Thursday, October 05, 2006

Munger on Human Misjudgments

Behavioural finance is a vital subject that need to be learnt and understood to be a great investor.

Excerpt from Motley Fool's article by Whitney Tilson


Charlie Munger gave an insightful speech a few years ago at Harvard Law School on "24 Standard Causes of Human Misjudgment." The message has powerful implications for investors. Whitney Tilson summarizes some of the key points......

Bias from consistency and commitment tendencyMunger explains this bias with the following analogy: "The human mind is a lot like the human egg, and the human egg has a shut-off device. When one sperm gets in, it shuts down so the next one can't get in." In other words, once people make a decision (to buy a stock, for example), it becomes extremely unlikely that they will reverse this decision, especially if they have publicly committed to it........

Big-shot businessmen get into these waves of social proof. Do you remember some years ago, when one oil company bought a fertilizer company, and every other major oil company practically ran out and bought a fertilizer company? And there was no more damned reason for all these oil companies to buy fertilizer companies, but they didn't know exactly what to do, and if Exxon was doing it, it was good enough for Mobil, and vice versa. I think they're all gone now, but it was a total disaster....


To read the complete article.

Happy learning,


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