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    The psychology of human misjudgment  vi The psychology of human misjudgment vi Presentation Transcript

    • The Psychology of HumanMisjudgment- VI
    • Bias # 9Incentives & Incentive- caused bias
    • “People Respond to incentives.” The rest is commentaryMost of economics can be summarized in four words: “People Respond toincentives.” The rest is commentary- Steven Landsburg
    • Example 1Freakonomics
    • Read the book (and its sequel Superfreakonomics), watch the movie.YouTube - Freakonomics - Official Trailer [HD]http://www.youtube.com/watch?v=56k1xVAq290These two guys have done some wonderful work on “incentives.”Subscribe to their old blog:Opinion - Freakonomics Blog - NYTimes.comhttp://freakonomics.blogs.nytimes.com/And the New one:http://www.freakonomics.com
    • Example 2Demand Curve
    • Price and Demand are inversely related. Provide two exceptions where to increase demand, you should increase price.1. Price associated with quality2. Bribe the customer’s agent to push the product - invoking one the mostpost powerful psychological tendencies - the superpower of incentives
    • Boiler Room Scene demonstrating incentive superpower
    • Boiler Room Scene demonstrating incentive superpower
    • Boiler Room Scene demonstrating incentive superpower
    • Boiler Room Scene demonstrating incentive superpower
    • Are there “functional equivalents” of boiler room operations?cocaine, mutual fund units, penny stocks in boiler rooms, medical drugs,time shares, insurance - ANY product with a fat commission behind it. Nomatter how toxic, it WILL get pushed.Micro-lending in Andhra Pradesh.
    • Yes! “Any time you create large differences in commissions wherethe guy gets X% for selling A, which is some mundane thing, and 10 times X for selling B, which is something toxic, you know what’s going to happen.”
    • You’ll get lots of B despite its toxicity.Moreover it willget rationalized. Man is not arational animal,rather man is a rationalizing animal
    • I-C Bias is so pervasive it occurs in all professions.Lawyers make clients litigate more than its necessary.
    • Doctors prescribing unsuitable medication because its in their own selfinterest.
    • Read this blog post I did in 2007:Fundoo Professor: Incentive-caused Bias in the Medical Professionhttp://fundooprofessor.blogspot.com/2007/11/incentive-caused-bias-in-medical.htmlRead original article from:http://www.nytimes.com/2007/11/25/magazine/25memoir-t.html?
    • Auditors would overlook accounting irregularities and so on…Client: How much is 1+1?Auditor: How much do you want it to be?
    • Example 3Credit Rating Agencies
    • Read this:Market Shock: AAA Rating May Be Junk - New York Timeshttp://select.nytimes.com/2007/07/20/business/20norris.html?_r=1
    • Read this:http://www92.homepage.villanova.edu/shawn.howton/Fin%202227/articles/subprimemess.pdf
    • The process of converting something toxic to something pure…This is the alchemy of finance.
    • Read this:Op-Ed Columnist - All Fall Down - NYTimes.comhttp://www.nytimes.com/2008/11/26/opinion/26friedman.html
    • “Whose bread i eat, his song i sing”“Fear professional advice especially when it is good for the advisor.”“Double check, disbelieve, or replace much of what you’re told, to thedegree that seems appropriate after objective thought”
    • Michael AronsteinI love this quote...“Of the many advances in the long history of commerce, the advent of sausage standsout as one of the greatest...
    • “The idea of taking something which, in pure form, would be repellent to potential customers, and by thorough grinding, mixing, reshapingand adulterating, creating an entirely new entity that could be marketed free from the taint of its original ingredients, marked a milestone inthe annals of business thought. Sausage making is the prototype for an entire class of merchandising technique that has become particularlycommon in modern finance. The financial marketer who uses commingling as an approach is responding to the same general conditions thatdrive the sausage stuffer: an abundance of lower grade ingredients along with hungry and credulous public.” – Michael AronsteinBe Wary of Financial Innovation…The guys who do it keep on re-inventing the wheel and hoodwink you into believing that what they are doing “this time, its different.”Galbraith once wrote: “All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy byreal assets … All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlyingmeans of payment.”He was right as you’ll discover when you read “The Great Crash 1929”
    • Munger advices you to never ask the barber if you need a haircut.
    • Example 4 Tobacco
    • Scene from “Thank you for smoking”YouTube - Thank You For Smoking Movie (1/9)http://www.youtube.com/watch?v=4HC3xwlfcFMThis is a great movie which highlights a man who is a lobbyist for thetobacco industry, does a brilliant job, and faces no cognitive dissonancebecause he is doing it “for the money.”However everything changes in the last scene...
    • Scene from “Thank you for smoking”YouTube - Thank you for smoking part 4/9http://www.youtube.com/watch?v=Ft9kOLfd0Vs&feature=relatedSee from 6:55 onwards
    • Scene from “Thank you for smoking” Experiencing Cognitive dissonancehttp://www.youtube.com/watch?v=3Quv3ZYf72Q&feature=relatedSee from 5:42 onwardsAndhttp://www.youtube.com/watch?v=h9n-UdMhBNQ&feature=relatedWhen you take up a job, you will have the same problem. All professions have this problem ofincentive-caused bias, when you fool yourself into believing that what’s good for you is alsogood for your client. And so, you will find yourself selling overpriced and unsuitable insurance,addiction, unsuitable products (e.g. tech mutual funds on the top of a tech boom to widowsand orphans) just for the money...I-C Bias is very pervasive. What’s the solution?According to Munger, the solution is financial independence.
    • “Whose bread i eat, his song i sing”“Any time you create large differences in commissions where the guy gets X% for selling A, which is some mundane thing, and 10 times X for selling B,which is something toxic, you know what’s going to happen.”“Fear professional advice especially when it is good for the advisor.”“Double check, disbelieve, or replace much of what you’re told, to thedegree that seems appropriate after objective thought”
    • Example 5Peddling Leveragein USA - taking 2nd mortgages for consumption
    • rather go to bed supperless than rise in debt - Ben franklinThis is the story of a founding father of one of the greatest nations - USA,and the subsequent behavior of its citizens and its businesses.This is the story of debt, and how it got pushed like a drug because therewas “money in it”All you MUST read the following books by Franklin.Poor Richard’s AlmanakThe Way to Wealth
    • Frankin gave some very valuable advice to his citizens…look what they did and look how they were pushed into this by the“extremes of capitalism”
    • "But what madness must it be to run in debt for these superfluities? We are offered bythe terms of this sale, six months credit; and that, perhaps, has induced some of us toattend it, because we cannot spare the ready money, and hope now to be fine withoutit. But, ah! think what you do when, I you run I in debt you give to another power overyour liberty. If you cannot pay at the time, you will be ashamed to see your creditor; youwill be in fear when you speak to him; you will make poor, pitiful, sneaking excuses,and, by degrees, come to lose your veracity, and sink into base, downright lying; forThe second vice is lying, the first is running in debt, as Poor Richard says.”The love of debt, like any addiction, WILL result in breakdown of morality.
    • its hard for anempty sack to stand upright - ben franklin
    • I love this one…
    • Example 6 Peddling Leveragein USA - Credit card debt
    • http://www.youtube.com/watch?v=ysyFqkHXuscAddiction to debt - promoted by Mastercard.Take a good idea (credit cards), then take it to the extreme (as capitalismdoes), and then see what happens. It results in DISASTER every time.
    • Watch this documentary:http://topdocumentaryfilms.com/maxed-out/How are the credit card companies any different than Shakespeare’s Shylock in “The Merchant of Venice?” Alsosee:Super size Mehttp://freedocumentaries.org/film.php?id=98And think about the cognitive dissonance faced by managers of McDonalds if they see this film...
    • Maxed Out | Watch Free Documentary Onlinehttp://topdocumentaryfilms.com/maxed-out/
    • “Whose bread i eat, his song i sing”
    • since The borrower is a slave to the lender and the debtor to the creditor, disdain the chain, preserve your freedom; and maintain your independency. - benjamin franklinWho says slavery has gone?Its here - alive and kicking. All those people who will work all their lives fortheir credit card companies? Who are these people? If they are not slavesthen what are they?
    • silk and satins, scarlets and velvets,put out the kitchen fire- ben franklin
    • Maxed Out | Watch Free Documentary Onlinehttp://topdocumentaryfilms.com/maxed-out/
    • Maxed Out | Watch Free Documentary Onlinehttp://topdocumentaryfilms.com/maxed-out/Role of financial independence- Makes you see things as they really are.Its very tough for someone who is not financially independent to escape from the clutches of incentive-cased bias…
    • Its difficult to get a man to understand something, when hissalary depends upon his notunderstanding it - Upton sinclair
    • “Whose bread i eat, his song i sing”“Fear professional advice especially when it is good for the advisor.”“Double check, disbelieve, or replace much of what you’re told, to thedegree that seems appropriate after objective thought”
    • Example 7diet and the FastFood and Pharma Industries
    • Me two years agohttp://en.wikipedia.org/wiki/Super_Size_Me
    • Fat, Sick, and Nearly Deadhttp://www.youtube.com/watch?v=x9SGWcZwk7c
    • Forks over kniveshttp://www.youtube.com/watch?v=O7ijukNzlUg
    • Food Mattershttp://www.youtube.com/watch?v=r4DOQ6Xhqss
    • Promptly resolve cognitive dissonance...
    • “Whosebread i eat, his song i sing”
    • Example 8Investment Banking
    • Investment banker making a pitch to clients.
    • Why potential buyers even look at projections prepared by sellers baffles me. Charlie and Inever give them a glance, but instead keep in mind the story of the man with an ailing horse.Visiting the vet, he said: "Can you help me? Sometimes my horse walks just fine andsometimes he limps." The vets reply was pointed: "No problem – when hes walking just fine,sell him." ... At Berkshire, we have all the difficulties in perceiving the future that otheracquisition-minded companies do. Like they also, we face the inherent problem that theseller of a business practically always knows far more about it than the buyer and also picksthe time of sale – a time when the business is likely to be walking "just fine." – WB
    • “This fishing tackle manufacturer I knew had all these flashy green and purplelures. I asked, ‘Do fish take these? “Charlie?’ he said, ‘Idon’t sell these lures to fish.’” — Munger
    • Game-able systems leading to unintended consequences(Peltzman effect)
    • Take a look at this commercial. It has all the attributes of an effectivecommercial. See for yourself:YouTube - Awesome "Buckle Up" PSA Commercialhttp://www.youtube.com/watch?v=m6ZKVdKTWww
    • The PSA commercial on previous slide was persuasive, but was it right?Take a look at this:YouTube - Sam Peltzman on the Peltzman Effecthttp://www.youtube.com/watch?v=7IB2xRfRHOAPeltzman effect - Wikipedia, the free encyclopediahttp://en.wikipedia.org/wiki/Peltzman_effectThe Peltzman effect is a contributing factor in the explanation of Smeeds Law, an empirical observation that traffic fatality rates in many countries are correlated with the number ofvehicle registrations per capita, and differing safety standards do not appear to be significant.Peletzman effect is a mental model which tells you to not ignore the second or third order effects like the designer of the incentive scheme which rewardedstudents a $1 for catching a rat on campus after all other efforts to get rid of the rats failed. Well, pretty soon, the students were breeding rats…People not only respond to incentives, sometimes one’s well-intentioned decisions result in perverse outcomes. We call that “perverse incentives.” Read moreabout this from:http://en.wikipedia.org/wiki/Perverse_incentive
    • are there “functionalequivalents” of the peltzman effect?
    • Example 9Price Controls
    • Oh Yeah?
    • Jim Rogers “You can either control the price, or the supply, but not BOTH!” See “Will Indian Steel Disappear?” Black Markets License raj Ration shopshttp://www.blonnet.com/2004/08/31/stories/2004083100111100.htmIf you fix price too low, supply will vanish!If you fix the supply (e.g. license raj) and then try to impose price controlsalso, you will see a black market emerge.Low price of diesel vs petrolSmugglers and black marketeers vs. Arbitrageurs
    • Cocaine Incorporated - The New York Times
    • http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/article3935602.ece?homepage=true
    • Example 10Credit default swaps
    • Pitched as an “insurance product”What happens when CDS are bought by hedge funds with no insurableinterest?i.e. who have nothing to lose from the demise of the corporation, are not“insurance” in the true sense of the word.
    • Leaking bad news to mediaPlanting false storiesPressurizing bankersto recall their loans etc..
    • Example 9: Carol loomis on“The risk that won’t go away”
    • The risk that won’t go away The risk that STILL wont go away Law of conservation of riskhttp://money.cnn.com/2008/09/25/magazines/fortune/loomis_swamp.fortune/index.htmhttp://money.cnn.com/2009/06/22/news/economy/derivatives_regulation_risks.fortune/index.htmhttp://fundooprofessor.blogspot.com/2005/09/carol-loomis-risk-and-law-of.html
    • Example 11Wall Street Casino
    • Buffett’s column: How to tame the casino societyPerverse incentives out of low brokerage costs.
    • How does HE deal withincentives?
    • Example 12Scott Fetzer
    • What’s Causing This???
    • “In setting compensation, we like to hold out the promise of large carrots, but make sure their delivery is tied directly to results in the area that a manager controls. When capital invested in an operation is significant, we also both charge managers a high rate for incremental capital they employ and credit them at an equally high rate for capital they release.“The product of this moneys-not-free approach is definitely visible at ScottFetzer. If Ralph can employ incremental funds at good returns, it pays himto do so: His bonus increases when earnings on additional capital exceed ameaningful hurdle charge. “But our bonus calculation is symmetrical: Ifincremental investment yields sub-standard returns, the shortfall is costlyto Ralph as well as to Berkshire. The consequence of this two- wayarrangement is that it pays Ralph - and pays him well - to send to Omahaany cash he cant advantageously use in his business.”
    • Example 13 GEICO
    • “The bonuses received by dozens of top executives,starting with Tony, are based upon only two key variables:(1) growth in voluntary autopolicies and (2) underwriting profitability on “seasoned” auto business (meaningpolicies that have been on the books for more than one year).”
    • Example 14H.H. Brown
    • “A distinguishing characteristic of H. H. Brown is one of the most unusual compensation systems I’ve encountered - but one that warms my heart: A number of key managers are paid an annual salary of $7,800, to which is added a designated percentage of the profits of the company after these are reduced by a charge for capital employed. These managers therefore truly stand in the shoes of owners.” “In contrast, most managers talk the talk but dont walk the walk, choosinginstead to employ compensation systems that are long on carrots but shorton sticks (and that almost invariably treat equity capital as if it were cost-free). The arrangement at Brown, in any case, has served both the companyand its managers exceptionally well, which should be no surprise: Managerseager to bet heavily on their abilities usually have plenty of ability to beton.”
    • Example 15Ending the deficit
    • “If you were to persuade, appeal to interest not reason” - Ben franklin
    • Bias # 10 PavlovianAssociation
    • This is the famous dog of pavlov who learnt to salivate at the sound of abell.The human equivalent of the pavlovian dog is there in all of us.
    • Invert,AlwaysInvert :-)
    • pattern seeking is pavlovian misassociation
    • Looking for trends when there aren’t anyAssociating Trend with DestinyWill this stock keep going up? vs. Has this stock been going up?Mind looks for patterns in things that are random.
    • Michael Shermer: Pattern Seeking Videohttp://www.ted.com/talks/michael_shermer_on_believing_strange_things.html
    • Pavlovian Association
    • Pavlovian Association
    • Restaurants stopped serving tandoori items and sale of tandoors plunged...
    • High priceassociatedwith high quality e.g.Nakshatra diamondsmade by De Beers
    • Advertisers demonstrate the power of positive associations by constantly connecting their products with the things we like.Advertisers demonstrate the power of positive associations by constantly connectingtheir products with the things we like.Girl Models next to Car ModelsLending positive traits of beauty and desirabilityYou won’t see Coke advertised alongside some account of the death of a child. Instead,Coke ads picture life as happier than reality.
    • “Throwing the baby out with the bathwater”“If Satyam Computers is a fraud, then all IT companies are frauds, so I amgoing to dump them all.” - Mr. MarketUnder what circumstances, Mr. Market would be wrong?
    • Painting Everythin g with the same brush“Painting everything with the same brush”A drop in price of steel is bad news for ALL steel companies, so I am goingto dump them all.” - Mr. Market.Under what circumstances, Mr. Market would be wrong?
    • “Our inferential machinery, that we use in daily life, is not made for a complicated environment inwhich a statement changes markedly when its wording is slightly modified. Consider that in aprimitive environment there is no consequential difference between “most killers are wild animals”and “most wild animals are killers.” The error here is almost inconsequential.“Our statistical intuitions have not evolved for a habitat in which these subtleties can make a bigdifference.”
    • between 1983 and 1993, when butter production was up 1%, the S&P 500 was up 2% the next year. Conversely, if butter production was down 10%, S&P 500 DECLINED BY 20%.Co-relation and causation
    • Insensitivity to Base Rates (Probability unconditioned on featured evidence)Base rate is the probability unconditioned on featural evidence, frequently alsoknown as prior probabilities. For example, if it were the case that 1% of thepublic are "medical professionals" and 99% of the public are not "medicalprofessionals," then the base rates in this case are 1% and 99%, respectively.
    • “In all free-enterprise attitudes there is a strong tendency to believe thatthe more money, either as income or assets, of which an individual ispossessed, the deeper and more compelling his economic and socialperception, the more astute and penetrating his mental processes. In aworld where for many the acquisition of money is difficult... the possessionof it in large amount seems a miracle. Accordingly, possession must beassociated with some special genius.”- Galbraith
    • Mis-associating good outcomes with skill (stock market swindle, massivelyoutperforming fund etc.)Mis-associating bad outcomes with bad processUnder-appreciation of role of luck
    • Role of Luck
    • Summer of 2000
    • Simone Tata, Chairperson of Trent & Stepmother of Ratan Tata,Chairman of the Tata Group http://en.wikipedia.org/wiki/Simone_Tata
    • 20021.In 2002, a class-project report on a company called Trent landed on my table and when I opened it my eyespopped out again!2.Lakme, a highly valued cosmetics company had, some time back, sold off its brands to Unilever. Lakme wascontrolled by the Tata’s one of India’s largest business groups.3.The lady who was running the company, in her own wisdom decided to not distribute the money to the company’sstockholders. Instead, she announced a foray into retail business of running departmental stores - TRENT -WESTSIDE4.That market hated that decision - NEXT SLIDE
    • Trent’s Stock Price Chart1.Over the next few years, as retail boom took off, so did the stock - what webought for Rs 68 was now quoting at Rs 800.2.When someone asks me when will I buy a retail stock, my favorite answer is“when its free!”3.Value investing does have a tendency to spoil you!4.The key lesson here is that while we may try to be catalysts in unlocking value, tosucceed here is not a precondition - there may be OTHER catalysts in place will willgive you a very nice exit.
    • “Chance favors theprepared mind.” - Louis Pasteur
    • http://en.wikipedia.org/wiki/SerendipityYou find something when you’re not looking for it.do not ignore the importance of accidental discoveries - events, meetings, chancehappenings - keep an open mind to all possibilities.
    • I love what Taleb has to say about inventions, how almost all of the discoveries that have had tremendous impact on our culture were accidents in the sense that they were discovered while searching for something else. Arlene Goldbard, Blogger“Because of hindsight bias, he says, histories of economic life and scientific discoveries are writtenwith straightforward story lines: someone set out to do something and succeeded, it’s all aboutintention and design. But in truth, “most of what people were looking for, they did not find. Mostof what they found they were not looking for. Penicillin was just some mold inhibiting the growthof another lab culture; lasers at first had no application but were thought to be useful as a form ofradar; the Internet was conceived as a military network; and despite massive National CancerInstitute-funded cancer research, the most potent treatment—chemotherapy—was discovered as aside-effect of mustard gas in warfare (people who were exposed to it had very low white blood cellcounts). Look at today’s biggest medical moneymakers: Viagra was devised to treat heart diseaseand high blood pressure.”
    • Chains of habit are too light to be felt ... ... until they are too heavy to be broken - Warren BuffettDon’t take the same route to office, don’t listen to same type of music, don’t read papers from frontpage, don’t order from a menu from starters to desserts, expose yourself to different cultures - youdon’t know what you idea might stumble upon…and when u get that flash of inspiration - your idea - JOT it down - some of the best business plans were madeon napkinsAllow one thing to lead to another (serendipity)Be connected- Linkedin, Facebook, etc…
    • “Go where events flow fastest. Surroundyourself with a churning mass of people and things happening.”
    • “But why is she in the right places at the right times? Because she has made the effort to be in many places at many times. Fate has given her a lucky break, but she has earned it. She has positioned herself for it.”Drop what you’re doing when you get an interesting opportunity, call etc - DONT IGNORE IT!
    • “It is a fundamental assumption of the Work Ethic that people ought to have goals and should struggle toward them in a straight line. We are counseled to fix our eyes on our goals, looking neither to the right nor to the left, refusing to be distracted. Max Gunther This is supposed to be the sure route to success. But here is a puzzling fact. It turns outthat lucky men and women, on the whole are not straight-line strugglers. They not onlypermit themselves to be distracted, they invite distraction. Their lives are not straight linesbut zigzags.”
    • Herb Simon "I have encountered many branches in the maze of lifes path, where I have followed now the left fork, now the right. . . .In describing my life as maze-like, I do not mean that I have a large number of deliberate, wrenching decisions to go off in one direction or another.On the contrary, I have made very few. Obvious responses to opportunities andcircumstances, rather than studied decisions, have put me on the particular roads I havefollowed."
    • “The lucky... are aware that life is always going to be a turbulent sea of opportunities drifting randomly past in all directions.”“If you put blinders on yourself so that you can see only straight ahead, you will miss nearlyeverything. This is what the unlucky typically do. They stick to preplanned life routes evenwhen they are going nowhere or are actually plodding downhill to disaster.”- Max Gunther
    • Search strategy - I do not ignore serendipity The Rabbit Runs Faster than the Fox because the Fox is only running for his dinner while the rabbit is running for his life.Ideas can come from screens, company management interaction, reading “news” - ignoremacroeconomic, focus on company specific - management interviews or make up ur ownnews by looking at fundamental, slow but long-term changes happening to companies.ideas come from reading books from multiple disciplines, even Aesop fables.Rise in the price of a raw material leads to the idea of looking at the company which suppliesthe raw material
    • Bias # 11 REASONRESPECTING TENDENCY
    • “Excuse me. I have five pages. May I use the Xerox machine?” Compliance Rate: 64%Reason Respecting TendencyThe word “because” is one of the most powerful words in English.
    • “Excuse me, I have five pages. May I use theXerox machine because I am in a rush?”Compliance Rate: 94%
    • “Excuse me. I have five pages. May I use the Xerox machine because I have to make some copies?” Compliance Rate:93%Implication for us:Because people want reasons which explain why something happened, there are people whomaterialize to offer reasons even when there isn’t any.
    • Bias # 12PAIN REDUCINGPSYCHOLOGICAL DENIAL
    • I call this the “Dam Fools” Model - Pain Reducing Psychological Denial. This from Jared Diamond:“The last reason that I shall mention for irrational failure to try to solve a perceived problem is psychological denial. This is a technical term with aprecisely defined meaning in individual psychology, and it has been taken over into the pop culture. If something that you perceive arouses anunbearably painful emotion, you may subconsciously suppress or deny your perception in order to avoid the unbearable pain, even though thepractical results of ignoring your perception may prove ultimately disastrous. The emotions most often responsible are terror, anxiety, and sadness.Typical examples include refusing to think about the likelihood that your husband, wife, child, or best friend may be dying, because the thought isso painfully sad, or else blocking out a terrifying experience. For example, consider a narrow deep river valley below a high dam, such that if thedam burst, the resulting flood of water would drown people for a long distance downstream. When attitude pollsters ask people downstream of thedam how concerned they are about the dams bursting, its not surprising that fear of a dam burst is lowest far downstream, and increases amongresidents increasingly close to the dam. Surprisingly, though, when one gets within a few miles of the dam, where fear of the dams breaking ishighest, as you then get closer to the dam the concern falls off to zero! That is, the people living immediately under the dam who are certain to bedrowned in a dam burst profess unconcern. That is because of psychological denial: the only way of preserving ones sanity while living immediatelyunder the high dam is to deny the finite possibility that it could burst.”There is much denial in the world of business. Witness what’s happening in the banking sector right now.
    • A Cocoon of Unreality
    • Refusal to look at stock market pages when facing massive losses vs. doing frequent marking to market ofportfolios during bull runs
    • “I think its in the nature of things for some businesses to die. Its also in the nature of things that in some cases, you shouldn’t fight it...“There’s no logical answer in some cases except to wring the money outand go elsewhere. And that’s very tough for managements to do. In fact,they almost never face up to that. It’s very rare.” — Munger.
    • Perverse incentives:Restructured assets - DenialEvergreeningThrowing good money after bad.
    • “I dont want you to think we have anyway of learning or behaving so you wont make mistakes. Im just saying that you can learn to make fewer mistakes than other people - and how to fix mistakes faster when you do make them...
    • “But theres no way you can live anadequate life without making many mistakes.
    • In fact, one trick in life is to get so youcan handle mistakes. Failure to handlepsychological denial is a common way for people to go broke...
    • “Youve made an enormous commitment to something.The more the effort and money you’ve poured in, the more the wholeconsistency principle makes you think: "Now it has to work, If I put in just a little more, then itll work.“ [Contrast- boiling frog]
    • And deprival super-reaction syndrome also comesin:Youre going to lose the whole thing if you dont put in a little more. People go broke that way - because they cant stop and rethink and say: "I can afford to write this one off and live to fight again. I don’t have to pursue this thing as an obsession - in a way that will break me...
    • Part of what you must learn is to handle mistakes and new facts that change the odds. Life, in part, is like a poker game,wherein you have to learn to quit sometime when holding a much-loved hand.”
    • Thank You