Overrating oneself | Value Research How the human tendency to overrate his abilities, possessions and decisions can hurt him
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Overrating oneself

How the human tendency to overrate his abilities, possessions and decisions can hurt him

Overrating oneself

What is it? This is the tendency of humans to overrate their decisions, possessions as well as abilities. Munger gives the example of Swedish divers, 90 percent of whom judge themselves to be above average. This however cannot be true in real life.

This tendency also appears in the case of possessions. Says Munger, "Even man's minor possessions tend to be overappraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn't already own them. There is a name in psychology for this overappraise-your-own-possessions phenomenon: the "endowment effect.""

The Russian novelist and author of War and Peace (1869) once wrote of the power of excessive self-regard tendency. Munger says, "According to Tolstoy, the worst criminals don't appraise themselves as all that bad. They come to believe either (1) that they didn't commit their crimes or (2) that, considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became."

Excessive self-regard is not all bad. It does have some positive benefits too. Munger says, "While an excess of self-regard is often counterproductive in its effects on cognition, it can cause some weird successes from overconfidence that happens to cause success. This factor accounts for the adage: "Never underestimate the man who overestimates himself."

Of course, some high self-appraisals are correct and serve better than false modesty. Moreover, self-regard in the form of a justified pride in a job well done, or a life well lived, is a large constructive force. Without such justified pride, many more airplanes would crash."

Often found in: Assessment of one's own abilities, decisions, etc.

In Life: How many times you have heard parents go overboard praising their bright kids? Munger explains some of the worst incidences of the excessive self-regard tendency come into life when "dysfunctional groups of cliquish persons, dominated by excessive self-regard tendency, select as new members of their organizations persons who are very much like themselves. Thus if the English department at an elite university becomes mentally dysfunctional or the sales department of a brokerage firm slips into routine fraud, the problem will have a natural tendency to get worse and to be quite resistant to change for the better."

But there is an antidote for falling into the excessive self-regard tendency. According to Munger, "The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn't easy to do well and won't work perfectly, but it will work much better than simply letting psychological nature take its normal course."

In investing: Sometimes after a good run in a bull market, we get lulled into believing that we are very good at the investing game, even though one of the primary reasons for the good run could be the general market going up. Says Munger, "Intensify man's love of his own conclusions by adding the possessory wallop from the "endowment effect," and you will find that a man who has already bought a pork-belly future on a commodity exchange now foolishly believes, even more strongly than before, in the merits of his speculative bet."

You just read about one of the misjudgements people generally make while investing. Read 25 ways to (Not) make mistakes to get an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.


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