25 ways to (Not) make mistakes | Value Research A super-investor's crash course in the most frequent misjudgements and how to avoid them

25 ways to (Not) make mistakes

A super-investor's crash course in the most frequent misjudgements and how to avoid them

25 ways to (Not) make mistakes

Is there an investor who hasn't looked back on his mistakes and said to himself, 'I must have been crazy. Why did I do that? Had I gone crazy?' Those investors who haven't said anything like this, never wondered about why they made mistakes, never taken a hard look at their own mistakes will probably go on to make more mistakes. All successful investors eventually realise that understanding and controlling their own psychology is at least as important as understanding their investments.

One of the masterpieces of the psychology of why and how people make mistakes is not a dry academic book or article, but a fascinating, witty speech by Warren Buffett's partner and Vice-Chairman of Berkshire Hathway, Charlie Munger. This speech, 'The psychology of human misjudgement' was given by Munger to the students of his alma mater, Harvard Law School, in 1995.

Munger talked about 25 common misjudgements people make because of the way human psychology operates. Almost every one of these has a bearing on how people invest, or how they don't invest and why they make characteristic mistakes in their investments.

Here's an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.

  1. Carrots, sticks and responses
  2. The Power that love holds over individuals
  3. Hate Makes Blind, Just as Love
  4. Look before you leap
  5. Shutting out new inputs
  6. Only the curious learn
  7. The instinct for fairness
  8. The Green Goddess strikes
  9. Give and take policy in life and in relationships
  10. Misleading associations
  11. The depths of denial
  12. Overrating oneself
  13. The optimist's folly
  14. Mourning over trivialities
  15. Herds of dumb sheep
  16. Faulty comparisons
  17. Destroyed by stress
  18. The availability problem
  19. Practice does make one perfect
  20. Keep a clean nose
  21. Old is not always wise
  22. The boss is not always right
  23. Waste not, want not
  24. Unbeatable logic
  25. The lollapalooza effect

This story first appeared in August 2015.

Other Categories