Business

Charlie’s Thoughts on Decision Making

I read a few years ago the Poor Charlie’s Almanack and found it to be a really great book for many areas in life. It’s also a long and heavy book so you might wish to get it it to your Kindle. Charles Munger is a brilliant thinker and it’s no surprise that the book is full of practical wisdom.

Some of the points I took and used many times:

Incentives – He talks about the incentives and how they are in the root of many systems. One of the more powerful statements is: “If you wish to see what people will do – look at their incentives”. It holds true both to people and to teams & companies.

Bias – How the human mind is closing itself after it ‘knows’ something. That might be really hard when you want to change your thoughts on a topic. You should embrace people who think differently and aren’t agree with you on every topic. It’s not easy but rewarding and will improve your decisions.

What you see and what you just think you see – If you know what you understand (and what not), you know where you have an edge over others. When you are honest about where your knowledge is lacking you know where you are vulnerable and where you can improve. Understanding your circle of competence improves decision making and outcomes because it force you to consult with experts that compensate on the lack of knowledge.

First principles thinking – One of the best ways to reverse-engineer complicated situations and unleash creative possibility. It’s a tool to help clarify complicated problems by separating the underlying ideas or facts from any assumptions based on them. What remains are the essentials. If you know the first principles of something, you can build the rest of your knowledge around them to produce something new.

Second-Order thinking or long term thinking – Almost everyone can anticipate the immediate results of their actions. This type of first-order thinking is easy and safe but it’s also a way to ensure you get the same results that everyone else gets.
Second-order thinking is thinking farther ahead and thinking holistically on the macro picture and not the next month.
It requires us to not only consider our actions and their immediate consequences but the subsequent effects of those actions as well. Failing to consider the second and third order effects can unleash disaster. It’s sort of a ‘guided plan’ that take into account ‘few’ steps down the road.

Thought experiment – Many disciplines, such as philosophy and physics, make use of thought experiments to examine what can be known. It’s a powerful tool for business and not a lot of companies are using in their day to day process.
In doing so, they can open up new avenues for inquiry and exploration. Thought experiments are powerful because they help us learn from our mistakes and avoid future ones.

Probabilistic thinking – Probabilistic thinking is essentially trying to estimate, using some tools of math and logic, the likelihood of any specific outcome coming to pass. It is one of the best tools we have to improve the accuracy of our decisions. The world is not black or white nor it’s zero and one. We should try to attached probabilities to the bets we are making. Many organizations started to do so and it’s giving them a real competitive advantage. A great book I read on the topic last month was “Thinking in Bets”.

The map is not the territory – Even the best maps are imperfect because they are just reductions of what they represent. If a map were to represent the territory with perfect fidelity, it would no longer be a reduction and thus would no longer be useful to us. A map can also be a snapshot of a point in time, representing something that no longer exists. This is important to keep in mind as we think through problems and make better decisions.

Inversion / Think the opposite – Inversion is a powerful tool to improve your thinking because it helps you identify and remove obstacles to success. The root of inversion is “invert,” which means to turn upside down. As a thinking tool, it means approaching a situation from the opposite end of the natural starting point. Most of us tend to think one way about a problem: forward. Inversion allows us to flip the problem around and think backward. Sometimes it’s good to start at the beginning, but it can be more useful to start at the end.

The Razors:

Occam – Simpler explanations are more likely to be true than complicated ones. This is the essence of Occam’s Razor, a classic principle of logic and problem-solving. Instead of wasting time trying to disprove complex scenarios, you can make decisions more confidently by basing them on the explanation that has the fewest moving parts.

Hanlon – Hard to trace in its origin, Hanlon’s Razor states that we should not attribute to malice that which is more easily explained by stupidity. In a complex world, using this model helps us avoid paranoia and ideology. By not generally assuming that bad results are the fault of a bad actor, we look for options instead of missing opportunities.
This model reminds us that people do make mistakes. It demands that we ask if there is another reasonable explanation for the events that have occurred. The explanation most likely to be right is the one that contains the least amount of intent.

Below is the full speech by Charlie Munger on the psychology of human misjudgment given at Harvard University circa Jun 1995. I’m sure many will keep learn from it in the future.

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