Nivi · March 25th, 2008
In The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6, Marc Andreessen kindly interprets an essay from Charlie Munger‘s book, Poor Charlie’s Almanack:
“Mr. Munger’s magnum opus speech, included in the book, is The Psychology of Human Misjudgment — an exposition of 25 key forms of human behavior that lead to misjudgment and error, derived from Mr. Munger’s 60 years of business experience. Think of it as a practitioner’s summary of human psychology and behavioral economics as observed in the real world.
“In this series of blog posts, I will walk through all 25 of the biases Mr. Munger identifies, and then adapt them for the modern entrepreneur. In each case I will start with relevant excerpts of Mr. Munger’s speech, and then after that add my own thoughts.”
I started making a cheat sheet of Marc and Charlie’s key points—I thought I would share it with you. It’s a handy reference once you’ve read the full article.
(For another great article on cognitive bias, see Cognitive biases potentially affecting judgment of global risks.)
1. Reward and Punishment Super-Response
Once you realize how much incentives influence human behaviour, you need to assume their influence is even bigger than you think. Never think about something else when you should be thinking about incentives.
“If you would persuade, appeal to interest and not to reason.”
Incentives are so powerful that every incentive should have a counter-incentive to restrict gaming of the first incentive.
2. Liking and Loving
Liking and loving something conditions you to (1) ignore faults of and comply with wishes of the loved, (2) favor people, products, and actions associated with the loved, and (3) distort other facts to facilitate love.
Wanting to be liked by your teammates impedes you from firing people and making unpopular but good decisions.
3. Disliking and Hating
Disliking or hating something conditions you to (1) ignore virtues in the disliked, (2) dislike people, products, and actions associated with the disliked, and (3) distort other facts to facilitate hatred.
Startups should focus on their customers, not their competition—whom they may dislike.
4. Doubt Avoidance
Execution is often better than further contemplation:
“A good plan, violently executed now, is better than a perfect plan next week.”
Believing that something will happen, and convincing others that it will be so, makes it more likely to happen.
While a hypothesis is still doubted, wise entrepreneurs know whether (1) persistence and iteration will prove the hypothesis, or (2) the hypothesis will not be proven and additional testing is a destructive waste of time—a new hypothesis is required.
5. Inconsistency Avoidance
Have strong opinions, weakly held. New and correct ideas may not be accepted simply because they are inconsistent with existing ideas.
Your existing ideas may be unknown to you. They may be hidden assumptions. We often make hidden assumptions about unknown unknowns.
If existing customers in the market aren’t ready for a product that is inconsistent with their behaviour, go after customers who aren’t in the market because they can’t afford the existing product or don’t have access to it. See The Innovator’s Dilemma and The Innovator’s Solution.