Paul Bevelin focuses on 28 biases relevant to investors in his book: Seeking Wisdom: from Darwin to Munger. A book summary by Paul Asel, Managing Partner at NGP Capital.

1. Seeking Wisdom
From Darwin to Munger
ngp capital portfolio founders
Book by Peter Bevelin
Review by @PaulAsel, Managing Partner, NGP Capital

2. • “Search men’s governing principles, and consider
the wise, what they shun and what they cleave
to.” - Marcus Aurelius
• “Cherish some man of high character, and keep
him ever before your eyes, living as if he were
watching you, and ordering all your actions as if
he beheld them.” - Seneca
• “Decisions shouldn’t be evaluated only on the
basis of results. Even the best decisions are
probabilistic and run a real risk of failure, but the
failure wouldn’t necessarily make the decision
wrong.” - Robert Rubin, In an Uncertain World

3. Charlie Munger on Biases
• “I came to the psychology of human misjudgment
almost against my will; I rejected it until I realized that
my attitude was costing me a lot of money.” - Charles
Munger
• “If you want to avoid irrationality, it helps to
understand the quirks in your own mental wiring and
then you can take appropriate precautions.” -
Charles Munger
• “Buffet’s genius is largely a genius of character – of
patience, discipline and rationality … His talent
sprang from his unrivaled independence of mind and
ability to focus on his work and shut out the world.” -
Roger Lowenstein, Buffett: The Making of an
American Capitalist

4. Levels of Knowledge – Personal Investment Perspective*
Personal Awareness
MarketAwareness
Known
Known
Unknown
Unknown
Insight
Common
Knowledge
Insight
Blind Spot
Unknown
Unknowns
• Challenges
 Partial Knowledge: reality is the entire picture. We all
operate with imperfect, partial models
 Judgment: we are pre-wired with biases that impair
our judgment
• Uncertain World: good outcomes may come from poor
decisions; poor outcomes may come from good decisions
• Investment Objective: optimize decisions with available
information, opportunities
 Eliminate/reduce blind spots
 Increase/leverage insights
 Appropriately value common knowledge
 Margin of safety for unknown unknowns
• Key Success Factors:
 Expand opportunity horizon within optimal frame of
reference
 Optimize awareness through due diligence
 Make sound judgments with available information
* Summation, personal compilation from many sources

5. Table of Contents
Biases & Judgment Errors
Seeking Wisdom – Lessons from Munger, Buffett, others

6. Catalog of Biases & Judgment Errors
Biases Reviewed
1. Narrative Bias
2. Anchoring Bias
3. Crowd Folly
4. Over Optimism
5. Bias for Action
6. Status Quo Bias
7. Confirmation Bias
8. Survival Bias
9. Blind Spots
10. Deal Fever
11. Deprival Bias
12. Loss Aversion
13. Self-Interest
14. Association Bias
15. Liking Bias
16. Inattentiveness
17. Authority Bias
18. Recency/Vividness Bias
19. Wishful Thinking
20. Reciprocation Tendency
21. Selective Memory
* Cognitive Bias Codex identifies 191 biases, Risky
Business 117, Seeking Wisdom 28

7. Narrative Bias
• Definition: form fitting a story regardless of whether facts
support the full narrative
• Relevance: Bezos cites as major decision making concern with
Amazon memos
• “Our need for making sense makes us believe in nonsense.”
“Life is understood backward but must be lived forward.”
• Investor Significance: embeds other biases into self sealing
investment rationale
• Antidotes:
 Don’t confuse correlation with causation
 Look for alternatives: in hindsight, everything seems
obvious; if we look forward there are many possible
outcomes
• Consider: do investment memos help us identify false logic or
beguile readers to accept false logic and overlook contrary
evidence?

8. Anchoring Bias
• Definition: overweighing initial information as
reference for future decisions
• Relevance: entrepreneurs, prior rounds, bids,
comps, recent events preset our views
• Antidote:
 Buffett refuses to read banker prospectus
 consider choices from a zero base level
 focus on what you want to achieve
• Consider: are we over influenced by strong
promoters & current market prices?

9. Crowd Folly
• Definition: following trends, general behavior
unquestioningly (also Groupthink)
• “When everyone thinks alike, no one is thinking.” “When
all are accountable, no one is accountable.”
• Relevance: investors rely on social proof – references,
expert views, investor syndicates. Alpha is earned by
thinking different correctly
• Antidotes:
 “Obligation to dissent” - McKinsey
 Inverter – embed contrarian thinking in process
 Reject consensus deals
• Consider: the hardest fought deals have higher beta –
resulting in bigger winners & losers. When do we seek
consensus? Allow high conviction, contested deals?

10. Over Optimism
• Definition: overconfidence – 85% of people believe they
are above average (also Illusion of Control, Impact Bias)
• Relevance: investors overprice assets or take
unwarranted risks due to over optimism
• Buffett: “It’s the strong swimmers who drown.” “When
investing, pessimism is your friend.”
• Antidotes:
 Build in a margin of safety
 Inverter - seek contrary views
 Humility - Ask ‘What if I’m wrong?’
• Consider: With higher uncertainty, businesses require a
larger margin of safety. What is an appropriate VC
safety margin?

11. Bias for Action
• Definition: impatience even when inaction is the
best policy; overvalue current v. future options
• Relevance: eliminates future optionality, better
risk/reward settings, new companies
• Buffett: “Don’t confuse activity with results. There is
no reason to do a good job with something you
shouldn’t do in the first place.”
• Key Questions:
 Is time our friend or foe?
 Any unintended, higher order consequences?
 Weigh good/bad scenarios of any decision
• Consider: in what situations did we invest too early?
Too late?

12. Status Quo Bias
• Definition: preference for current situation or default
options. Boiled frog syndrome
• Relevance: holding onto underperforming executives or
portfolio companies
• Munger: “You can’t avoid wrong decisions. But if you
recognize them promptly and do something about them,
you can frequently turn the lemons into lemonade.”
• Antidotes:
 Wingman, inverter – require alternate views
 New looks – outside experts, external arbiters
 Avoid ‘Necessity’ investments
• Consider: Doing nothing is also a decision and can be
more costly than acting

13. Confirmation Bias
• “People can foresee the future only when it conforms with their own
wishes, and the most grossly obvious facts can be ignored when
they are unwelcome.” George Orwell
• “Forecasts tell us more about the forecaster than the future.” Warren
Buffett
• Definition: seek evidence that confirms prior actions;
ignore or distort contrary views
• Relevance: premature commitment tends to distort future
diligence
• Buffett: “When you find information that contradicts your
existing beliefs, you have a special obligation to look at it –
and quickly.”
• Antidotes:
 Inverter, investment committee, external arbiter
 Avoid affirmation, commitment as long as possible
 Open mindedness – seek contrary views
• Consider: Selling to win competitive deals distorts
investment judgment. How do we keep an open mind yet
compete for deals?

14. Survival Bias
• Definition: over index on success as only survivors are
available for study (also: availability heuristic)
• Relevance: comparable analysis inherently skews to
survival bias
• Antidotes:
 Build in margin of safety
 Discount comp valuations by 25-50%
 Find and learn from relevant failures
• Consider: Entrepreneurs are preternaturally optimistic. Do
venture investors skew optimistic too?

15. Blind Spots
• Definition: missing information; what others know that we do not
• Relevance: venture capital deals with highly uncertain, changing
situations with limited information; most susceptible to
persuasion when new to a field
• Antidotes:
 Thematic investing: build domain expertise
 Expert networks: tap relevant experts
 Humility: open mindedness to contrary evidence
• Consider: Innovation tends to come from external sources. What
is the optimal balance between domain expertise and an
outsider’s perspective as an investor and entrepreneur?
• Malcolm Gladwell, Outliers – expertise requires 10,000 hours of
practice
• “Perfect practice makes perfect.”
- Cal Ripken

16. Deal Fever
• Definition: hasty judgments made when influenced by intense
emotions
• Relevance: Our highest failure rate is with strong promoters.
Beware of ‘reality distortion fields’
• Munger: “Having a certain temperament is more important than
brains. You need to keep raw irrational emotion under control.
You need patience and discipline.”
• Buffett: “If you feel like you have to invest every day, you’re
going to make a lot of mistakes. … You have to wait for the fat
pitch.”
• Antidotes:
 Cooling off period. Avoid early commitments
 Domain expertise: novices are more susceptible
 Wingman: trusted partner to maintain balance
• Consider: It is often better to appeal to emotions than reason

17. Deprival Bias
• Definition: overvaluing that which is lost or unattainable; also
envy or jealousy
• Relevance: Buffett says his worst mistakes were made with a
perceived pressure to invest
• Buffett: “An important principle in investing is you don’t have to
make it back the way you lost it. In fact, it’s usually a mistake to
try to make it back the way you lost it.”
• Antidotes:
 Have a high BATNA (Best Alternative to No Agreement)
 Maintain a robust pipeline, monitor list
 Avoid deal pressure: be quick but don’t be in a hurry
• Consider: After a lockdown, people are restless. Investors will
have the same tendency. How do we stay active without being
anxious?

18. Loss Aversion
• Definition: tendency to prefer avoiding losses to acquiring
equivalent gains
• Endowment effect: investors tend to place more value on
assets owned than not owned
• Relevance: necessity v. opportunity investments; focus
attention on problem investments rather than potential
winners
• Buffett: “When you’re in a hole stop digging.” “Turnarounds
seldom turnaround.”
• Antidotes:
 New looks – third party assessments
 Wingman to help maintain perspective
 Policy to disclose bad news immediately
• Consider: virtuous impact of strong portfolio when
allocating capital between existing & new investments

19. Self Interest
• Definition: personal interests create conflicts of interest
• Relevance: co-investors, friends, landmark deals may
invoke self interest conflicts
• Buffett: “Never ask a barber if you need a haircut.”
• Antidotes:
 First understand people’s motivations – money,
status, reputation, position, power, envy
 Voting – dual sponsorship with two 5s
 Investment committee – arms length decisions
• Consider: what personal motivations are impacting my
investment decision?

20. Associative Bias
• Definition: seeing situations as identical because they
seem similar
• Relevance: we rely on pattern recognition yet no two
situations are exactly alike
• Sherlock Holmes: “There is nothing more deceptive
than an obvious fact.”
• Antidotes:
 Look for differences; Da Vinci detected anomalies
by viewing his paintings in a mirror
 Evaluate situations on their own merits
 Seek market anomalies based on associations
• Consider: What situations am I overly drawn to or avoid
based on past experience?

21. Liking Bias
• Definition: believing, trusting, agreeing with those we
like
• Relevance: we tend to invest in people similar to us or
key off technologies, markets, businesses we like
• Buffett: invests in CEOs he likes & trusts; his best
investment National Indemnity was with a friend with a
one page purchase agreement
• Antidotes:
 Judge people based on accomplishments and past
behavior rather than first impressions
 Keep friends close, enemies closer; their opinion of
us is closer to the truth than our own
• Consider: Successes grab more attention, but failures
may be more telling

22. Inattentiveness
• Definition: neglecting abstract or important missing
information, especially when busy, stressed
• Relevance: Attentiveness requires buffer time for careful
thought. Stress, busyness undermines good decision
making
• Buffett: Berkshire Hathaway has no regular meetings.
Buffett claims to read 6 hours per day
• Antidotes:
 Be quick but don’t be in a hurry: create buffer time for
thinking, reading and seizing opportunities
 Focus on one deal at a time; clear the deck and avoid
distractions when a deal is live
 Look for missing information, alternate explanations
• Consider: What can we eliminate/modify to create more
time?

23. Authority Bias
• Definition: over-valuing expertise or perceived authority
• Relevance: we seek expert opinions, yet innovation
often comes from outsiders
• “More crimes have been committed in the name of
obedience than in rebellion.” Charles Percy Snow
• Buffett: hire two experts to present opposite views
• Antidotes:
 Consider expert interests; are we aligned?
 Evaluate truth irrespective of source
• Consider: What is true expertise? Is our advisor bench
deep enough in our investment themes?

24. Recency/Vividness Bias
• Definition: over-valuing recent or vivid events
• Relevance: markets pronate positive. Entrepreneurs,
media, bankers, consultants all have vested interests to
overblow opportunity.
• “Once burned twice shy.” “History doesn’t repeat itself
but it rhymes.”
• Buffett: never reads banker pitch decks
• Antidotes:
 Seek accurate data. Question vivid anecdotes
 Take the long view. Be a student of history
• Consider:
 We tend to overreact to success and failures.
When do we double down or hold?
 How do you discern signal from market noise?

25. Wishful Thinking
• Definition: distortion of reality to reduce pain and increase
pleasure
• Relevance: great promoters create reality distortion fields. Our
investment memos are salesy
• “If Ifs and Buts were candies and nuts, it would be a hell of a
Christmas.” “The path to hell is paved with good intentions.”
• Antidotes:
 Get the bad news out first. Good news can wait
 Inverters & jungle guides: seek contrary opinions
 Pre-mortems: describe in detail how a company or
investment will fail
• Consider:
 CEOs are preternatural optimists. When is optimism
adaptive and when is it destructive?
 Our investment memos are salesy. How do we create a
culture that values balanced assessments?
“What is wanted is not the will to believe, but
the will to find out, which is the exact
opposite.” - Bertrand Russell
“The first principle is that you must not fool
yourself – and you are the easiest person to
fool.” - Richard Feynman

26. Reciprocation Tendency
• Definition: implicit pressure to repay favors, concessions,
information in kind
• Cicero: “There is no duty more indispensable than returning a
kindness. All men distrust one forgetful of a benefit.”
• Antidotes:
 Give small gifts to reinforce loyalty
 Consider what you want to achieve when making a
concession
 Beware of favors that create entangling alliances.
Governments ban gifts for this reason
• Consider:
 A favor or gift is most effective when it is personal,
significant and unexpected
 CEO Summits, World of Connections, Newsletters,
Roundtables all leverage reciprocation tendency to help
NGP build loyal, proprietary networks. What tools at NGP
or elsewhere are most effective?

27. Selective Memory
• Definition: remembering incorrectly to fit an outcome or desired
view
• Relevance: Our present knowledge influences how we
remember the past. We often edit or rewrite entirely our previous
experiences
• Antidotes:
 Keep records of important events for later reference
 After action reviews: consult source documents; elicit
views from others to frame appropriately
 Votes, BCAs, Q, After Investment Reviews are tools to
create institutional memory improve decision making
• Consider:
 Our votes are a way to record views for later reference.
Elaborate your reasoning on all votes
 What tools can we better leverage to improve institutional
memory?
“Everyone complains of his memory and no
one complains of his judgment.”
- Francois Duc de la Rochefoucauld

28. Table of Contents
Biases & Judgment Errors
Seeking Wisdom – Lessons from Munger, Buffett, others
 On Investment Filters
 Circle of Competence
 Forecasting

29. Buffett Investment Filters
1. Industry - Circle of Competence: Do I understand the
business? Sound industry, business fundamentals?
2. Business - Sustainable Competitive Advantage: Nature of
advantage? How durable? Capital intensity? How translate
into profits & value?
3. Management: intelligence, energy, character.
4. Investment - Valuation: Priced to provide good return with
adequate margin of safety, measured against other
alternatives supported by factual evidence.
5. Inversion: Review mental checklist of business and
psychological considerations. How can the business get
killed? How resistant to adversity? Competitive risks?
Technology risk? Recession risk? My motives and biases?
What are the consequences if I am wrong?
“Elimination is a great conservator of energy.”
- Warren Buffett

30. Circle of Competence
• Buffett: “You have to stick within your circle of competence. You
have to know what you understand and what you don’t
understand. It’s not terribly important how big the circle is. But it’s
terribly important that you know where the perimeter is.”
• Definition: Understand technology, nature of customer demand,
industry structure, return characteristics over ten years.
• Key Success Factors:
 Discipline: defining, staying within area of expertise
 Humility: “It’s the strong swimmers who drown.”
 Avoid envy: focus on what you know, do not fret on other’s
success outside your circle of competence
• Consider:
 Overconfidence: What you know v. think you know
“Is he good because he is lucky or lucky because he is
good.” - Pierre Dupont
“It is not necessary to do extraordinary things to get
extraordinary results.” - Warren Buffett

31. Forecasting
• Buffett on Intrinsic Value: “Despite its fuzziness, intrinsic value is the only logical
way to evaluate relative attractiveness of investments and businesses.”
• Colin Powell1 40/70 rule: knowing 40-70% of total information allows prudent
decisions while focusing on the principle issues. Over 70% can lead to analysis
paralysis, lull decision makers into a false sense of security and increase chances of
making a big mistake
• Margin of Safety: “It is likely that unlikely things should happen.” Unlikely events will
happen with enough time and events.
• Forecasting Factors to Consider:
 Repeatability: Frequent or unique? Stable? Past data representative of future
or change in conditions? Sufficient sample size and duration? Changing
exposure over time?
 Causation: What are the root causes? Contributing factors? Required
preconditions? Has catalysts changed over time?
 Nature of probability: Normal distribution, stochastic? Long tails or fat tails?
Watch for hidden correlations that compound consequences of an event
 Exposure: Risk of loss? Known? Measurable? Magnitude of loss? Secondary
consequences? Reputational risk? What is the worst that could happen?
“A business that must deal with fast-moving technology is not
going to lend itself to reliable evaluations of its long-term
economics.”
- Warren Buffett (1993)
“Forecasts tell us more about the forecaster than the future.” -
Warren Buffett
“It is better to be generally right than precisely wrong.” - John
Maynard Keynes
1Chairman of the Joint Chiefs of Staff, US Department of Defense

32. Investment Checklists
• Munger on Checklists: Use a two-track analysis.
1. Key factors to consider in a rational decision?
2. Subconscious influences influencing the decision?
• Munger: use the main models of psychology as a
checklist in reviewing outcomes in complex situations.
No pilot takes off without reviewing a ckecklist
• Factors to Consider:
 Avoid excessive reliance on checklists. What is
new and unique about a situation?
 Pay special attention to multiple biases that
compound & create significant distortions of reality
Preflight checklist: Boeing first used in 1935 to
reduce human errors and crashes

33. On Simplicity
• Buffett: “The truly big investment idea can usually be explained in a short
paragraph … Investors should remember that their scorecard is not computed using
Olympic diving methods. Degree of difficulty does not count.”
• Munger: Best way to solve difficult problems is to avoid them:
 If something is too hard, we pass. Look for one-foot hurdles rather than
seven footers.
 Good businesses yield easy decisions; bad businesses yield horrible choices.
 Stay focused: shifting attention among tasks costs time, impairs
understanding and leads to decision errors.
 Be problem oriented, not method oriented. Use what works.
 Focus on key success factors. Look for good enough solutions appropriate to
the problem. In trying to get too much information, we overlook obvious truths.
Dealing with what’s important forces us to prioritize.
 Make fewer and better decisions. One good idea per year. Adopted a strategy
that requires us to be smart – and not too smart at that – only a very few
times.
Keep it simple: “Clear tough-minded people are
the most simple.” - Jack Welch
“Theories should be as simple as possible but
not simpler.” “The formulation of a problem is
often more essential than its solution, which
may be merely a matter of mathematical or
experimental skill.”
- Albert Einstein

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