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 to understand life. He took particular pleasure in identifying our psychological tendencies as human beings.
“I was soon surrounded by much extreme irrationality, displayed in patterns and subpatterns,” Charlie writes in Poor Charlie’s Almanack, “So surrounded, I could see that I was not going to cope as well as I wished with life unless I could acquire a better theory-structure on which to hang my observations and experiences.”
So, what did he 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: The last two Fridays [here and here], we’ve examined why we must be fully aware of the fierce power of incentives. Because, in a given circumstance, the right incentive may result in otherwise irrational or suboptimal behavior.
Today, we will look at the power of disincentives or penalties to impact how we show up.
“I frequently cite the example of having your career over in the Navy if your ship goes aground, even if it wasn’t your fault,” Charlie writes.
“I say the lack of justice for the one guy who wasn’t at fault is way more than made up by a greater justice for everybody when every captain of a ship always sweats blood to make sure the ship doesn’t go aground.”
But is that “fair”?
“Like most worldly outcomes,” he explains, “the craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us.”
Isn’t that too tough a standard? What about due process?
Charlie’s opinion: “Well, the Navy model really forces people to pay attention when conditions are tough, because they know that there’s no excuse.”
3: Stiff penalties also result in positive behavior in other circumstances.
“For instance,” Charlie observes, “illegal price fixing was fairly common in America when it was customarily punished by modest fines. Then, after a few prominent business executives were removed from their eminent positions and sent to federal prisons, price-fixing behavior was greatly reduced.”
The military, he reasons, has a long history of employing severe penalties to change behavior: “Probably because they needed to cause extreme behavior.”
Exhibit one: “After the Defense Department had much truly awful experience with misbehaving contractors,” he explains, “the reaction of our republic was to make it a crime for a contracting officer in the Defense Department to sign such a contract—and not only a crime but a felony.”
Exhibit two: “George Washington,” Charlie notes, “hanged farm-boy deserters 40 feet high as an example to others who might contemplate desertion.”
And finally: “Around the time of Caesar,” he writes, “there was a European tribe that, when the assembly horn blew, always killed the last warrior to reach his assigned place, and no one enjoyed fighting this tribe.”
Mic drop. Charlie wishes you a wonderful weekend.
More next week!
____________________________
Reflection: What circumstances warrant extreme penalties to influence human behavior?
Action: Discuss with a family member, friend, or colleague.
What did you think of this post?
