Thursday, April 3, 2014

Scam Psychology: Charlie Munger on How You Screw Up: Part 3 of 6

Charlie Munger
Charlie Munger (Photo credit: Wikipedia)
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.  Please also check out the previous sections 1-4, and 5-8


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".  Here is 9 through 12

9) Failure to Recognize Contrast Bias

Contrast bias is simple to explain... If I give you one item and ask you to rate it, you will give your honest opinion. However, if I have you rate that item, plus an HORRIBLE item, that original item will be rated higher, on the average, because there's a contrasting item.

Here's a simple experiment by Professor Cialdini. Two buckets of water, one quite cold, one quite hot (neither will actually harm). Volunteers are asked to put one hand in hot water and one hand in cold water for 5-10 seconds. Then both are removed and placed in the same bucket of water. The hand what was in hot water now feels cold, and the hand what was in cold water now feels warm/hot, but they are feeling the SAME bucket of water. It's the contrast that makes the water feel hot or cold.

And this experience shows up everywhere. It's often recommended in some pickup artistry books that you bring along an ugly friend or two to make yourself look better. This is the same idea: contrast.

A somewhat anecdotal and apocryphal real estate sales technique if you want to get rid of a not-so-good property is you show the prospects two really awful properties, have them go tsk-tsk and shake their head, then you take them to this "better" property, and they'll probably bite.

On the flip side, without a contrast or a measure against a neutral background (control group), you may not be aware of creeping changes. This can be termed "anti-contrast bias".

Then there's the "boiled frog" urban legend, where the claim is if you put a frog in a pot of water, but you cook it VERY VERY slowly, the frog will never jump out. It's not true, but it's an interesting legend and illustrates this point. You can "creep" in changes and if the movement is small enough it may escape notice.

So beware of this being used on you... Either a special contrast example is used to make a position to look better or worse than it really is... this coercing a bias, or someone tried to "creep" in some changes and rely on your momentum bias to say nothing.

10) Failure to recognize Over-influence by authority

Authority is NOT always right, yet many people will do something just because an authority said so. 

One of the most famous is the Milgrim experiment, where people are asked to apply electrical shocks to another participant who appears to be a great pain or possibly fatal distress. And a lot of people will do it, because an anonymous voice over the speakers ordered them to. 

There's another case where an Asian airline had a series of accidents ordered a full safety review, and by observing pilots and copilots in simulators, it was found that copilots, being the junior in the cockpit, often will NOT override the pilot even when it is BLATANTLY obvious that the pilot is endangering the plane. In 25% of the test cases, the copilot actually allowed the pilot to crash the plane and did NOTHING.

In fact, it's currently suspected that the Asiana crash in SFO was caused by one such "failure to intervene". 

There's another case that a McDonald's supervisor in Mt. Washington, Kentucky, was ordered by a "detective" over the phone to strip search one of the employees. It may have been pranks perpetrated by one man. But are you *sure* when you get an order from someone of authority, you won't refuse?

Yet network marketing is dominated by authorities. Upline is an authority. People who got in before you and allegedly made ton of money are "authorities". Company head are authorities. 

Beware when an "authority" appear to have overstepped his/her bounds. Just because they are an authority doesn't make them right.

11) Failure to Recognize Fear of Loss (Loss Aversion) Bias

People don't react to gain and loss by the same proportions. Once you have something, you will NEVER give it up without some huge fight. It's much like trying to take food out of mouth of a dog... expect to get bitten. People are more willing to avoid loss than to seek gains. 

Ask yourself this question. Say, if I flip a coin, and it is heads, you lose $10. If it is tails, you gain X. What is the minimum of X that you will accept? Most people say $20. They need to see a possibility to GAIN $20 before they will consider losing $10, and that's assuming even odds.  Even though $11 should be quite acceptable. 

Loss aversion also shows up in strange places. One of the more devious "reload" scams is calling up a scam victim and promise to recover their money... If they pay a certain fee. Obviously, no recovery is possible. Yet loss aversion and promise of recovery is enough to get some victims to pay up... and be victimized again even if logically they should be "once bitten twice shy".

Loss aversion can also be flipped on its head... By convincing you that "you can't win if you don't play". Then of course they exaggerate the gain and minimize the risk to get over that "two to one" gain hump to get you to commit your money. 

Learn to spot loss aversion in yourself and others, and make sure you are making the best decision based on the present evidence, not just because you wish to avoid loss. 

12) Failure to recognize envy / jealousy bias. 

Envy is a serious enough bias to get a mention in the Ten Commandments and virtually every other religious text in the world. Warren Buffet once said "It's not greed that drives the world, but envy."  Which is why rising income did not produce a happier populace. Rising tide floats all boats. Humans are social creatures and acclaim (and contrast) is what drives the need to obtain more wealth, not greed. 

Envy is everywhere, from sibling rivalries to workplace politics and intrigue. Students who are liked by teachers are called "teacher's pets" by their rivals due to envy. etc. etc.

A research study posed the following question: which new employee would be happier, the person making $36,000 in a firm where the starting salary is $40,000 or the one making $34,000 where the average is $30,000?

Around 80% said $34,000 would make them happier.

Yet network marketing is constantly parading the winners. X just qualified for "ambassador!" Y just got rank "Diamond"! Z just got his $1000 bonus!  W just qualified for his "free" BMW!

They are out there to stoke your envy. They are out there to make you UNHAPPY. 

You need to understand the envy bias in your mind, and how it affects your decision making, so you can recognize when it is being used against you. 


Stay tuned for part 4 of 6! 

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