1: Getting better at getting better is what RiseWithDrew is all about.
Monday through Thursday, we explore ideas from authors, thought leaders, and exemplary organizations.
On Fridays, to begin 2025, I will be sharing some of the wit and wisdom of the late, great Charlie Munger, Warren Buffett‘s business partner and the former Vice Chairman of Berkshire Hathaway.
Charlie developed a set of mental models that he used to analyze investment opportunities and understand life. He took particular pleasure in identifying our psychological tendencies as human beings.
Living life, Charlie writes in Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger, “I was soon surrounded by much extreme irrationality, displayed in patterns and subpatterns. . .
So, what did Charlie do? “I slowly developed my own system of psychology,” he explains.
Today and on Fridays to follow, we will explore some of Charlie’s realizations about the psychology of human beings.
2: Today’s lesson builds on last Friday’s post about the fierce power of incentives to drive human behavior.
“Human nature, bedeviled by incentive-caused bias,” Charlie reasons, “causes a lot of ghastly abuse under these standard incentive patterns of the world.”
He received an early education in the power of incentives from the leading hospital in his grandfather’s town of Lincoln, Nebraska.
A surgeon was sending “bushel baskets full of normal gallbladders down to the pathology lab,” Charlie writes. The practice went on for many years before the crime was discovered.
Charlie asked a family friend, a doctor who participated in the doctor’s removal, “Did this surgeon think, ‘Here’s a way for me to exercise my talents and make a high living by doing a few maimings and murders every year in the course of routine fraud?'”
The friend responded: “Hell no, Charlie. He thought that the gallbladder was the source of all medical evil, and if you really loved your patients, you couldn’t get that organ out rapidly enough.”
Our ability to rationalize our bad behavior is “one of the most important consequences of incentive superpower,” Charlie notes. “A man has an acculturated nature, making him a pretty decent fellow, and yet, driven both consciously and subconsciously by incentives, he drifts into immoral behavior in order to get what he wants. . .
“Now, that’s an extreme case, but in lesser strength, the cognitive drift of that surgeon is present in every profession and in every human being,” he writes. “And it causes perfectly terrible behavior.”
Last week we looked at this principle at work to positive effect at Federal Express [hyperlink to last Friday’s RWD], where the power of incentives resulted in the planes getting loaded on time to facilitate next-day delivery, and to negative effect at Xerox [hyperlink to last Friday’s RWD] where sales people were harming customers by maximizing their sales commissions.
“Economists, speaking from the employer’s point of view,” Charlie writes, “have long had a name for the natural results of incentive-caused bias: agency cost.”
Other examples? “Consider the presentations of brokers selling commercial real estate and businesses,” he observes. “I’ve never seen one that I thought was even within hailing distance of objective truth.”
Or, Charlie reflects, “In my long life, I have never seen a management consultants report that didn’t end with the same advice: ‘The problem needs more management consulting services.'”
3: Charlie advises: “Widespread incentive-caused bias requires that one should often distrust or take with a grain of salt the advice of one’s professional adviser, even if they are an engineer.”
What can we do to protect ourselves?
First, “especially fear professional advice,” he recommends, “when it is especially good for the adviser.”
Second, “learn and use the basic elements of our adviser’s trade as we deal with your adviser.”
And third, “double-check, disbelieve, or replace much of what we’re told, to the degree that seems appropriate after objective thought.”
More next week!
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Reflection: Think about a current sticky situation at work. What role might incentives play? Is there an opportunity to change the incentives to achieve the desired result?
Action: Discuss with a colleague or with my team.