All Annotations of blog.pmarca.com: The Psychology of Entrepreneurial Misjudgment, part 1: Biases 1-6[Preview]

saved by16 people, first byKO - on 2008-03-25, last byTodd Suomela on 2008-06-20

• 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.

• Charlie Munger is an 80-something billionaire who cofounded top-tier law firm Munger, Tolles & Olson and is Warren Buffett's long-time partner and Vice-Chairman at Berkshire Hathaway, one of the most successful companies of all time.

  
  
  

  Some people, including me, consider Mr. Munger to be an even more interesting thinker and writer than Mr. Buffett, and recently a group of Mr. Munger's friends assembled a compilation book of his most interesting thoughts and speeches called Poor Charlie's Almanack, inspired by Ben Franklin's Poor Richard's Almanack. (The Munger book is only available on Amazon in used form, although you can apparently buy a new copy here.)

  
  
  

  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 think I've been in the top five percent of my age cohort almost all my adult life in understanding the power of incentives, and yet I've always underestimated that power
• If you would persuade, appeal to interest and not to reason
• he drifts into immoral behavior in order to get what he wants, a result he facilitates by rationalizing his bad behavior
• For that reason, in the long run it probably makes sense for some new approach to stock-based compensation to be developed that both preserves the motivation to create as opposed to preserve value,
• [M]an will generally strive, lifelong, for the affection and approval of many people not related to him.
• I believe startups often overfocus on their competitors
• A variant on this dynamic is letting your competitor determine your strategy
• In my view, entrepreneurial judgment is the ability to tell the difference between a situation that's not working but persistence and iteration will ultimately prove it out, versus a situation that's not working and additional effort is a destructive waste of time and radical change is necessary
• As Lord Keynes pointed out about his exalted intellectual group at one of the greatest universities in the world, it was not the intrinsic difficulty of new ideas that prevented their acceptance. Instead, the new ideas were not accepted because they were inconsistent with old ideas in place...
• Then three or four or five years later, another startup launches with a very similar product, and this time the market says, hell yes!
• and if people just aren't ready for a new idea, you usually can't make them ready
• is that lack of curiosity can be a huge danger to a startup in the following way: often, your initial strategy won't quite work, but you can learn as you go based on other things that happen in the market and eventually iterate into a strategy that does work. Obviously, insufficient curiosity can prevent you from seeing the new data and lead you to continue to pursue a losing strategy even when you wouldn't have to.