Sunday, March 9, 2014

Scam Psychology: Charlie Munger on How You Screw Up, Part 2 of 6

You may have heard of Charlie Munger. But if you haven't, you should have heard of his partner: Warren Buffet, one of the 5 richest man in the world.  In 1995, Charlie Munger gave a speech at Harvard... about how people misjudge things. Here's my personal interpretation of his lessons, as applied to network marketing. You can read the full speech.


In the speech given at Harvard in 1995, Charlie Munger identified what he called "24 standard causes of human misjudgment." What he really meant is "24 reasons why you screw up".  Read 1 through 4 here. Here is 5 through 8.

5) Not Understanding momentum bias and its causes

You are under the influence of other people every day, much like the dogs in Pavlov's famous experiment, so you have learned to associate two completely unrelated events, like the dogs salivate at the ringing of a bell, after they've been conditioned to associate bell with food. And you will continue to recognize the unrelated events as being related when they are not, and base your decisions on factors that were never relevant, or are no longer relevant. You have momentum bias.

Momentum bias is basically... that's the way it's always done... why change? Though there are some additional factors such a s Pavlovian association and how your mind looks in your memory and tries to find correlations... even when those aren't really applicable.

My dad once fixed a transmission problem by replacing the battery in a vehicle. Apparently the bad battery is confusing the computer and causing it to shift improperly. It is a very rare circumstance. However, ever since, my dad advocates "swap the battery" for all transmission problems even when it makes no sense. He has momentum bias. 

In terms of network marketing, you are trained early on that company = success and leaders = success, even though that may not be the case, and if you took that attitude with you to the next opportunity where it no longer applies, you have a momentum bias.

Learn to detect momentum bias in yourself and others. Do things because they are the proper decision for the time based on available evidence, not because "that's the way things are around here".

6) Not understanding reciprocation tendency / rising to expectations

Reciprocation tendency... If the other person asked you a request for A, you said "no way", then the other person retracted the request to be B (which is less than A), you are far more likely to say yes than if he had came right out and asked for B. You feel free to give in (a little) because the other side relented (a little).

Instead of making a decision based on the merits of evidence in front of you, you actually want to act in a way that is seemingly "fair", as well as consistent with what you did before (alternate form of momentum bias). That's a bias as you want to act as other people expect you to act. This is also known as "in for a penny, in for a pound".

This gets worse as you get into a system where there are little if any noticeable consequences (See "Stanford Prison Experiment") Your actions will change your actual view on the subject. You can be goaded  / coerced into doing things you would never contemplate doing... because people asked you to in certain coercive ways. And that's a bias.

Learn to detect reciprocation coercion and rising to expectations when it's used to influence you.

7) Not understanding bandwagon effect / over influence of social proof

"Everybody else is doing it" is not a reason, but an observation.

Network marketers are especially vulnerable to social proof... Because network marketing is social marketing, and relies on social proof. Look at our leader, so successful! He made X sales this month! He got promoted to level Y! He was at an award ceremony! He spend Z years in MLM! We should all be like him!

It's gotten so bad people are faking the social proof. Shill reviews, fake review sites, fake "certification" sites, fake "scam warning" sites, and much more are on the Internet now. There's even "reputation managers" that supposedly will help you bury other people's bad comments about you through both legal and potentially illegal means.

There's also the question... SHOULD you really follow someone else's decision, when it was basically a 'bet' made under uncertainty and stress? How do you know it's not a random pick or a coin-flip? Did you go backwards and look for the reasons he *may* have used to justify his actions? Or "if it's good enough for him, it's good enough for me"?  Is "keeping up with the Jones'" that important?

If you make your decision based on someone else's decision without full understanding of why s/he made such a decision, you are biased due to the bandwagon effect.

8) Not understanding Occam's razor isn't always right, esp. when it comes to human psyche

Human psyche is a weird mess, and often simple mathematical models are just too simple to be accurate, even though they sure *sounds* elegant.

Efficient Market Theory, for example, *assumes* that commodity and stock prices reflects all the information available about the commodity or stock being traded, and thus one cannot consistently profit from trading such over long-term without getting some sort of insider information. Clearly, this theory doesn't work that well, which is why the theory itself had splintered into "weak, semi-strong, and strong" versions. The market for commodity and stocks are a reflection of the human psyche, and that is impossible to measure but can sometimes be estimated.

Happiness Ratio is a junk science first published in 2005. It postulates that one must keep positive to negative emotions at a ratio of > 2.9013 to maintain happiness. One of the coauthor of the paper also published a book in 2009 touting the same 3 to 1 ratio. How did they come up with this number? Fluid dynamics equations called "Lorentz Equations". (WTF?!)  It was thoroughly debunked in 2013.  And it sure sounded simple and easy to follow.

Don't believe in simple theories or explanations just because they are simple, as Occam's Razor was often applied. Only when you are sure that competing theories are equally supported by evidence and you must choose one, THEN you should apply Occam's Razor. Lest you slice yourself instead.

To be continued! Wait for part 3 of 6!

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