“Man is a rational animal. So at least we have been told. Throughout a long life I have searched diligently for evidence in favor of this statement. So far, I have not had the good fortune to come across it.” –Bertrand Russell 
This introduction is part of a multi-part series on human misjudgment by Phil Ordway, managing principal of Anabatic Investment Partners.
Danny Kahneman’s book Thinking, Fast & Slow has filled in a lot of holes in my knowledge, and it is the best collection of thinking on the subject that I’ve found. I had previously listened to a recording of Munger’s “The Psychology of Human Misjudgment” and read the transcript in Poor Charlie’s Almanack and elsewhere. That probably spurred some of my initial interest in the subject, and the combination of Munger’s talk with Kahneman’s research and writing is especially powerful. I think those two books tell you almost everything you need to know about the psychology of investing, and a lot about life in general too.
A special focus here will be business and investing. That is partly because those fields are such a fertile ground for misjudgment, but these lessons apply to almost all areas of life. I didn’t revisit my old college textbook in psychology, either – most or all of these examples were taken from own experiences or from the popular accounts I found online, in the newspaper, etc. over the past few months.
I’m assuming that most people are familiar with the original masterpiece, so I plan to just briefly allude to the “standard causes of human misjudgment” and the original examples so we can spend time on more recent findings and examples. As usual, Munger figured out the important ideas and left very few holes for us to patch, so I’ve tried to take the original material and add one or two new or supplemental topics and a few new examples. As always, the biggest bang for our buck – the lollapaloozas – will be found when the various factors combine and act in concert. “Cherchez la femme” and the combination. We need a working understanding of multiple models and their interaction, and it must be derived individually – it will be different for each circumstance and each person.
A short list of topics that would likely get more attention in “The Psychology of Human Misjudgment 3.0”:
- Baseline information or base rates
- Prospect Theory and loss aversion
- Munger’s “two-track analysis” – first, what are the fundamentals of the situation, rationally judged, and second, what are the subconscious or other psychological factors at play?
- Self-awareness and self-honesty
next series start series overview
What is Charlie Munger’s “Psychology of Human Misjudgment”?
 The Basic Writings of Bertrand Russell (2009), p. 45
About The Author: Philip Ordway
Philip Ordway is Principal and Portfolio Manager of Anabatic Fund, L.P. Previously, Philip was a partner at Chicago Fundamental Investment Partners (CFIP). At CFIP, which he joined in 2007, Philip was responsible for investments across the capital structure in various industries. Prior to joining Chicago Fundamental Investment Partners, Philip was an analyst in structured corporate finance with Citigroup Global Markets, Inc. from 2002 to 2005, where he was part of a team responsible for identifying financing solutions for companies initially in the global power and utilities group and ultimately in the global autos and industrials group. Philip earned his M.B.A. from the Kellogg School of Management at Northwestern University in 2007 and his B.S. in Education & Social Policy and Economics from Northwestern University in 2002.
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