family Trust; all rights reserved.
- ACKNOWLEDGMENTS -
Thanks to Charles Munger and Warren Buffett for their kind permission to quote extensively from their work. Thanks to Charles Munger who generously took the time to read the whole original manuscript. Thanks to Warren Buffett for his early encouragement of my first private memorandum - the foundation for this book - and his compliments on this work. I am deeply grateful to Peter Kaufman for his generosity in helping me getting this Third Edition into wide circulation. I am delighted to partner with him.
Thanks also to Jim Ross at Hudson BookSellers in Omaha for his fine job in promoting the earlier editions of this book. Thanks also to Rose-Marie Strandberg at Printing. Thanks to Henry Emerson who permitted me to quote from Outstanding Investor Digest. Thanks to Ralph Greenspan at the Neurosciences Institute for many fruitful discussions. Thanks also to Gerald Edelman. Always a source of knowledge and joy. I would also like to thank the following people who kindly commented on
some of the issues covered in this book: Tom
Ackerman, Edward Beltrami, Charles Brenner, Nico Bunzeck, Bent Flyvbjerg, Daniel Gilbert, Mark Graber, Peter Gardenfors, Tom Hamill, Mathew Hayward, Vibeke Horstmann, John Ioannidis, Andrew Kilpatrick, Frank Lambert, Chris Landsea, Jennifer Lerner, Richard Lucas, Ronald Newburgh, Robert Rauber, Robert Sapolsky, Kaveh Shojania,
Maria Stromme, Philip Swigard, Nassim Taleb, W illiam Thompson, and Carl Zimmer. The reader shouldn't assume that any of these people agree with what I have written in this book. Any misconceptions, deficiences or errors are mine alone.
Thanks to JoAnna Barrett who gave valuable editing advice.
Finally, I wish to thank my wife, Monica, who read every sentence with critical eyes. Whatever I have achieved in life I owe her. She is the wind beneath my wings. Monica, you are the best.
Peter Bevelin
INTRODUCTION
PART ONE
- CONTENTS -
WHAT INFLUENCES OUR THINKING?
1
One
Our anatomy sets the limits for our behavior
3
Two
Evolution selected the connections that produce useful behavior
for survival and reproduction
11
Three
Adaptive behavior for survival and reproduction
21
PART Two
THE PSYCHOLOGY OF MISJUDGMENTS
37
One
Misjudgments explained by psychology
39
Two
Psychological reasons for mistakes
42
PART THREE
THE PHYSICS AND MATHEMATICS OF MISJUDGMENTS
115
One
120
Two
Scale and limits
129
Three
Causes
135
Four
Numbers and their meaning
141
Five
Probabilities and number ofpossible outcomes
144
Six
Scenarios
158
Seven
Coincidences and miracles
165
Eight
Reliability of case evidence
169
Nine
Misrepresentative evidence
176
PART FouR
GUIDELINES TO BETTER THINKING
187
One
Models of reality
189
Two
Meaning
Three
Simplification
212
Four
Rules and filters
218
Five
Goals
223
Six
Alternatives
225
Seven
Consequences
228
Eight
Quantification
231
Evidence
238
Ten
Back ward thinking
244
Eleven
Risk
248
Twelve
Attitudes
252
Appendix One
Charles T. Munger speech on prescriptions for
guaranteed misery in life
260
Appendix Two
Wisdom from Charles T. Munger and Warren E. Buffett
264
Appendix Three
Probability
278
Appendix Four
Checklists
287
Source Notes
297
199
Bibliography 307
- INTRODUCTION -
A man who has committed a mistake and doesn't correct it, is committing another mistake.
- Confucius (Chinese thinker, 6th to 5th Century BC)
Why do we behave like we do? American writer Mark Twain once wrote: "The character of the human race never changes, it is permanent." Why is it so?
What do we want out of life? To be healthy, happy with our families, in our work, etc? What interferes with this? Isn't it often emotions like fear, anger, worry, disappointment, stress, and sadness caused by problems, mistakes, losses, or unreal expectations? Maybe we misjudged people, situations, the time or some investment.We chose the wrong occupation, spouse, investment, or place to live. Why?
This book is about searching for wisdom. It is in the spirit of Charles Munger, Vice Chairman of Berkshire Hathaway, Inc. who says, ''All I want to know is where I'm going to die so I'll never go there." There are roads that lead to unhappiness. An understanding of how and why we can "die" should help us avoid them.
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 like 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.
How do we achieve wisdom? It is hard to improve ourselves simply by looking at our own mistakes. 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 ever figured out.I don't believe in just sitting down and trying to dream it all up yourself Nobody's that smart. "
The 16th Century French essayist Michel de Montaigne said: ''Anyone who
wishes to be cured of ignorance must first admit to it." My quest for wisdom originates partly from making mistakes myself and observing those of others but also from the philosophy of Charles Munger. A man whose simplicity and clarity of thought is unequal to anything I have seen. What especially influenced me
were his lectures on worldly wisdom, many of them reproduced in the newsletter Outstanding Investor Digest. In one speech, he said that the best way to achieve wisdom was to learn the big ideas that underlie reality. In another, he referred to Charles Darwin as one of the best thinkers who ever lived. Darwin's lesson is that even people who aren't geniuses can outthink the rest of mankind if they develop certain thinking habits.
To learn more about Darwin's habits, I started to read his autobiography and other writings about him. I found him to be a fascinating character and a wonderful lesson on objectivity. In his autobiography, Darwin said:
I think that I am superior to the common run of men in noticing things which easily escape attention, and in observing them carefully. My industry has been nearly as great as it could have been in the observation and collection of facts. What is far more important, my love of natural science has been steady and ardent... From my early youth I have had the strongest desire to understand or explain whatever I observed, that is, to group all facts under some general laws. These causes combined have given me the patience to reflect or ponder for any number of years over any unexplained problem. As far as I can judge, I am not apt to follow blindly the lead of other men. I have steadily endeavoured to keep my mind free so as to give up any hypothesis, however much beloved (and I cannot resist forming one on every subject), as soon as facts are shown to be opposed to it.
Darwin reinforced my interest in understanding human behavior. To improve my own thinking, I read books in biology, psychology, neuroscience, physics, and mathematics. fu the 17th Century French philosopher Rene Descartes said: "The reading of all good books is like conversation with the finest minds of past centuries."
I started to write down what I learned. The result is this book. The ideas in it are built largely from the works and thoughts of others. fu the Roman poet Publius Terentius (c.190-159 BC) wrote: "Nothing has yet been said that's not been said before." I have condensed what others have wr
itten in a usable form and added my own conclusions.
In this book you find a broad-based collection of wisdom from outstanding scientists like Darwin, Albert Einstein, Richard Feynman, and two of the world's most successful businessmen and investors, Charles Munger and the Chairman of Berkshire Hathaway, Warren Buffett. Albert Einstein once said that there are only a few enlightened people with a lucid mind and good taste within a century. Warren Buffett and Charles Munger are such people. I owe a great debt to them whose messages have been instructional as well as encouraging. lfl had listened
11
to them earlier in my life - so many expensive mistakes would have been avoided. They are my heroes!
I advise all of you to read the annual reports of Berkshire Hathaway and Wesco Financial (Charles Munger is chairman). These reports are the best educational tools about how to think about investing and business. The lessons also show us how to behave in life.
This book has four parts. First, I explore what influences our thinking. This serves as a foundation. In the second part, I give examples of psychological reasons for misjudgments. The third part explores reasons for misjudgments caused both by our psychology and a lack of considering some basic ideas from physics and mathematics. In the final part I reveal tools for better thinking. The appendix contains a speech from Charles Munger and quotes from Munger and Warren Buffett. It also contains checklists. Checklists often eliminate biases and make it easier for us to be sure we've covered the important things.