Poor Charlie’s Almanack – Audiobook - The Essential Wit and Wisdom of Charles T. Munger - Part 2

This is part two of the audio book Poor Charlie's Almanac by Peter D. Kaufman, presented by the Legendary Investor Channel. In this video, you'll hear from talk four to the end of the book.

Talk 4, practical thought about practical thought. July 20th, 1996. An informal talk.

In this talk, Charlie explains how he makes decisions and solves problems by taking us step by step through a diverse set of mental models. He presents a case study that asks rhetorically how the listener would go about producing a $2 trillion business from scratch, using Coca-Cola as his example. Naturally, he has his own solution, apt to strike you as both brilliant and perceptive.

Charlie's case study leads him to a discussion of academia's failures and its record of having produced generations of sloppy decision makers. For this problem, he has other solutions. This talk was delivered in 1996 to a group that has a policy of not publicizing its programs.

Editor's warning, as suggested by Charlie: Most people don't understand this talk. Charlie says it was an extreme communication failure when made, and people have since found it difficult to understand, even when read slowly twice. To Charlie, these outcomes have profound educational implications.

The title of my talk is "Practical Thought About Practical Thought?" In a long career, I have assimilated various ultra-simple general notions that I find helpful in solving problems. Five of these helpful notions I will now describe. After that, I will present to you a problem of extreme scale. Indeed, the problem will involve turning startup capital of $2 million into $2 trillion, a sum large enough to represent a practical achievement. Then I will try to solve the problem, assisted by my helpful general notions. Following that, I will suggest that there are important educational implications in my demonstration. I will so finish because my objective is educational. My game today being a search for better methods of thought.

The first helpful notion is that it is usually best to simplify problems by deciding big, no-brainer questions first.

The second helpful notion mimics Galileo's conclusion that scientific reality is often revealed only by math, as if math was the language of God. Galileo's attitude also works well in messy practical life. Without numerical fluency in the part of life most of us inhabit, you are like a one-legged man in an ass-kicking contest.

The third helpful notion is that it is not enough to think problems through forward. You must also think in reverse, much like the rustic who wanted to know where he was going to die so that he'd never go there. Indeed, many problems can't be solved forward. And that is why the great algebraist Carl Jacobi so often said, "Invert, always invert." And why the Pythagoreans thought in reverse to prove that the square root of two was an irrational number.

The fourth helpful notion is that the best and most practical wisdom is elementary academic wisdom. But there is one extremely important qualification. You must think in a multidisciplinary manner. You must routinely use all the easy-to-learn concepts from the freshman course in every basic subject where elementary ideas will serve. Your problem-solving must not be limited, as academia and many business bureaucracies are limited by extreme Balkanization into disciplines and sub-disciplines with strong taboos against any venture outside assigned territory. Instead, you must do your multidisciplinary thinking in accord with Ben Franklin's prescription in Poor Richard: "If you want it done, go. If not, send." If in your thinking you rely entirely on others, often through purchase of professional advice, whenever outside a small territory of your own, you will suffer much calamity. And it is not just difficulties in complex coordination that will do you in. You will also suffer from the reality evoked by the shaven character who said, "In the last analysis, every profession is a conspiracy against the laity." Indeed, a shaven character for once understated the horrors of something George Bernard Shaw didn't like. It is not usually the conscious malfeasance of your narrow professional adviser that does you in. Instead, your troubles come from his subconscious bias. His cognition will often be impaired for your purposes by financial incentives different from yours. And he will also suffer from the psychological defect caught by the proverb: "To a man with a hammer, every problem looks like a nail."

The fifth helpful notion is that really big effects, "lao-lao" effects, will often come only from large combinations of factors. For instance, tuberculosis was tamed, at least for a long time, only by routine combined use in each case of three different drugs. And other "lao-lao" effects, like the flight of an airplane, follow a similar pattern.

It is now time to present my practical problem. And here is the problem: It is 1884 in Atlanta. You are brought along with 20 others like you before a rich and eccentric Atlanta citizen named Glattz. Both you and Glattz share two characteristics. First, you routinely use in problem-solving the five helpful notions. And second, you know all the elementary ideas and all the basic college courses as taught in 1996. However, all discoverers and all examples demonstrating these elementary ideas come from dates before 1884. Neither you nor Glattz knows anything about anything that has happened after 1884. Glattz offers to invest $2 million in 1884, yet take only half the equity for a Glattz charitable foundation in a new corporation organized to go into the non-alcoholic beverage business and remain in that business only forever. Glattz wants to use a name that has somehow charmed him, Coca-Cola. The other half of the new corporation's equity will go to the man who most plausibly demonstrates that his business plan will cause Glattz's foundation to be worth a trillion dollars 150 years later, in the money of that later time, 2034, despite paying out a large part of its earnings each year as a dividend. This will make the whole new corporation worth $2 trillion, even after paying out many billions of dollars in dividends. You have 15 minutes to make your pitch. What do you say to Glattz?

Here is my solution. My pitch to Glattz, using only the helpful notions and what every bright college sophomore should know.

Well, Glattz, the big, no-brainer decisions that to simplify our problem should be made first are as follows. First, we are never going to create something worth $2 trillion by selling some generic beverage. Therefore, we must make your name, Coca-Cola, into a strong, legally protected trademark. Second, we can get to $2 trillion only by starting in Atlanta, then succeeding in the rest of the United States, then rapidly succeeding with our new beverage all over the world. This will require developing a product that has universal appeal because it harnesses powerful elemental forces. And the right place to find such powerful elemental forces is in the subject matter of elementary academic courses.

We will next use numerical fluency to ascertain what our target implies. We can guess reasonably that by 2034 there will be about 8 billion beverage consumers in the world. On average, each of these consumers will be much more prosperous in real terms than the average consumer of 1884. Each consumer is composed mostly of water and must ingest about 64 ounces of water per day. This is 8 8-oz servings. Thus, if our new beverage and other imitative beverages in our new market can flavor and otherwise improve only 25% of ingested water worldwide, and we can occupy half of the new world market, we can sell 2.92 trillion 8-oz servings in 2034. And if we can then net 4 cents per serving, we will earn $17 billion. This will be enough, if our business is still growing at a good rate, to make it easily worth $2 trillion.

A big question, of course, is whether 4 cents per serving is a reasonable profit target for 2034. And the answer is yes. If we can create a beverage with strong universal appeal, 150 years is a long time. The dollar, like the Roman denarius, will almost surely suffer monetary depreciation. Concurrently, real purchasing power of the average beverage consumer in the world will go way up. His proclivity to inexpensively improve his experience while ingesting water will go up considerably faster. Meanwhile, as technology improves, the cost of our simple product in units of constant purchasing power will go down. All four factors will work together in favor of our 4-cent per serving profit target. Worldwide beverage purchasing power in dollars will probably multiply by a factor of at least 40 over 150 years. Thinking in reverse, this makes our profit per serving target under 1884 conditions a mere 1/40th of 4 cents, or 1/10th of a cent per serving. This is an easy-to-exceed target as we start out, if our new product has universal appeal.

That decided, we must next solve the problem of invention to create universal appeal. There are two intertwined challenges of large scale. First, over 150 years, we must cause a new beverage market to assimilate about 1/4th of the world's water ingestion. Second, we must so operate that half the new market is ours, while all our competitors combined are left to share the remaining half. These results are "lao-lao" results. Accordingly, we must attack our problem by causing every favorable factor we can think of to work for us. Plainly, only a powerful combination of many factors is likely to cause the "lao-lao" consequences we desire. Fortunately, the solution to these intertwined problems turns out to be fairly easy if one has stayed awake in all the freshman courses.

Let us start by exploring the consequences of our simplifying, no-brainer decision that we must rely on a strong trademark. This conclusion automatically leads to an understanding of the essence of our business in proper elementary academic terms. We can see from the introductory course in psychology that, in essence, we are going into the business of creating and maintaining conditioned reflexes. The Coca-Cola trade name and trade dress will act as the stimuli, and the purchase and ingestion of our beverage will be the desired responses. And how does one create and maintain conditioned reflexes? Well, the psychology text gives two answers: one, by operant conditioning, and two, by classical conditioning, often called Pavlovian conditioning, to honor the great Russian scientist. And since we want a "lao-lao" result, we must use both conditioning techniques and all we can invent to enhance effects from each technique.

The operant conditioning part of our problem is easy to solve. We need only: one, maximize rewards of our beverage's ingestion, and two, minimize possibilities that desired reflexes, once created by us, will be extinguished through operant conditioning by proprietors of competing products. For operant conditioning rewards, there are only a few categories we will find practical: one, food value in calories or other inputs; two, flavor, texture, and aroma acting as stimuli to consumption under neural pre-programming of man through Darwinian natural selection; three, stimulus, as by sugar or caffeine; four, cooling effect when man is too hot, or warming effect when man is too cool. Wanting a "lao-lao" result, we will naturally include rewards in all the categories. To start out, it is easy to decide to design our beverage for consumption cold. There is much less opportunity without ingesting a beverage to counteract excessive heat compared with excessive cold. Moreover, with excessive heat, much liquid must be consumed, and the reverse is not true. It is also easy to decide to include both sugar and caffeine. After all, tea, coffee, and lemonade are already widely consumed. And it is also clear that we must be fanatic about determining, through trial and error, flavor and other characteristics that will maximize human pleasure while taking in the sugared water and caffeine we will provide. And to counteract possibilities that desired operant conditioned reflexes, once created by us, will be extinguished by operant conditioning employing competing products, there is also an obvious answer. We will make it a permanent obsession in our company that our beverage, as fast as practicable, will at all times be available everywhere throughout the world. After all, a competing product, if it is never tried, can't act as a reward, creating a conflicting habit. Every spouse knows that.

We must next consider the Pavlovian conditioning we must also use. In Pavlovian conditioning, powerful effects come from mere association. The neural system of Pavlov's dog causes it to salivate at the bell it can't eat. And the brain of man yearns for the type of beverage held by the pretty woman he can't have. And so, Glattz, we must use every sort of decent, honorable Pavlovian conditioning we can think of. For as long as we are in business, our beverage and its promotion must be associated in consumer minds with all other things consumers like or admire. Such extensive Pavlovian conditioning will cost a lot of money, particularly for advertising. We will spend big money as far ahead as we can imagine. But the money will be effectively spent as we expand fast in our new beverage market. Our competitors will face gross disadvantages of scale in buying advertising to create the Pavlovian conditioning they need. And this outcome, along with other volume-created power effects, should help us gain and hold at least 50% of the new market everywhere. Indeed, provided buyers are scattered, our higher volumes will give us very extreme cost advantages in distribution. Moreover, Pavlovian effects from mere association will help us choose the flavor, texture, and color of our new beverage. Considering Pavlovian effects, we will have wisely chosen the exotic and expensive-sounding name Coca-Cola instead of a pedestrian name like Glattz's sugared caffeinated water. For similar Pavlovian reasons, it will be wise to have our beverage look pretty much like wine instead of sugared water. So, we will artificially color our beverage if it comes out clear. And we will carbonate our water, making our product seem like champagne or some other expensive beverage, while also making its flavor better and imitation harder to arrange for competing products. And because we are going to attach so many expensive psychological effects to our flavor, that flavor should be different from any other standard flavor so that we maximize difficulties for competitors and give no accidental same-flavor benefit to any existing product.

What else from the psychology textbook can help our new business? Well, there is that powerful "monkey see, monkey do" aspect of human nature that psychologists often call social proof. Social proof, imitative consumption triggered by mere sight of consumption, will not only help induce trial of our beverage, it will also bolster perceived rewards from consumption. We will always take this powerful social proof factor into account as we design advertising and sales promotion. And as we forego present profit to enhance present and future consumption more than with most other products, increased selling power will come from each increase in sales. We can now see, Glattz, that by combining: one, much Pavlovian conditioning; two, powerful social proof effects; and three, a wonderful-tasting, energy-giving, stimulating, and desirably cold beverage that causes much operant conditioning, we are going to get sales that speed up for a long time by reason of the huge mixture of factors we have chosen. Therefore, we are going to start something like an autocatalytic reaction in chemistry. Precisely the sort of multifactor-triggered "lao-lao" effect we need.

The logistics and the distribution strategy of our business will be simple. There are only two practical ways to sell our beverage: one, as syrup to fountains and restaurants, and two, as a complete carbonated water product in containers. Wanting "lao-lao" results, we will naturally do it both ways. And wanting huge Pavlovian and social proof effects, we will always spend on advertising and sales promotion per serving over 40% of the fountain price for syrup needed to make the serving. A few syrup-making plants can serve the world. However, to avoid needless shipping of mere space and water, we will need many bottling plants scattered over the world. We will maximize profits if, like early General Electric with light bulbs, we always set the first sale price either one, for fountain syrup, or two, for any container of our complete product. The best way to arrange this desirable profit-maximizing control is to make any independent bottler we need a subcontractor, not a vendee of syrup, and certainly not a vendee of syrup under a perpetual franchise specifying a syrup price frozen forever at its starting level. Being unable to get a patent or copyright on our super-important flavor, we will work obsessively to keep our formula secret. We will make a big hoopla over our secrecy, which will enhance Pavlovian effects. Eventually, food chemical engineering will advance so that our flavor can be copied with near exactitude. But by that time, we will be so far ahead with such strong trademarks and complete, always-available worldwide distribution that good flavor copying won't bar us from our objective. Moreover, the advances in food chemistry that help competitors will almost surely be accompanied by technological advances that will help us, including refrigeration, better transportation, and, for dieters, the ability to insert a sugar taste without inserting sugar's calories. Also, there will be related beverage opportunities we will seize.

This brings us to a final reality check for our business plan. We will once more think in reverse, like Jacobi. What must we avoid because we don't want it? Four answers seem clear. First, we must avoid the protective, clawing, stop-consumption effects of aftertaste that are a standard part of physiology developed through Darwinian evolution to enhance the replication of man's genes by forcing a generally helpful moderation on the gene carrier. To serve our ends on hot days, a consumer must be able to drink container after container of our product with almost no impediment from aftertaste. We will find a wonderful no-aftertaste flavor by trial and error and will thereby solve this problem. Second, we must avoid ever losing even half of our powerful trademarked name. It will cost us mightily, for instance, if our sloppiness should ever allow the sale of any other kind of cola, for instance, a "peppy cola." If there is ever a "peppy cola," we will be the proprietor of the brand. Third, with so much success coming, we must avoid bad effects from envy, which is given a prominent place in the Ten Commandments because envy is so much a part of human nature. The best way to avoid envy, as recognized by Aristotle, is to plainly deserve the success we get. We will be fanatic about product quality, quality of product presentation, and reasonableness of prices, considering the harmless pleasure we will provide. Fourth, after our trademarked flavor dominates our new market, we must avoid making any huge and sudden change in our flavor. Even if a new flavor performs better in blind taste tests, changing to that new flavor would be a foolish thing to do. This follows because under such conditions, our old flavor will be so entrenched in consumer preference by psychological effects that a big flavor change would do us little good. And it would do immense harm by triggering in consumers the standard "deprival super-reaction syndrome" that makes takeaways so hard to get in any type of negotiation and helps make most gamblers so irrational. Moreover, such a large flavor change would allow a competitor, by copying our old flavor, to take advantage of both: one, the hostile consumer super-reaction to deprival, and two, the huge love of our original flavor created by our previous work.

Well, that is my solution to my own problem of turning $2 million into $2 trillion, even after paying out billions of dollars in dividends. I think it would have won with Glattz in 1884 and should convince you more than you expected at the outset. After all, the correct strategies are clear after being related to elementary academic ideas brought into play by the helpful notions.

How consistent is my solution with the history of the real Coca-Cola Company? Well, as late as 1896, 12 years after the fictional Glattz was to start vigorously with $2 million in 1884, the real Coca-Cola Company had a net worth under $150,000 and earnings of about zero. And thereafter, the real Coca-Cola Company did lose half its trademark and did grant perpetual bottling franchises at fixed syrup prices. And some of the bottlers were not very effective and couldn't easily be changed. And the real Coca-Cola Company, with this system, did lose much pricing control that would have improved results had it been retained. Yet, even so, the real Coca-Cola Company followed so much of the plan given to Glattz that it is now worth about $125 billion and will have to increase its value at only 8% per year until 2034 to reach a value of $2 trillion. And it can hit an annual physical volume target of 2.92 trillion servings if servings grow until 2034 at only 6% per year. A result consistent with much past experience and leaving plenty of plain water ingestion for Coca-Cola to replace after 2034. So I would guess that the fictional Glattz, starting earlier and stronger and avoiding the worst errors, would have easily hit his $2 trillion target, and he would have done it well before 2034.

This brings me at last to the main purpose of my talk. Large educational implications exist. If my answer to Glattz's problem is roughly right, and if you make one more assumption, I believe true that most PhD educators, even psychology professors and business school deans, would not have given the same simple answer I did. And if I am right in these two ways, this would indicate that our civilization now keeps in place a great many educators who can't satisfactorily explain Coca-Cola, even in retrospect, and even after watching it closely all their lives. This is not a satisfactory state of affairs. Moreover, and this result is even more extreme, the brilliant and effective executives who, surrounded by business school and law school graduates, have run the Coca-Cola Company with glorious success in recent years, also did not understand elementary psychology well enough to predict and avoid the New Coke fiasco, which dangerously threatened their company. That people so talented, surrounded by professional advisers from the best universities, should thus demonstrate a huge gap in their education is also not a satisfactory state of affairs. Such extreme ignorance in both the high reaches of academia and the high reaches of business is a "lao-lao" effect of a negative sort, demonstrating grave defects in academia. Because the bad effect is a "lao-lao," we should expect to find intertwined multiple academic causes. I suspect at least two such causes. First, academic psychology, while it is admirable and useful as a list of ingenious and important experiments, lacks intradisciplinary synthesis. In particular, not enough attention is given to "lao-lao" effects coming from combinations of psychological tendencies. This creates a situation reminding one of a rustic teacher who tries to simplify schoolwork by rounding pi to an even three. And it violates Einstein's injunction that "everything should be made as simple as possible, but no more simple." In general, psychology is laid out and misunderstood as electromagnetism would now be misunderstood if physics had produced many brilliant experimenters like Michael Faraday and no grand synthesizer like James Clerk Maxwell. Second, there is a truly horrible lack of synthesis blending psychology and other academic subjects. But only an interdisciplinary approach will correctly deal with reality in academia, as with the Coca-Cola Company. In short, academic psychology departments are immensely more important and useful than other academic departments think. And at the same time, the psychology departments are immensely worse than most of their inhabitants think. It is, of course, normal for self-appraisal to be more positive than external appraisal. Indeed, a problem of this sort may have given you your speaker today. But the size of this psychology department gap is preposterously large. In fact, the gap is so enormous that one very eminent university, Chicago, simply abolished its psychology department, perhaps with an undisclosed hope of later creating a better version. In such a state of affairs, many years ago, and with much that was plainly wrong already present, the New Coke fiasco occurred. Therein, Coke's executives came to the brink of destroying the most valuable trademark in the world. The academically correct reaction to this immense and well-publicized fiasco would have been the sort of reaction Boeing would display if three of its new airplanes crashed in a single week. After all, product integrity is involved in each case, and the plain educational failure was immense. But almost no such responsible, Boeing-like reaction has come from academia. Instead, academia, by and large, continues in its Balkanized way to tolerate psychology professors who misteach psychology, non-psychology professors who failed to consider psychological effects obviously crucial in their subject matter, and professional schools that carefully preserve psychological ignorance coming in with each entering class and are proud of their inadequacies.

Even though this regrettable blindness and latitude is now the normal academic result, are there exceptions providing hope that disgraceful shortcomings of the education system will eventually be corrected? Here my answer is a very optimistic yes. For instance, consider the recent behavior of the economics department of the University of Chicago. Over the last decade, this department has enjoyed a near monopoly of the Nobel Prizes in economics, largely by getting good predictions out of free-market models postulating man's rationality. And what is the reaction of this department after winning so steadily with its rational man approach? Well, it has just invited into a precious slot amid its company of greats, a wise and witty Cornell economist, Richard Thaler. And it has done this because Thaler pokes fun at much that is holy at the University of Chicago. Indeed, Thaler believes with me that people are often massively irrational in ways predicted by psychology that must be taken into account in microeconomics. In so behaving, the University of Chicago is imitating Darwin, who spent much of his long life thinking in reverse as he tried to disprove his own hardest-won and best-loved ideas. And so long as there are parts of academia that keep alive its best values by thinking in reverse, like Darwin, we can confidently expect that silly educational practices will eventually be replaced by better ones, exactly as Carl Jacobi might have predicted. This will happen because the Darwinian approach, with its habitual objectivity taken on as a sort of hair shirt, is a mighty approach indeed. No less a figure than Einstein said that one of the four causes of his achievement was self-criticism, ranking right up there alongside curiosity, concentration, and perseverance. And to further appreciate the power of self-criticism, consider where lies the grave of that very ungifted undergraduate Charles Darwin. It is in Westminster Abbey, right next to the headstone of Isaac Newton, perhaps the most gifted student who ever lived. Honored on that headstone in eight Latin words constituting the most eloquent praise in all graveyard print: "Hic depositum est quod mortale fuit Isaaci Newtoni." Here lies that which was mortal of Isaac Newton. A civilization that so places a dead Darwin will eventually develop and integrate psychology in a proper and practical fashion that greatly increases skills of all sorts. But all of us who have dollops of power and see the light should help the process along. There is a lot at stake. If, in many high places, a universal product as successful as Coca-Cola is not properly understood and explained, it can't bode well for our competency in dealing with much else that is important. Of course, those of you with 50% of net worth in Coca-Cola stock occurring because you tried to invest 10% after thinking like I did in making my pitch to Glattz can ignore my message about psychology as too elementary for useful transmission to you. But I am not so sure that this reaction is wise for the rest of you. The situation reminds me of the old-time Warner & Swasey ad that was a favorite of mine: "The company that needs a new machine tool and hasn't bought it is already paying for it."

[Music]

Talk 4 Revisited.

In this talk, I attempted to demonstrate large, correctable, and important cognitive failures in U.S. academia and business. After all, I argued: one, if academia and business functioned with best practicable results, most denizens would be able to explain the success of the Coca-Cola Company through parsimonious use of basic concepts and problem-solving techniques. Yet two, as the New Coke fiasco and its aftermath indicated, neither academia nor business had a respectable grasp of the simple realities causing the success of Coca-Cola. As matters worked out, my 1996 talk failed to get through to almost all people hearing it. Then later, between 1996 and 2006, even when the talk's written version was slowly read twice by very intelligent people who admired me, its message likewise failed. In almost all cases, the message did not get through in any constructive way. On the other hand, no one said to me that the talk was wrong. Instead, people were puzzled briefly, then moved on. Thus, my failure as a communicator was even more extreme than the cognitive failure I was trying to explain. Why? The best explanation I now think is that I displayed gross folly as an amateur teacher. I attempted too much. I have always avoided all people who want to converse at length about the meaning of meaning. Yet I chose as my title "Practical Thought About Practical Thought." This was a start into tough territory. Then I worked out a long, complex interplay of five generalized, powerful problem-solving tricks with basic ideas from a great many disciplines. I particularly included psychology, about which I wanted to demonstrate that there is much lamentable ignorance even among highly educated people, some of whom teach psychology. My demonstration naturally relied on correct psychology as part of my would-be demonstration. This was logically sound. But if psychological ignorance is widespread, why would most of my hearers recognize that my version of psychology was correct? Thus, for most hearers, I did the rough equivalent of trying to explain some hard-to-comprehend ideas by simply defining those ideas as equivalent to themselves. And this was not the outer limit of my teaching folly. After I knew that the written version of my talk was hard to understand, I consented to an order of talks in Poor Charlie's Almanac where, in my psychology talk was talk 11, inserted many pages after talk 4. Instead, I should have recognized that the order of the two talks should be reversed, considering that talk 4 assumed that readers had already mastered basic psychology, the subject of talk 11. Then, finally, I preferred to maintain the original, unhelpful order of the two talks. I did this because I like closing the book with my most recent organization of psychology into a sort of checklist that has long been helpful to me. Readers, if they wish, can correct somewhat for the teaching defects that I have stubbornly retained. That is, they can reread talk 4 after mastering the final talk. If they are willing to endure this ordeal, I predict that at least some of them will find the result worth the effort.

Talk 5, the need for more multidisciplinary skills from professionals. Educational implications. April 24th, 1998. 50th reunion of Harvard Law School, class of 1948.

Having ranted in the previous speech about all that is wrong in academia, Charlie holds forth here on the solutions delivered in 1998 at the 50th reunion of his Harvard Law School class. This talk focuses on a hugely complicated issue, the narrowness of elite education, and segments it into elements whose solutions, when taken together, form a satisfactory answer to the problem. Through a series of rhetorical questions, Charlie posits that professionals, such as attorneys, to their own detriment, lack multidisciplinary skills. From his own extensive multidisciplinary studies, he recognizes that there are subconscious mental tendencies that keep people from broadening their own horizons sufficiently. Nonetheless, he brings unique and memorable solutions to the problem. This talk, a favorite of your editor, clearly demonstrates Charlie's uncommon common sense. He says when it really matters, as with pilots and surgeons, educational systems employ highly effective structures. Yet they don't employ these same well-understood structures in other areas of learning that are also important. If superior structures are known and available, why don't educators more broadly utilize them? What could be more simple? Today I am going to engage in a game reminding us of our old professors' Socratic solitaire. I will ask and briefly answer five questions: One, do broad-scale professionals need more multidisciplinary skill? Two, was our education sufficiently multidisciplinary? Three, in elite broad-scale soft science, what is the essential nature of practicable best-form multidisciplinary education? Four, in the last 50 years, how far has elite academia progressed toward attainable best-form multidisciplinarity? Five, what educational practices would make progress faster?

We start with the question: Do broad-scale professionals need more multidisciplinary skill? To answer the first question, we must first decide whether more multidisciplinarity will improve professional cognition. And to decide what will cure bad cognition, it will help to know what causes it. One of Bernard Shaw's characters explained professional defects as follows: "In the last analysis, every profession is a conspiracy against the laity." There is a lot of truth in Shaw's diagnosis, as was early demonstrated when, in the 16th century, the dominant profession, the clergy, burned William Tyndale at the stake for translating the Bible into English. But Shaw plainly understates the problem in implying that a conscious, self-interested malevolence is the main culprit. More important, there are frequent terrible effects in professionals from intertwined subconscious mental tendencies, two of which are exceptionally prone to cause trouble: One, incentive-caused bias, a natural cognitive drift toward the conclusion that what is good for the professional is good for the client and the wider civilization. And two, "man with a hammer" tendency, with the name taken from the proverb: "To a man with only a hammer, every problem tends to look pretty much like a nail." One partial cure for "man with a hammer" tendency is obvious. If a man has a vast set of skills over multiple disciplines, he by definition carries multiple tools and therefore will limit bad cognitive effects from "man with a hammer" tendency. Moreover, when he is multidisciplinary enough to absorb from practical psychology the idea that all his life he must fight bad effects from both the tendencies I mentioned, both within himself and from others, he has taken a constructive step on the road to worldly wisdom. If A is narrow professional doctrine and B consists of the big, extra useful concepts from other disciplines, then clearly the professional possessing A plus B will usually be better off than the poor possessor of A alone. How could it be otherwise? And thus, the only rational excuse for not acquiring more B is that it is not practical to do so, given the man's need for A and the other urgent demands in his life. I will later try to demonstrate that this excuse for unid disciplinarity, at least for our most gifted people, is usually unsound.

My second question is so easy to answer that I won't give it much time. Our education was far too unidisiplinary. Broad-scale problems by definition cross many academic disciplines. Accordingly, using an undisciplinary attack on such problems is like playing a bridge hand by counting trumps while ignoring all else. This is bonkers. Sort of like the Mad Hatter's Tea Party. But nonetheless, too much that is similar remains present in professional practice, and even worse, has long been encouraged in isolated departments of soft science, defined as everything less fundamental than biology. Even in our youth, some of the best professors were horrified by bad effects from the Balkanization of academia into insular, turf-protecting enclaves wherein notions were maintained by leaps of faith plus exclusion of non-believers. Alfred North Whitehead, for one, long ago sounded an alarm in strong language when he spoke of the "fatal unconnectedness of academic disciplines." And since then, elite educational institutions, agreeing more and more with Whitehead, have steadily fought unconnectedness by bringing in more multidisciplinarity, causing some awesome plaudits to be won in our time by great unconnectedness fighters at the borders of academic disciplines, for instance, Harvard's E.O. Wilson and Caltech's Linus Pauling. Modern academia now gives more multidisciplinarity than we received, and is plainly right to do so.

The natural third question then becomes: What is now the goal? What is the essential nature of best-form multidisciplinarity in elite education? This question too is easy to answer. All we have to do is examine our most successful narrow-scale education, identify essential elements, and scale up those elements to reach the sensible solution. To find the best educational narrow-scale model, we have to look not at unthreatened schools of education and the like, too much driven by our two counterproductive psychological tendencies and other bad influences, but instead look where incentives for effective education are strongest and results are most closely measured. This leads us to a logical place: the hugely successful education now mandatory for pilots. Yes, I am suggesting today that mighty Harvard would do better if it thought more about pilot training.

In piloting, as in other professions, one great hazard is a bad effect from "men with a hammer" tendency. We don't want a pilot ever to respond to a hazard as if it was hazard X just because his mind contains only a hazard X model. And so, for that and other reasons, we train a pilot in a strict six-element system: One, his formal education is wide enough to cover practically everything useful in piloting. Two, his knowledge of practically everything needed by pilots is not taught just well enough to enable him to pass one test or two. Instead, all his knowledge is raised to practice-based fluency, even in handling two or three intertwined hazards at once. Three, like any good algebraist, he is made to think sometimes in a forward fashion and sometimes in reverse. And so he learns when to concentrate mostly on what he wants to happen and also when to concentrate mostly on avoiding what he does not want to happen. Four, his training time is allocated among subjects so as to minimize damage from his later malfunctions. And so what is most important in his performance gets the most training coverage and is raised to the highest fluency levels. Five, checklist routines are always mandatory for him. Six, even after original training, he is forced into a special knowledge maintenance routine: regular use of the aircraft simulator to prevent atrophy through long disuse of skills needed to cope with rare and important problems.

The need for this clearly correct six-element system, with its large demands in a narrow-scale field where stakes are high, is rooted in the deep structure of the human mind. Therefore, we must expect that the education we need for broad-scale problem-solving will keep all these elements, but with awesomely expanded coverage for each element. How could it be otherwise? Thus, it follows as the night the day that in our most elite broad-scale education, wherein we are trying to make silk purses out of silk, we need for best results to have multidisciplinary coverage of immense amplitude, with all needed skills raised to an ever-maintained practice-based fluency, including considerable power of synthesis at boundaries between disciplines, with the highest fluency levels being achieved where they are most needed, with forward and reverse thinking techniques being employed in a manner reminding one of inversion in algebra, and with checklist routines being a permanent part of the knowledge system. There can be no other way, no easier way to broad-scale worldly wisdom.

Thus, the task, when first identified in its immense breadth, seems daunting, verging on impossible. But the task, considered in full context, is far from impossible when we consider three factors. First, the concept of "all needed skills" lets us recognize that we don't have to raise everyone's skill in celestial mechanics to that of Pierre-Simon Laplace and also ask everyone to achieve a similar skill level in all other knowledge. Instead, it turns out that the truly big ideas in each discipline, learned only in essence, carry most of the freight, and they are not so numerous, nor are their interactions so complex, that a large and multidisciplinary understanding is impossible for many, given large amounts of talent and time. Second, in elite education, we have available the large amounts of talent and time that we need. After all, we are educating the top 1% in aptitude, using teachers who on average have more aptitude than the students. And we have roughly 13 long years in which to turn our most promising 12-year-olds into starting professionals. Third, thinking by inversion and thorough use of checklists is easily learned in broad-scale life, as in piloting. Moreover, we can believe in the attainability of broad multidisciplinary skill for the same reason the fellow from Arkansas gave for his belief in baptism: "I've seen it done." We all know of individuals, modern Ben Franklins, who have one, achieved a massive multidisciplinary synthesis with less time in formal education than is now available to our numerous brilliant young, and two, thus become better performers in their own disciplines, not worse, despite diversion of learning time to matter outside the normal coverage of their own disciplines. Given the time and talent available and examples of successful masters of multiple disciplines, what is shown by our present failure to minimize bad effects from "man with a hammer" tendency is only that you can't win big in multidisciplinarity in soft science academia if you are so satisfied with the status quo or so frightened by the difficulties of change that you don't try hard enough to win big.

Which brings us to our fourth question: Judged with reference to an optimized, feasible multi-disciplinary goal, how much has elite soft science education been corrected after we left? The answer is that many things have been tried as corrections in the direction of better multidisciplinarity, and after allowing for some counterproductive results, there has been some considerable improvement net, but much desirable correction is still undone and lies far ahead. For instance, soft science academia has increasingly found it helpful when professors from different disciplines collaborate or when a professor has been credentialed in more than one discipline. But a different sort of correction has usually worked best, namely augmentation or a "take what you wish" practice that encourages any discipline to simply assimilate whatever it chooses from other disciplines. Perhaps it has worked best because it bypassed academic squabbles rooted in the tradition and territoriality that had caused the unid disciplinary folly for which correction was now sought. In any event, through increased use of "take what you wish," many soft science disciplines reduced folly from "men with a hammer" tendency. For instance, led by our classmate Roger Fisher, the law schools brought in negotiation, drawing on other disciplines. Over 3 million copies of Roger's wise and ethical negotiation book have now been sold, and his life's achievement may well be the best ever from our whole class. The law schools also brought in a lot of sound and useful economics, even some good game theory to enlighten antitrust law by better explaining how competition really works. Economics, in turn, took in from a biologist the "tragedy of the commons" model, thus correctly finding a wicked invisible foot in coexistence with Adam Smith's angelic invisible hand. These days, there is even some behavioral economics wisely seeking aid from psychology. However, an extremely permissive practice like "take what you wish" was not destined to have 100% admirable results in soft science. Indeed, in some of its worst outcomes, it helped changes like the assimilation of Freudianism in some literature departments; the importation into many places of extremist political ideologies of the left or right that had, for their possessors, made regaining objectivity almost as unlikely as regaining virginity; and the importation into many law and business schools of hard-form efficient market theory by misguided would-be experts in corporate finance, one of whom kept explaining Berkshire Hathaway's investing success by adding standard deviations of luck until, at six standard deviations, he encountered enough derision to force a change in explanation. Moreover, even when it avoided such lunacies, "take what you wish" had some serious defects. For instance, takings from more fundamental disciplines were often done without attribution, sometimes under new names, with little attention given to rank in a fundamentalist order for absorbed concepts. Such practices one, act like a lousy filing system that must impair the successful use and synthesis of absorbed knowledge, and two, do not maximize in soft science the equivalent of Linus Pauling's systematic mining of physics to improve chemistry. There must be a better way.

This brings us finally to our last question. In elite soft science, what practices would hasten our progress toward optimized disciplinarity? Here again, there are some easy answers. First, many more courses should be mandatory, not optional. And this, in turn, requires that the people who decide what is mandatory must possess large multidisciplinary knowledge maintained in fluency. This conclusion is as obvious in the training of the would-be broad-scale problem solver as it is in the training of the would-be pilot. For instance, both psychology mastery and accounting mastery should be required as outcomes in legal education. Yet, in many elite places, even today, there are no such requirements, often such as the narrowness of mind of the program designers that they neither see what is needed and missing nor are able to fix deficiencies. Second, there should be much more problem-solving practice that crosses several disciplines, including practice that mimics the function of the aircraft simulator in preventing loss of skills through disuse. Let me give an example, roughly remembered, of this sort of teaching by a very wise but untypical Harvard Business School professor many decades ago. This professor gave a test involving two unworldly old ladies who had just inherited a New England shoe factory making branded shoes and beset with serious business problems described in great detail. The professor then gave the students ample time to answer with written advice to the old ladies. In response to the answers, the professor gave every student an undesirable grade except for one student who was graded at the top by a wide margin. What was the winning answer? It was very short and roughly as follows: "This business field and this particular business in its particular location present crucial problems that are so difficult that unworldly old ladies cannot wisely try to solve them through hired help. Given the difficulties and unavoidable agency costs, the old ladies should promptly sell the shoe factory, probably to the competitor who would enjoy the greatest marginal utility advantage." Thus, the winning answer relied not on what the students had most recently been taught in business school, but instead on more fundamental concepts like agency costs and marginal utility, lifted from undergraduate psychology and economics. Ah, my fellow members of the Harvard Law class of 1948, if only we had been much more often tested like that, just think of what more we might have accomplished. Incidentally, many elite private schools now wisely use such multidisciplinary methods in seventh-grade science, while at the same time, many graduate schools have not yet seen the same light. This is one more sad example.

of Whitehead's fatal unconnectedness in education.

Third, most soft science professional schools should increase their use of the best business periodicals like the Wall Street Journal, Forbes, Fortune, etc. Such periodicals are now quite good and perform the function of the aircraft simulator if used to prompt practice in relating events to multidisciplinary causes, often intertwined. And sometimes the periodicals even introduce new models for causes instead of merely refreshing old knowledge. Also, it is not just slightly sound to have the student practice in school what he must practice lifelong after formal education is over if he is going to maximize his good judgment. I know no person in business respected for verified good judgment whose wisdom maintenance system does not include use of such periodicals. Why should academia be different?

Fourth, in filling scarce academic vacancies, professors of super strong passionate political ideology, whether on the left or right, should usually be avoided. So also for students best form multidisiplinarity requires an objectivity such passionate people have lost and a difficult synthesis is not likely to be achieved by minds in ideological fetterss in our day. Some Harvard law professors could and did point to a wonderful example of just such ideology-based folly. This of course was the law school at Yale which was then viewed by many at Harvard as trying to improve legal education by importing a particular political ideology as a dominant factor.

Fifth, soft science should more intensely imitate the fundamental organizing ethos of hard science defined as the fundamental four discipline combination of math, physics, chemistry and engineering. This ethos deserves more imitation. After all, hard science has by a wide margin the best record for both one avoiding unidisciplinary folly and two making user friendly a big patch of multidisciplinary domain with frequent good results like those of physicist Richard Fineman when he so quickly found in cold O-rings the cause of our greatest space shuttle disaster. Previous extensions of the ethos into softer fear have worked well. For instance, biology starting 150 years ago with a descriptive mess not much related to deep theory has gradually absorbed the fundamental organizing ethos with marvelous results as new generations have come to use better thinking methods containing models that answer the question why. And there is no clear reason why the ethos of hard science can't also help in disciplines far less fundamental than biology.

Here as I interpret it is this fundamental organizing ethos I am talking about. One, you must both rank and use disciplines in order of fundamentalness. Two, you must, like it or not, master to tested fluency and routinely use the truly essential parts of all four constituents of the fundamental four discipline combination with particularly intense attention given to disciplines more fundamental than your own. Three, you may never practice either cross-disciplinary absorption without attribution or departure from a principle of economy that forbids explaining in any other way anything readily explainable from more fundamental material in your own or any other discipline. Four, but when the step three approach doesn't produce much new and useful insight, you should hypothesize and test to establishment new principles. ordinarily by using methods similar to those that created successful old principles. But you may not use any new principle inconsistent with an old one unless you can now prove that the old principle is not true.

You will note that compared with much current practice in soft science, the fundamental organizing ethos of hard science is more severe. This reminds one of pilot training, and this outcome is not a coincidence. Reality is talking to anyone who will listen. Like pilot training, the ethos of hard science does not say take what you wish, but learn it all to fluency like it or not. And rational organization of multiddisciplinary knowledge is forced by making mandatory one full attribution for cross-disciplinary takings and two mandatory preference for the most fundamental explanation. This simple idea may appear too obvious to be useful, but there is an old two-part rule that often works wonders in business, science, and elsewhere. One, take a simple basic idea. And two, take it very seriously.

And as some evidence for the value of taking very seriously the fundamental organizing ethos, I offer the example of my own life. I came to Harvard Law School very poorly educated with desolatory work habits and no college degree. I was admitted over the objection of Warren Abner CVI through the intervention of family friend Rosco Pound. I had taken one silly course in biology in high school, briefly learning mostly by rote an obviously incomplete theory of evolution portions of the anatomy of the paramecium and frog, plus a ridiculous concept of protoplasm that has since disappeared. To this day, I have never taken any course anywhere in chemistry, economics, psychology, or business. But I early took elementary physics and math and paid enough attention to somehow assimilate the fundamental organizing ethos of hard science, which I thereafter pushed further and further into softer and softer fair as my organizing guide and filing system in a search for whatever multi-disciplinary worldly wisdom it would be easy to get. Thus, my life became a sort of accidental educational experiment with respect to the feasibility and utility of a very gross academic extension of the fundamental organizing ethos by a man who also learned well what his own discipline had to teach.

What I found in my extended attempts to complete by informal means my stunted education was that plugging along with only ordinary will but with the fundamental organizing ethos as my guide, my ability to serve everything I loved was enhanced far beyond my desserts. Large gains came in places that seemed unlikely as I started out, sometimes making me like the only one without a blindfold in a highstakes game of pin the tail on the donkey. For instance, I was productively led into psychology where I had no plans to go, creating large advantages that deserve a story on another day.

Today I have no more story. I have finished my talk by answering my own questions as best I could in a brief time. What is most interesting to me in my answers is that while everything I have said is non-original and has long been obvious to the point of banality to many sound and well-educated minds, all the evils I decry remain grossly overpresent in the best of our soft science educational domains, wherein virtually every professor has a two unidisiplinary habit of mind. even while a better model exists just across the aisle in his own university. To me, this ridiculous outcome implies that the soft science departments tolerate perverse incentives. Wrong incentives are a major cause because, as Dr. Samuel Johnson so wisely observed, truth is hard to assimilate in any mind when opposed by interest. And if institutional incentives cause the problem, then a remedy is feasible because incentives can be changed. I have tried to demonstrate today and indeed by the example of my life that it is neither inevitable nor advantageous for soft science educational domains to tolerate as much unidisiplinary wrongheadedness as they now do. Please remember the word Dr. Johnson used to describe maintenance of academic ignorance that is removable through diligence. To Dr. Johnson, such conduct was treachery. And if duty will not move improvement, advantage is also available. There will be immense worldly rewards for law schools and other academic domains. As for Charlie Munger, in a more multidisciplinary approach to many problems, common or uncommon, and more fun as well as more accomplishment, the happier mental realm, I recommend, is one from which no one willingly returns. A return would be like cutting off one's hands.

Talk five revisited. As I review talk 5 in 2006, I would not change a word, and I continue to believe that my ideas are important. In my attitude, I may be displaying too much similarity to my long dead relative, Reverend Theodore Munger, former chaplain of Yale. Theodore published a collection of his sermons, laying out proper conduct with a strong ex cathedra tone. Then late in life he published a final edition reporting in his forward that he had made no changes at all and was now producing the new edition only because the extreme popularity of his sermons had caused excessive wear in the original printing plates.

Talk six, investment practices of leading charitable foundations. October 14th, 1998. Speech to the foundation financial officers group at Myiramar Sheraton Hotel, Santa Monica, California. Sponsored by the Conrad Hilton Foundation, the Amateur Athletic Foundation, the J. Paul Getty Trust, and Rio Hondo Memorial Foundation.

This speech delivered in October 1998 to the Foundation Financial Officers Group in Santa Monica helps account for Charlie's line, "It's sad but true. Not everybody loves me." In the talk, he attacks the accepted and practiced orthodoxy of his audience with sharp humor, though always without malice. Charlie has a deep and abiding belief in philanthropy as is demonstrated by his own generous giving and he seeks here to save the philanthropic community from itself. Charlie believes foundations should serve as societal exemplars which means they must discourage wasteful non-productive practices. He posits a choice for his audience. The model of genius statesman Ben Franklin or that of disgraced fund manager Bernie Kornfeld. Referring to his days as a limited partnership manager, Charlie employs as his typical self-deprecation and self-reflection. Early Charlie Munger is a horrible career model for the young. If Charlie can emerge from that state successfully, he seems to be saying, so can the wayward foundation managers in his audience.

I am speaking here today because my friend John Argue asked me. And John well knew that I, who, unlike many other speakers on your agenda, have nothing to sell any of you, would be irreverent about much current investment practice in large institutions, including charitable foundations. Therefore, any hostility my talk will cause should be directed at John Argu, who comes from the legal profession and may even enjoy it.

It was long the norm at large charitable foundations to invest mostly in unleveraged marketable domestic securities, mostly equities. The equities were selected by one or a very few investment counseling organizations. But in recent years, there has been a drift toward more complexity. Some foundations following the lead of institutions like Yale have tried to become much better versions of Bernie Kornfeld's fund of funds. This is an amazing development. Few would have predicted that long after Kornfeld's fall into disgrace, major universities would be leading foundations into Kornfeld's system.

Now in some foundations there are not few but many investment counselors chosen by an additional layer of consultants who are hired to decide which investment counselors are best. Help in allocating funds to various categories. Make sure that foreign securities are not neglected in favor of domestic securities. Check the validity of claimed investment records. Ensure that claimed investment styles are scrupulously followed and help augment an already large diversification in a way that conforms to the latest notions of corporate finance professors about volatility and beta. But even with this amazingly active would-be polymathic new layer of consultants choosing consultants, the individual investment counselors in picking common stocks still rely to a considerable extent on a third layer of consultants. The third layer consists of the security analysts employed by investment banks. These security analysts receive enormous salaries, sometimes set in seven figures after bidding wars. The hiring investment banks recoup these salaries from two sources. One, commissions and trading spreads borne by security buyers, some of which are rebated as soft dollars to money managers, plus two, investment banking charges paid by corporations that appreciate the enthusiastic way their securities are being recommended by the security analysts.

There is one thing sure about all this complexity, including its touches of behavior lacking the full punctilio of honor. Even when nothing but unleveraged stockpicking is involved, the total cost of all the investment management plus the frictional costs of fairly often getting in and out of many large investment positions can easily reach 3% of foundation net worth per annum if foundations urged on by consultants add new activity year after year. This full cost doesn't show up in conventional accounting but that is because accounting has limitations and not because the full cost isn't present.

Next we come to time for a little arithmetic. It is one thing each year to pay the cruier 3% of starting wealth when the average foundation is enjoying a real return say of 17% before the cruier take. But it is not written in the stars that foundations will always gain 17% growth, a common result in recent years. And if the average annual gross real return from indexed investment in equities goes back say to 5% over some long future period and the cruier's take turns out to remain the waste it has always been even for the average intelligent player then the average intelligent foundation will be in a prolonged uncomfortable shrinking mode. After all 5% - 3% minus 5% in donations leaves an annual shrinkage of 3%. All the equity investors in total will surely bear a performance disadvantage per annum equal to the total croo's costs they have jointly elected to bear. This is an inescapable fact of life and it is also inescapable that exactly half of the investors will get a result below the median result after the kier's take which median result may well be somewhere between unexciting and lousy.

Human nature being what it is most people assume away worries like those I raise. After all, centuries before Christ, Damascan noted, "What a man wishes, he will believe." And in self-appraisals of prospects and talents, it is the norm, as Damascan predicted, for people to be ridiculously overoptimistic. For instance, a careful survey in Sweden showed that 90% of automobile drivers considered themselves above average. And people who are successfully selling something, as investment counselors do, make Swedish drivers sound like depressives. Virtually every investment expert's public assessment is that he is above average, no matter what the evidence to the contrary.

But you may think my foundation at least will be above average. It is well-endowed, hires the best, and considers all investment issues at length and with objective professionalism. And to this I respond that an excess of what seems like professionalism will often hurt you horribly. Precisely because the careful procedures themselves often lead to overconfidence in their outcome. General Motors recently made just such a mistake and it was a laal palooa using fancy consumer surveys. Its excess of professionalism. It concluded not to put a fourth door in a truck designed to serve as the equivalent of a comfortable five passenger car. Its competitors, more basic, had actually seen five people enter and exit cars. Moreover, they had noticed that people were used to four doors in a comfortable five passenger car and that biological creatures ordinarily prefer effort minimization in routine activities and don't like removals of long enjoyed benefits. There are only two words that come instantly to mind in reviewing General Motors's horrible decision, which has blown many hundreds of millions of dollars. And one of those words is oops.

Similarly, the hedge fund known as Long-Term Capital Management recently collapsed through overconfidence in its highly leveraged methods despite IQs of its principles that must have averaged 160. Smart, hard-working people aren't exempted from professional disasters from overconfidence. Often they just go aground in the more difficult voyages they choose relying on their self-appraisals that they have superior talents and methods. It is of course irritating that extra care and thinking is not all good but also introduces extra error. But most good things have undesired side effects and thinking is no exception. The best defense is that of the best physicists who systematically criticize themselves to an extreme degree using a mindset described by Nobel laureate Richard Feynman as follows. The first principle is that you must not fool yourself and you're the easiest person to fool.

But suppose that an abnormally realistic foundation thinking like Feynman fears a poor future investment outcome because it is unwilling to assume that its unleveraged equities will outperform equity indexes minus all investment costs merely because the foundation has adopted the approach of becoming a fund of funds with much investment turnover and layers of consultants who consider themselves above average. What are this fearful foundation's options as it seeks improved prospects? There are at least three modern choices.

One, the foundation can both dispense with its consultants and reduce its investment turnover as it changes to indexed investment in equities. Two, the foundation can follow the example of Berkshire Hathaway and thus get total annual CRPA costs below one-tenth of 1% of principal per annum by investing with virtually total passivity in a very few much admired domestic corporations. And there is no reason why some outside advice can't be used in this process. All the fee payer has to do is suitably control the high talent in investment counseling organizations so that the servant becomes the useful tool of its master instead of serving itself under the perverse incentives of a sort of madhatter's tea party. Three, the foundation can supplement unleveraged investment in marketable equities with investment in limited partnerships that do some combination of the following. Unleveraged investment in high-tech corporations in their infancy, leveraged investments in corporate buyouts, leveraged relative value trades in equities, and leveraged convergence trades and other exotic trades in all kinds of securities and derivatives.

For the obvious reasons given by purveyors of indexed equities, I think choice one, indexing, is a wiser choice for the average foundation than what it is now doing in unleveraged equity investment and particularly so as its present total kier costs exceed 1% of principal per annum. Indexing can't work well forever if almost everybody turns to it, but it will work all right for a long time. Choice three, investment in fancy limited partnerships, is largely beyond the scope of this talk. I will only say that the Munger Foundation does not so invest and briefly mention two considerations bearing on LBO funds. The first consideration bearing on LBO funds is that buying 100% of corporations with much financial leverage and two layers of promotional carry, one for the management and one for the general partners in the LBO fund is no sure thing to outperform equity indexes in the future if equity indexes perform poorly in the future. In substance, an LBO fund is a better way of buying equivalents of marketable equities on margin. And the debt could prove disastrous if future marketable equity performance is bad and particularly so if the bad performance comes from generally bad business conditions. The second consideration is increasing competition for LBO candidates. For instance, if the LBO candidates are good service corporations, General Electric can now buy more than $10 billion worth per year in GE's credit corporation with 100% debt financing at an interest rate only slightly higher than the US government is paying. This sort of thing is not ordinary competition, but super competition. And there are now very many LBO funds, both large and small, mostly a wash in money and with general partners highly incentivized to buy something. In addition, there is increased buying competition from corporations other than GE using some combination of debt and equity. In short, in the LBO field, there is a buried co-variance with marketable equities toward disaster in generally bad business conditions, and competition is now extreme. Given time limitations, I can say no more about limited partnerships, one of which I once ran.

This leaves for extensive discussion only foundation choice two. More imitation of the investment practices of Berkshire Hathaway in maintaining marketable equity portfolios with virtually zero turnover and with only a very few stocks chosen. This brings us to the question of how much investment diversification is desirable at foundations. I have more than skepticism regarding the orthodox view that huge diversification is a must for those wise enough. So that indexation is not the logical mode for equity investment. I think the orthodox view is grossly mistaken. In the United States, a person or institution with almost all wealth invested long-term in just three fine domestic corporations is securely rich. And why should such an owner care if at any time most other investors are faring somewhat better or worse? Particularly when he rationally believes like Berkshire that his long-term results will be superior by reason of his lower costs required emphasis on long-term effects and concentration in his most preferred choices. I go even further. I think it can be a rational choice in some situations for a family or a foundation to remain 90% concentrated in one equity. Indeed, I hope the Mongers follow roughly this course. And I note that the Robert Woodruff foundations have so far proven extremely wise to retain an approximately 90% concentration in the founder's Coca-Cola stock. It would be interesting to calculate just how all American foundations would have fared if they had never sold a share of founder's stock. Very many, I think, would now be much better off. But you may say the diversifiers simply took out insurance against a catastrophe that didn't occur. And I reply, there are worse things than some foundations losing relative clout in the world. And rich institutions like rich individuals should do a lot of self-insurance if they want to maximize long-term results. Furthermore, all the good in the world is not done by foundation donations. Much more good is done through the ordinary business operations of the corporations in which the foundations invest. And some corporations do much more good than others do in a way that gives investors therein better than average long-term prospects. And I don't consider it foolish, stupid, evil, or illegal for a foundation to greatly concentrate investment in what it admires or even loves. Indeed, Ben Franklin required just such an investment practice for the charitable endowment created by his will.

One other aspect of Berkshire's equity investment practice deserves comparative mention. So far, there has been almost no direct foreign investment at Berkshire and much foreign investment at foundations. Regarding this divergent history, I wish to say that I agree with Peter Drucker that the culture and legal systems of the United States are especially favorable to shareholder interests compared to other interests and compared to most other countries. Indeed, there are many other countries where any good going to public shareholders has a very low priority and almost every other constituency stands higher in line. This factor I think is underweighed at many investment institutions probably because it does not easily lead to quantitative thinking using modern financial technique but some important factor doesn't lose share of force just because some expert can better measure other types of force generally I tend to prefer over direct foreign investment Berkshire's practice of participating in foreign economies through the likes of Coca-Cola and Gillette it.

To conclude, I will make one controversial prediction and one controversial argument. The controversial prediction is that if some of you make your investment style more like Berkshire Hathaway's in a long-term retrospect, you will be unlikely to have cause for regret, even if you can't get Warren Buffett to work for nothing. Instead, Berkshire will have cause for regret as it faces more intelligent investment competition. But Berkshire won't actually regret any disadvantage from your enlightenment. We only want what success we can get despite encouraging others to share our general views about reality. My controversial argument is an additional consideration weighing against the complex high-cost investment modalities becoming ever more popular at foundations. Even if, contrary to my suspicions, such modalities should turn out to work pretty well, most of the money-making activity would contain profoundly antisocial effects. This would be so because the activity would exacerbate the current harmful trend in which more of the nation's ethical young brain power is attracted into lucrative money management and its attendant modern frictions as distinguished from work providing much more value to others. Money management does not create the right examples. Early Charlie Munger is a horrible career model for the young because not enough was delivered to civilization in return for what was wrested from capitalism. And other similar career models are even worse. Rather than encourage such models, a more constructive choice at foundations is long-term investment concentration in a few domestic corporations that are wisely admired. Why not thus imitate Ben Franklin? After all, old Ben was very effective in doing public good, and he was a pretty good investor, too. Better his model, I think, than Bernie Kornfeld's. The choice is plainly yours to make.

Talk six revisited. A lot of water has passed under the bridge since this talk was made in 1998. And what has happened by 2006 is that we now see much more of the conduct I criticized. In particular, frictional costs for stock market investors have increased markedly. And there has been an increase in the share of young brain power becoming with respect to investments what the tout is with respect to horse racing tracks. Indeed, I recently heard Warren Buffett say that if present investment trends spread to racetracks, most bettors will try to improve results by always bringing along a well-paid personal tout. However, at the same time that lovers of frictional costs have been spending more on what they love, there has also been an increase in holdings of stocks that track market indexes in a manner imposing negligible costs. This cost-averse index-mimicking group does not grow fast enough to prevent an increase in total frictional costs but more stockholding is slowly being converted to the passive indexed mode.

Talk seven breakfast meeting of the philanthropy round table November 10th 2000 philanthropy roundtable Pasadena California.

This speech was delivered in November 2000 to the Philanthropy Roundtable in Pasadena. Startling Charlie's family and friends, Jodie Curtis of Foundation News and Commentary characterized Charlie as a friendly old uncle, one with a jolly sense of humor at that. Charlie's goal, as was the case in the previous speech, was to save foundations from their own mistakes by getting them to invest effectively with minimum waste. Charlie warns foundations that they often act unwisely because of a failure to understand their own investment operations related to the larger system of which they're a part. Never one to pull punches, he boldly and bluntly challenges his listeners to cure the ignorance that is jeopardizing their foundations and those who depend on them. Charlie coins the term fabbezlement, the functional equivalent of embezzlement, to explain how wealth is stripped away by layers of unnecessary investment managers and consultants.

I am here today to talk about so-called wealth effects from rising prices for US common stocks. I should concede at the outset that wealth effects are part of the academic discipline of economics and that I have never taken a single course in economics nor tried to make a single dollar ever from foreseeing macroeconomic changes. Nonetheless, I have concluded that most PhD economists underappraise the power of the common stock-based wealth effect under current extreme conditions.

Everyone now agrees on two things. First, spending proclivity is influenced in an upward direction when stock prices go up and in a downward direction when stock prices go down. Second, the proclivity to spend is terribly important in macroeconomics. However, the professionals disagree about the size and timing of wealth effects and how they interact with other effects, including the obvious complication that increased spending tends to drive up stock prices while stock prices are concurrently driving up spending. Also, of course, rising stock prices increase corporate earnings even when spending is static. For instance, by reducing pension cost accruals, after which stock prices tend to rise more. Thus, wealth effects involve mathematical puzzles that are not nearly so well worked out as physics theories and never can be.

The wealth effect from rising US stock prices is particularly interesting right now for two reasons. First, there has never been an advance so extreme in the price of widespread stock holdings. And with stock prices going up so much faster than GDP, the related wealth effect must now be bigger than was common before. Second, what has happened in Japan over roughly the last 10 years has shaken up academic economics, as it obviously should, creating strong worries about recession from wealth effects in reverse. In Japan with much financial corruption, there was an extreme rise in stock and real estate prices for a very long time, accompanied by extreme real economic growth compared to the United States. Then asset values crashed and the Japanese economy stalled out at a very suboptimal level. After this, Japan, a modern economy that had learned all the would-be corrective Keynesian and monetary tricks, pushed these tricks hard and long. Japan for many years not only ran an immense government deficit, but also reduced interest rates to a place within hailing distance of zero and kept them there. Nonetheless, the Japanese economy year after year stays stalled as Japanese proclivity to spend stubbornly resists all the tricks of the economists and Japanese stock prices stay down. This Japanese experience is a disturbing example for everyone. And if something like it happened here, it would leave shrunken charitable foundations feeling clobbered by fate. Let us hope, as is probably the case, that the sad situation in Japan is caused in some large part by social psychological effects and corruption peculiar to Japan. In such case, our country may be at least half as safe as is widely assumed.

Well, grant that spending proclivity as influenced by stock prices is now an important subject, and that the long Japanese recession is disturbing. How big are the economic influences of US stock prices? A median conclusion of the economics professionals based mostly on data collected by the Federal Reserve system would probably be that the wealth effect on spending from stock prices is not all that big. After all, even now, real household net worth, excluding pensions, is probably up by less than 100% over the last 10 years, and remains a pretty modest figure per household. While market value of common stock is probably not yet one-third of aggregate household net worth, excluding pensions. Moreover, such household wealth in common stocks is almost incredibly concentrated and the super rich don't consume in proportion to their wealth. Leaving out pensions, the top 1% of households probably hold about 50% of common stock value, and the bottom 80% probably hold about 4%. Based on such data plus unexciting past correlation between stock prices and spending, it is easy for a professional economist to conclude say that even if the average household spends incrementally at a rate of 3% of asset values in stock, consumer spending would have risen less than .5% per year over the last 10 years, as a consequence of the huge unprecedented long-lasting consistent boom in stock prices.

I believe that such economic thinking widely misses underlying reality right now. To me, such thinking looks at the wrong numbers and asks the wrong questions. Let me, the ultimate amateur, boldly try to do a little better or at least a little differently. For one thing, I have been told probably correctly that Federal Reserve data collection due to practical obstacles doesn't properly take into account pension effects, including effects from 401k and similar plans. Assume some 63-year-old dentist has $1 million in GE stock in a private pension plan. The stock goes up in value to $2 million, and the dentist, feeling flush, trades in his very old Chevrolet and leases a new Cadillac at the giveaway rate now common. To me, this is an obvious large wealth effect in the dentist's spending. To many economists, using Federal Reserve data, I suspect the occasion looks like profligate dis-savings by the dentist. To me, the dentist and many others like him seem to be spending a lot more because of a very strong pension-related wealth effect. Accordingly, I believe that the present-day wealth effect from pension plans is far from trivial and much larger than it was in the past.

For another thing, the traditional thinking of economists often does not take into account implications from the idea of bezel. Let me repeat bezel. B-E-Z-E-L. The word bezel is a contraction of the word embezzle and it was coined by Harvard economics professor John Kenneth Galbraith to stand for the increase in any period of undisclosed embezzlement. Galbraith coined the bezel word because he saw that undisclosed embezzlement per dollar has a very powerful stimulating effect on spending. After all, the embezzler spends more because he has more income, and his employer spends as before because he doesn't know any of his assets are gone. But Galbraith did not push his insight on. He was content to stop with being a stimulating gadfly. So I will now try to push Galbraith's bezel concept to the next logical level.

As Keynes showed, in a native economy relying on earned income, when the seamstress sells a coat to the shoemaker for $20, the shoemaker has $20 less to spend and the seamstress has $20 more to spend. There is no laal palooa effect on aggregate spending. But when the government prints another $20 bill and uses it to buy a pair of shoes, the shoemaker has another $20 and no one feels poorer. And when the shoemaker next buys a coat, the process goes on and on, not to an infinite increase, but with what is now called the Keynesian multiplier effect, a sort of laal palooa effect on spending. Similarly, an undisclosed embezzlement has stronger stimulative effects per dollar on spending than a same-sized honest exchange of goods. Galbraith, being Scottish, liked the bleakness of life demonstrated by his insight. After all, the Scottish enthusiastically accepted the idea of pre-ordained unfixable infant damnation. But the rest of us don't like Galbraith's insight. Nevertheless, we have to recognize that Galbraith was roughly right. No doubt Galbraith saw the Keynesian multiplier type economic effects promised by increases in bezel. But he stopped there. After all, bezel could not grow very big because the discovery of massive theft was nearly inevitable and sure to have reverse effects in due course. Thus the increase in private bezel could not drive economies up and up and on and on at least for a considerable time like government spending.

Deterred by the apparent smallness of economic effects from his insight, Galbraith did not ask the next logical question. Are there important functional equivalents of bezel that are large and not promptly self-destructive? My answer to this question is yes. I will next describe only one. I will join Galbraith in coining new words. First fabbezzle to stand for the functional equivalent of bezel. Second fabbezlement to describe the process of creating fabbezzle and third febasers to describe persons engaged in fbezzlement. Then I will identify an important source of fezzle right in this room. You people I think have created a lot of fezzle through your foolish investment management practices in dealing with your large holdings of common stock. If a foundation or other investor wastes 3% of assets per year in unnecessary nonproductive investment costs in managing a strongly rising stock portfolio, it still feels richer despite the waste. While the people getting the wasted 3% for febasers though they are think they are virtuously earning income. The situation is functioning like undisclosed embezzlement without being self-limited. Indeed, the process can expand for a long while by feeding on itself. And all the while, what looks like spending from the earned income of the receivers of the wasted 3% is in substance spending from a disguised wealth effect from rising stock prices.

This room contains many people pretty well stricken by expired years in my generation or the one following. We tend to believe in thrift and avoiding waste as good things, a process that has worked well for us. It is paradoxical and disturbing to us that economists have long praised foolish spending as a necessary ingredient of a successful economy. Let us call foolish expenditures foolishures. And now you holders of old values are hearing one of your own add to the case for foolures. The case for fbezzlements, the functional equivalent of embezzlements. This may not seem like a nice way to start a new day. Please be assured that I don't like fbezzlements. It is just that I think fbezzlements are widespread and have powerful economic effects. And I also think that one should recognize reality even when one doesn't like it. Indeed, especially when one doesn't like it. Also, I think one should cheerfully endure paradox that one can't remove by good thinking. Even in pure mathematics, they can't remove all paradoxes. And the rest of us should also recognize we are going to have to endure a lot of paradox like it or not.

Let me also take this occasion to state that my previous notion of 3% of assets per annum in waste in much of institutional investment management related to stocks is quite likely too low in a great many cases. A friend after my talk to foundation financial officers sent me a summary of a study about mutual fund investors. The study concluded that the typical mutual fund investor gained at 7.25% per year in a 15-year period when the average stock fund gained at 12.8% per year, presumably after expenses. Thus, the real performance lag for investors was over 5% of assets per year in addition to whatever percentage per year the mutual funds after expenses lagged behind stock market averages. If this mutual fund study is roughly right, it raises huge questions about foundation wisdom in changing investment managers all the time as mutual fund investors do. If the extra lag reported in the mutual fund study exists, it is probably caused in considerable measure by folly in the constant removal of assets from lagging portfolio managers being forced to liquidate stockholdings, followed by the placement of removed assets with new investment managers that have high pressure asset gaining hoses in their mouths and clients whose investment results will not be improved by the super rapid injection of new funds. I am always having trouble like that caused by this new mutual fund study. I describe something realistically that looks so awful that my description is disregarded as extreme satire instead of reality. Next, new reality tops the horror of my disbelieved description by some large amount. No wonder Munger notions of reality are not widely welcome.

This may be my last talk to charitable foundations. Now toss in with fbezzlement in investment management about $750 billion in floating ever growing ever renewing wealth from employee stock options. And you get a lot more common stock-related wealth effect driving consumption with some of the wealth effect from employee stock options being in substance a fezzle effect facilitated by the corrupt accounting practice now required by standard practice. Next, consider that each 100 point advance in the S&P adds about $1 trillion in stock market value and throw in some sort of Keynesian type multiplier effect related to all fezzlement. The related macroeconomic wealth effects I believe become much larger than is conventionally supposed and aggregate wealth effect from stock prices can get very large indeed. It is an unfortunate fact that great and foolish excess can come into prices of common stocks in the aggregate. They are valued partly like bonds based on roughly rational projections of use value in producing future cash, but they are also valued partly like Rembrandt paintings purchased mostly because their prices have gone up so far. This situation combined with big wealth effects at first up and later down can conceivably produce much mischief. Let us try to investigate this by a thought experiment. One of the big British pension funds once bought a lot of ancient art, planning to sell it 10 years later, which it did at a modest profit. Suppose all pension funds purchased ancient art and only ancient art with all their assets. Wouldn't we eventually have a terrible mess on our hands with great and undesirable macroeconomic consequences? And wouldn't the mess be bad if only half of all pension funds were invested in ancient art? And if half of all stock value became a consequence of mania, isn't the situation much like the case wherein half of pension assets are ancient art?

My foregoing acceptance of the possibility that stock value and aggregate can become irrationally high is contrary to the hard form efficient market theory that many of you once learned as gospel from your mistaken professors. Your mistaken professors were too much influenced by rational man models of human behavior from economics and too little by foolish man models from psychology and real world experience. Crowd folly, the tendency of humans under some circumstances to resemble lemmings, explains much foolish thinking of brilliant men and much foolish behavior, like the investment management practices of many foundations represented here today. It is sad that today each institutional investor apparently fears most of all that its investment practices will be different from the practices of the rest of the crowd.

Well, this is enough uncredentialed musing for one breakfast meeting. If I am at all right, our present prosperity has had a stronger boost from common stock price related wealth effects, some of them disgusting, than has been the case in many former booms. If so, what was greater on the upside in the recent boom could also be greater on the downside at some time of future stock price decline. Incidentally, the economists may well conclude eventually that when stock market advances and declines are regarded as long-lasting, there is more downside force on optional consumption per dollar of stock market decline than there is upside force per dollar of stock market rise. I suspect that economists would believe this already if they were more willing to take assistance from the best ideas outside their own discipline or even to look harder at Japan. Remembering Japan, I also want to raise the possibility that there are in the very long-term virtue effects in economics. For instance, that widespread corrupt accounting will eventually create bad long-term consequences as a sort of obverse effect from the virtue-based boost double-entry bookkeeping gave to the heyday of Venice. I suggest that when the financial scene starts reminding you of Sodom and Gomorrah, you should fear practical consequences even if you like to participate in what is going on. Finally, I believe that the implications for charitable foundations of my conclusions today combined with the conclusions in my former talk to foundation financial officers go way beyond implications for investment techniques. If I am right, almost all US foundations are unwise through failure to understand their own investment operations related to the larger system. If so, this is not good. A rough rule in life is that an organization foolish in one way in dealing with a complex system is all too likely to be foolish in another. So the wisdom of foundation donations may need as much improvement as investment practices of foundations. And here we have two more old rules to guide us. One rule is ethical and the other is credential. The ethical rule is from Samuel Johnson who believed that maintenance of easily removable ignorance by a responsible office holder was treacherous malfeasance in meeting moral obligation. The credential rule is that underlying the old Warner and Swasey advertisement for machine tools. The man who needs a new machine tool and hasn't bought it is already paying for it. The Warner and Swasey rule also applies, I believe, to thinking tools. If you don't have the right thinking tools, you and the people you seek to help are already suffering from your easily removable ignorance.

Talk 7 revisited. This talk in November 2000 turned out to be pretty timely because stock market unpleasantness thereafter greatly increased, particularly for high-tech stocks. But as nearly as I can tell, there has been absolutely no theoretical reaction from anyone who heard or read the talk. I still believe everything I said about significant macroeconomic effects from fezzlement through excessive investment costs. But no one trained in economics has ever tried to engage with me on this subject. Undeterred by this apathy, I am now going to push my reasoning one notch further by laying out a thought experiment extrapolating the combined reasoning of talks 6 and 7 to an assumed higher level of investment costs. Assume that 2006 stock prices rise by 200% while corporate earnings do not rise. At which point all the sensibly distributable earnings of all US corporations combined amount to less than the total of all stockholder investment costs because such costs rise proportionally with stock prices. Now, so long as this situation continues, no money at all net of investment costs is going out of all corporations to all corporate owners combined. Instead, frictional cost imposers get more than all sensibly distributable corporate earnings. And at the end of any year, the corporate owners in aggregate can get money by reason of their stockholding only by making stock sales to providers of new money who, considering high continuing investment costs for themselves and others, must expect that stock prices will keep rising indefinitely while all stock owners combined are getting nothing net except by selling stock to more new money. To many imposers of frictional investment costs, this peculiar state of affairs would seem ideal, with more than 100% of sensibly distributable corporate earnings going to precisely the right sort of people instead of being wasted on the shareholders. And some economists would regard the result as good because it came about in a market. But to me, it would resemble a weird and disturbing combination of one, a gambling casino imposing an unreasonably greedy take for the house, plus two, a form of Ponzi-like scheme similar to the market for expensive art in which participation would be unsuitable for pension funds, etc., plus three, a bubble of speculation that would eventually burst, probably with unfortunate macroeconomic consequences. And what the situation would not look like is a state of affairs likely to function well in guiding the capital development of the surrounding civilization. Such a state of affairs or even a lesser version would, I think, reduce the reputation of our country and deservedly so.

Talk 8, the great financial scandal of 2003. [Music] Summer 2000, an account by Charles T. Munger.

This parable and morality play gives Charlie a chance to vent his anger at the accounting profession's role in corporate malfeasance. Handwritten by Charlie when he was vacationing in the summer of 2000, the speech is an eerie prediction of the scandals that surfaced well before his predicted date of 2003 and that continue today to be an important issue. The early quant tech appears to be loosely based on C.F. Braun Engineering, a firm whose brilliant founder Carl F. Braun and business practices Charlie greatly admired. The firm was ultimately sold to the Kuwaiti government, so the later quant is not modeled in any way on C.F. Braun Engineering. Charlie chronicles how leadership change in a very successful company can consign the firm to mediocrity or worse to disrepute and failure. When new management adopts modern financial engineering techniques, especially the use of stock options that aren't expensed, all is lost. Shakespeare's Henry V VI said, "The first thing we do, let's kill all the lawyers." Charlie, an attorney, might reject that idea, but accountants, well, the great financial scandal erupted in 2003 with the sudden deserved disgrace of Quant Technical Corporation, always called Quant Tech. By this time, Quant Tech was the country's largest pure engineering firm, having become so as a consequence of the contributions of its legendary founder, engineer Albert Berzog Quant. After 2003, people came to see the Quant story as a sort of morality play.

divided into two acts. Act one, the era of the great founding engineer was seen as a golden age of sound values. Act two, the era of the founders's immediate successors was seen as the age of false values with quant tech becoming in the end a sort of latter-day Sodom or Gomorrah.

In fact, as this account will make clear, the change from good to evil did not occur all at once when Quantek's founder died in 1982. Much good continued after 1982, and serious evil had existed for many years prior to 1982 in the financial culture in which Quantech had to operate.

The Quant story is best understood as a classic sort of tragedy in which a single flaw is inexorably punished by remorseless fate. The flaw was the country's amazingly peculiar accounting treatment for employee stock options. The victims were quant and its country. The history of the great financial scandal as it actually happened could have been written by Sophocles.

As his life ended in 1982, Albert Berzog Quant delivered to his successors and his maker a wonderfully prosperous and useful company. The sole business of Quant was designing for fees all over the world a novel type of super clean and superefficient small power plant that improved electricity generation. By 1982, Quant had a dominant market share in its business and was earning $und00 million on revenues of $1 billion.

Its costs were virtually all costs to compensate technical employees engaged in design work. Direct employee compensation cost amounted to 70% of revenues. Of this 70% 30% was base salaries and 40% was incentive bonuses being paid out under an elaborate system designed by the founder. All compensation was paid in cash.

There were no stock options because the old man considered the accounting treatment required for stock options to be weak, corrupt, and contemptable, and he no more wanted bad accounting in his business than he wanted bad engineering. Moreover, the old man believed in tailoring his huge incentive bonuses to precise performance standards established for individuals or small groups, instead of allowing what he considered undesirable compensation outcomes, both high and low, such as he believed occurred under other companies stock option plans.

Yet, even under the old man's system, most of Quantex's devoted longtime employees were becoming rich or sure to get rich. This was happening because the employees were buying Quantex stock in the market, just like non-employee shareholders. The old man had always figured that people smart enough and self-disciplined enough to design power plants could reasonably be expected to take care of their own financial affairs in this way. He would sometimes advise an employee to buy Quant stock, but more paternalistic than that, he would not become.

By the time the founder died in 1982, Quant was debt-free and except as a reputation enhancer, really didn't need any shareholders equity to run its business, no matter how fast revenues grew. However, the old man believed with Ben Franklin that it is hard for an empty sack to stand upright, and he wanted quant to stand upright. Moreover, he loved his business and his co-workers, and he always wanted to have on hand large amounts of cash equivalents so as to be able to maximize work out or work up chances if an unexpected adversity or opportunity came along. And so in 1982, Quant had on hand $500 million in cash equivalents amounting to 50% of revenues.

Possessing a strong balance sheet and a productive culture and also holding a critical mass of expertise in a rapidly changing and rapidly growing business. Quant using the old man's methods by 1982 was destined for 20 years ahead to maintain profits at 10% of revenues while revenues increased at 20% per year. After these 20 years commencing in 2003, Quant's profit margin would hold for a very long time at 10% while revenue growth would slow down to 4% per year. But no one at Quant knew precisely when its inevitable period of slow revenue growth would begin.

The old man's dividend policy for Quant was simplicity itself. He never paid a dividend. Instead, all earnings simply piled up in cash equivalents. Every truly sophisticated investor in common stocks could see that the stock of cashrich Quantech provided a splendid investment opportunity. in 1982 when it sold at a mere 15 times earnings and despite its brilliant prospects had a market capitalization of only $1.5 billion.

This low market capitalization despite brilliant prospects existed in 1982 because other wonderful common stocks were also then selling at 15 times earnings or less as a natural consequence of high interest rates then prevailing. plus disappointing investment returns that had occurred over many previous years for holders of typical diversified portfolios of common stocks. One result of Quantex's low market capitalization in 1982 was that it made Quantex directors uneasy and dissatisfied right after the old man's death.

A wiser board would then have bought in Quantex stock very aggressively, using up all cash on hand and also borrowing funds to use in the same way. However, such a decision was not in accord with conventional corporate wisdom in 1982. And so the directors made a conventional decision. They recruited a new CEO and CFO from outside Quant, in particular from a company that had a conventional stock option plan for employees and also possessed a market capitalization at 20 times reported earnings even though its balance sheet was weaker than Quantex and its earnings were growing more slowly than earnings at Quant.

Incident to the recruitment of the new executives. It was made plain that Quantex directors wanted a higher market capitalization as soon as feasible. The newly installed Quant officers quickly realized that the company could not wisely either drive its revenues up at an annual rate higher than the rate in place or increase Quantex profit margin. The founder had plainly achieved an optimum in each case. Nor did the new officers dare tinker with an engineering culture that was working so well.

Therefore, the new officers were attracted to employing what they called modern financial engineering, which required prompt use of any and all arguably lawful methods for driving up reported earnings with big simple changes to be made first. By a strange irony of fate, the accounting convention for stock options that had so displeased Quantex founder now made the new officer's job very easy and would ultimately ruin Quantex reputation.

There was now an accounting convention in the United States that provided employees were first given options required that when easily marketable stock was issued to employees at a below market price the bargain element for the employees although roughly equivalent to cash could not count as a compensation expense in determining a company's reported profits. This amazingly peculiar accounting convention had been selected by the accounting profession over the objection of some of its wisest and most ethical members because corporate managers by and large preferred that their gains from exercising options covering their employer's stock not be counted as an expense in determining their employer's earnings.

The accounting profession in making its amazingly peculiar decision had simply followed the injunction so often followed by persons quite different from prosperous entrenched accountants. The injunction was that normally followed by insecure and powerless people whose bread I eat, his song I sing. Fortunately, the income tax authorities did not have the same amazingly peculiar accounting idea as did the accounting profession. Elementary common sense prevailed, and the bargain element in stock option exercises, was treated as an obvious compensation expense, deductible in determining income for tax purposes.

Quantex new officers, financially shrewd as they were, could see at a glance that given the amazingly peculiar accounting convention and the sound income tax rules in place, Quant had a breathtakingly large opportunity to increase its reported profits by taking very simple action. The fact that so large a share of Quantex annual expense was incentive bonus expense provided a modern financial engineering opportunity second to none.

For instance, it was mere child's play for the executives to realize that if in 1982, Quant had substituted employee stock option exercise profits for all its incentive bonus expenses of $400 million. while using bonus money saved plus option prices paid to buy back all shares issued in option exercises and keeping all else the same. The result would have been to drive Quantex 1982 reported earnings up by $400% to $500 million from $100 million while shares outstanding remained exactly the same. And so it seemed that the obviously correct ploy for the officers was to start substituting employee stock option exercise profits for incentive bonuses.

Why should a group of numerate engineers care whether their bonuses were in cash or virtually perfect equivalents of cash? Arranging such substitutions on any schedule desired seemed like no difficult chore. However, it was also mere child's play for the new officers to realize that a certain amount of caution and restraint would be desirable in pushing their new ploy. Obviously, if they pushed their new ploy too hard in any single year, there might be rebellion from Quantex accountants or undesirable hostility from other sources. This in turn would risk killing a goose with a vast ability to deliver golden eggs, at least to the officers.

After all, it was quite clear that their ploy would be increasing reported earnings only by adding to real earnings an element of phony earnings. Phony in the sense that Quant would enjoy no true favorable economic effect except a temporary fraud type effect similar to that from overounting closing inventory from that part of reported earnings increases attributable to use of the ploy. The new CEO privately called the desirable cautious approach wisely restrained falsehood.

Plainly, the new officers saw it would be prudent to shift bonus payments to employee stock option exercise profits in only a moderate amount per year over many years ahead. They privately called the prudent plan they adopted their dollop by dollop system, which they believed had four obvious advantages. First, a moderate dollop of phony earnings in any single year would be less likely to be noticed than a large dollop. Second, the large long-term effect from accumulating many moderate dollops of phony earnings over the years would also tend to be obscured in the dollop by dollop system. As the CFO pithily and privately said, if we mix only a moderate minority share of turds with the raisins each year, probably no one will recognize what will ultimately become a very large collection of turds.

Third, the outside accountants, once they had blessed a few financial statements containing earnings increases, only a minority share of which were phony, would probably find it unendurably embarrassing not to bless new financial statements containing only the same phony proportion of reported earnings increases. Fourth, the dollop by dollop system would tend to prevent disgrace or something more seriously harmful for Quantex officers. With virtually all corporations except Quant having ever more liberal stock option plans, the officers could always explain that a moderate dollop of shift toward compensation in option exercise form was needed to help attract or retain employees. Indeed, given corporate culture and stock market enthusiasm likely to exist as a consequence of the strange accounting convention for stock options, this claim would often be true.

With these four advantages, the dollop bybyop system seemed so clearly desirable that it only remained for quant officers to decide how big to make their annual dollops of phony earnings. This decision too turned out to be easy. The officers first decided upon three reasonable conditions they wanted satisfied. First, they wanted to be able to continue their dollop by dollop system without major discontinuities for 20 years. Second, they wanted Quantex reported earnings to go up by roughly the same percentage each year throughout the whole 20 years because they believed that financial analysts representing institutional investors would value Quantex stock higher if reported annual earnings growth never significantly varied. Third, to protect credibility for reported earnings, they never wanted to strain the credul of investors by reporting even in their 20th year that Quant was earning more than 40% of revenues from designing power plants.

With these requirements, the math was easy. Given the officer's assumption that Quantex's nonphony earnings and revenues were both going to grow at 20% per year for 20 years, the officers quickly decided to use their dollar by dollar system to make Quantex reported earnings increase by 28% per year instead of the 20% that would have been reported by the founder. And so the great scheme of modern financial engineering went forward toward tragedy at Quant. And few disreputable schemes of man have ever worked better in achieving what was attempted.

Quantex reported earnings certified by its accountants increased regularly at 28% per year. No one criticized Quantex financial reporting except a few people widely regarded as impractical, overly theoretical, misanthropic cranks. It turned out that the founders's policy of never paying dividends, which was continued, greatly helped in preserving credibility for Quantex reports that its earnings were rising steadily at 28% per year with cash equivalents on hand. so remarkably high, the Pavlovian mere association effects that so often impair reality recognition served well to prevent detection of the phony element in the reported earnings.

It was therefore natural after the dollop by dollop system had been in place for a few years for Quantex officers to yearn to have Quantex reported earnings per share keep going up at 28% per year while cash equivalents grew much faster than they were then growing. This turned out to be a snap. By this time, Quantex stock was selling at a huge multiple of reported earnings, and the officers simply started causing some incremental stock option exercises that were not matched either by reductions in cash bonuses paid or by repurchases of Quantex stock.

This change, the officers easily recognized, was a very helpful revision of their original plan. Not only was detection of the phony element in the reported earnings made much more difficult as cash accumulation greatly accelerated but also a significant amount of Ponzi scheme or chain letter effect was being introduced into quant with real benefits for present shareholders including the officers. At this time, the officers also fixed another flaw in their original plan. They saw that as Quantex reported earnings containing an increasing phony element kept rising at 28%, Quantex income taxes, as a percentage of reported pre-tax earnings kept going lower and lower. This plainly increased their chances of attracting undesired questions and criticism.

This problem was soon eliminated. Many power plants in foreign nations were built and owned by governments, and it proved easy to get some foreign governments to raise Quantex design fees, provided that in each case, slightly more than the fee increase was paid back in additional income taxes to the foreign government concerned. Finally, for 2002, Quant reported $16 billion in earnings on $47 billion in revenue that now included a lot more revenue from interest on cash equivalents than would have been present without net issuances of new stock over the years. Cash equivalents on hand now amounted to an astounding $85 billion. And somehow it didn't seem impossible to most investors that a company virtually drowning in so much cash could be earning the $16 billion it was reporting.

The market capitalization of Quant at its peak early in 2003 became $1.4 trillion, about 90 times earnings reported for 2002. However, all man's desired geometric progressions, if a high rate of growth is chosen, at last come to grief on a finite earth. And the social system for man on earth is fair enough eventually that almost all massive cheating ends in disgrace. And in 2003, Quant failed in both ways.

By 2003, Quantex real earning power was growing at only 4% per year after sales growth had slowed to 4%. There was now no way for Quant to escape, causing a big disappointment for its shareholders, now largely consisting of institutional investors. This disappointment triggered a shocking decline in the price of Quantex stock which went down suddenly by 50%. This price decline in turn triggered a careful examination of Quantex financial reporting practices which at long last convinced nearly everyone that a very large majority of Quantex reported earnings had long been phony earnings and that massive and deliberate misreporting had gone on for a great many years.

This triggered even more price decline for Quant stock until in mid 2003 the market capitalization of Quant was only $140 billion, down 90% from its peak only 6 months earlier. A quick 90% decline in the price of the stock of such an important company that was previously so widely owned and admired caused immense human suffering. Considering the $1.3 trillion in market value that had disappeared and naturally with Quantex's deserved disgrace, the public and political reaction included intense hatred and revulsion directed at Quant even though its admirable engineers were still designing the nation's best power plants.

Moreover, the hatred and revulsion did not stop with Quant. It soon spread to other corporations, some of which plainly had undesirable financial cultures different from quantex only in degree. The public and political hatred, like the behavior that had caused it, soon went to gross excess and fed upon itself. Financial misery spread far beyond investors into a serious recession like that of Japan in the 1990s following the long period of false Japanese accounting.

There was huge public antipathy to profess following the great scandal. The accounting profession of course got the most blame. The rulemaking body for accountants had long borne the acronym FASBY and now nearly everyone said this stood for financial accounts still bogus. Economics professors likewise drew much criticism for failing to blow the whistle on false accounting and for not sufficiently warning about the eventual bad macroeconomic effects of widespread false accounting. So great was the disappointment with conventional economists that Harvard's John Kenneth Galbreth received the Nobel Prize in economics. After all, he had once predicted that massive undetected corporate embezzlement would have a wonderfully stimulating effect on the economy. And people could now see that something very close to what Galbrath had predicted had actually happened in the years preceding 2003 and had thereafter helped create a big reactive recession.

With Congress and the SEC so heavily peopleled by lawyers, and with lawyers having been so heavily involved in drafting financial disclosure documents now seen as bogus, there was a new lawyer joke every week. One such was, "The butcher says the reputation of lawyers has fallen dramatically." And the checkout clerk replies, "How do you fall dramatically off a pancake?" But the hostility to established professions did not stop with accountants, economists, and lawyers. There were many adverse ruboff effects on the reputations of professionals who had always performed well, like engineers who did not understand the financial fraud that their country had made a conventional requirement. In the end, much that was good about the country and needed for its future felicity was widely and unwisely hated.

At this point, action came from a higher realm. God himself, who reviews all, changed his decision schedule to bring to the four the sad case of the great financial scandal of 2003. He called in his chief detective and said, "Smith, bring in for harsh but fair judgment the most depraved of those responsible for this horrible outcome." But when Smith brought in a group of security analysts who had long and uncritically touted the stock of Quant, the great judge was displeased. Smith, he said, I can't come down hardest on low-level cognitive error, much of it subconsciously caused by the standard incentive systems of the world.

Next, Smith brought in a group of SEC commissioners and powerful politicians. No, no, said the great judge. These people operate in a virtual maelstrom of regrettable forces and can't reasonably be expected to meet the behavioral standard you seek to impose. Now the chief detective thought he had gotten the point. He next brought in the corporate officers who had practiced their version of modern financial engineering at Quant. You are getting close, said the great judge, but I told you to bring in the most depraved. These officers will of course get strong punishment for their massive fraud and disgusting stewardship of the great engineers legacy. But I want you to bring in the miscreants who will soon be in the lowest circle of hell. The ones who so easily could have prevented all this calamity.

At last the chief detective truly understood. He remembered that the lowest circle of hell was reserved for traitors. And so he now brought in from purgatory a group of elderly persons who in their days on earth had been prominent partners in major accounting firms. Here are your traders, said the chief detective. They adopted the false accounting convention for employee stock options. They occupied high positions in one of the noblest professions which like yours help make society work right by laying down the right rules. They were very smart and securely placed and it is inexcusable that they deliberately caused all this lying and cheating that was so obviously predictable. They well knew what they were doing was disastrously wrong. Yet they did it anyway. Owing to the press of business in your judicial system, you made a mistake at first in punishing them so lightly. But now you can send them into the lowest circle in hell. Startled by the vehements and presumption, the great judge paused. Then he quietly said, "Well done, my good and faithful servant."

This account is not an implied prediction about 2003. It is a work of fiction. Except in the case of Professor Galbrath, any resemblance to real persons or companies is accidental. It was written in an attempt to focus possibly useful attention on certain modern behaviors and belief systems. Talk 8 revisited. I had a lot of fun composing this account in the summer of 2000, but I was serious as I tried to show how standard accounting treatment for stock options was functionally equivalent to simpler types of promotional fraud.

To me, a profession and a nation that allow unound accounting for management cost are leaning in the same moral direction as the group that leaves most of the steel out of the concrete in erecting high-rise apartment buildings. Moreover, the unound accounting is more virilent than the murderous construction practice. After all, the defective constructors have a harder time rationalizing their deplorable behavior. And therefore, the bad accounting will more easily spread than the defective construction, which is exactly what happened.

As defective accounting for stock options became ubiquitous, there has been some good news since Talk 8 was delivered. The accounting profession now requires that some provision for stock option cost be charged against earnings. However, by the time stock options are exercised, the total cost charged is usually far less than total cost incurred. Moreover, the part of the cost that is charged to earnings is often manipulated downward by dubious techniques. What this accounting saga constitutes is one more sad example of evil rewarded dying hard as a great many people conclude that something can't be evil if they are profiting from it.

Top nine, academic economics, strengths and faults after considering interdisciplinary needs. October 3rd, 2003. Herb K undergraduate lecture, University of California, Santa Barbara Economics Department. The editor of this book spent 12 consecutive hours with Charlie on the day he delivered this speech at the University of California at Santa Barbara. Our schedule that day, a 2-hour drive each way from Los Angeles, lunch, pre-talk meetings, the talk itself, a post-talk reception, and finally dinner at the home of Jeff Henley, chief financial officer and now chairman of Oracle. Despite then being within a few months of his 80th birthday, Charlie performed like a tireless virtuoso. His sharpness, stamina, and good humor during that long day were astounding and inspiring. What Charlie laid forth on that occasion might be considered the grand unified theory of the Munger approach. The talk incorporates the many ideas that Charlie discussed in his previous talks and presents them checklist style as a coherent philosophy. Charlie's audience, the economics department of this major university, was the perfect group on which to unleash this lament and remediation proposals. Besides about the lack of multidisciplinarianism in the soft sciences, [Music] I have outlined some remarks in a rough way, and after I'm finished talking from that outline, I'll take questions as long as anybody can endure listening until they drag me away to wherever else I'm supposed to go.

As you might guess, I agreed to do this because the subject of getting the soft sciences so they talk better to each other has been one that has interested me for decades. And of course, economics is in many respects the queen of the soft sciences. It's expected to be better than the rest. It's my view that economics is better at the multidisciplinary stuff than the rest of soft science. It's also my view that it's still lousy and I'd like to discuss this failure in this talk. As I talk about strengths and weaknesses in academic economics, one interesting fact you are entitled to know is that I never took a course in economics. And with this striking lack of credentials, you may wonder why I have the hutbah to be up here giving this talk. The answer is I have a black belt in hutzbah. I was born with it. Some people like some of the women I know have a black belt in spending. They were born with that. But what they gave me was a black belt in hutzba.

I come from two peculiar strands of experience that may have given me some useful economic insights. One is Bergkshire Hathaway and the other is my personal educational history. Berkshire of course has finally gotten interesting. When Warren took over Berkshire, the market capitalization was about $10 million. 40some years later, there are not many more shares outstanding now than there were then. And the market capitalization is about $100 billion, $10,000 for one. And since that has happened year after year in kind of a grind ahead fashion with very few failures, it eventually drew some attention indicating that maybe Warren and I knew something useful in microeconomics. For a long time, there was a Nobel Prize-winning economist who explained Berkshire Hathaway's success as follows. First, he said Berkshire beat the market in common stock investing through one sigma of luck because nobody could beat the market except by luck. This hard form version of efficient market theory was taught in most schools of economics at the time. People were taught that nobody could beat the market. Next, the professor went to two sigas and three sigas and four sigas. And when he finally got to six sigas of luck, people were laughing so hard he stopped doing it. Then he reversed the explanation 180°. He said, "No, it was still six sigas, but it was six sigas of skill." Well, this very sad history demonstrates the truth of Benjamin Franklin's observation in poor Richard's almanac. If you would persuade, appeal to interest and not to reason. The man changed his silly view when his incentives made him change it and not before.

I watched the same thing happen at the Jules Stein Eye Institute at UCLA. I asked at one point, "Why are you treating cataracts only with a totally obsolete cataract operation?" And the man said to me, "Charlie, it's such a wonderful operation to teach." When he stopped using that operation, it was because almost all the patients had voted with their feet. Again, appeal to interest and not to reason if you want to change conclusions. Well, Berkshire's whole record has been achieved without paying one ounce of attention to the efficient market theory in its hard form, and not one ounce of attention to the descendants of that idea, which came out of academic economics and went into corporate finance. and morphed into such obscenities as the capital asset pricing model which we also paid no attention to. I think you'd have to believe in the tooth fairy to believe that you could easily outperform the market by 7 percentage points peranom just by investing in high volatility stocks. Yet, believe it or not, like the Jules Stein doctor, people once believed this stuff and the belief was rewarded and it spread and many people still believe it. But Berkshire never paid any attention to it. Now, I think the world is coming our way and the idea of perfection in all market outcomes is going the way of the dodo. It was always clear to me that the stock market couldn't be perfectly efficient because as a teenager I'd been to the racetrack in Omaha where they had the paramutual system and it was quite obvious to me that if the house take the crooier's take was 17%. Some people consistently lost a lot less than 17% of all their bets and other people consistently lost more than 17% of all their bets. So the paramutual system in Omaha had no perfect efficiency and so I didn't accept the argument that the stock market was always perfectly efficient in creating rational prices. Indeed, there have been some documented cases since of people getting so good at understanding horses and odds that they actually are able to beat the house in offtrack betting. There aren't many people who can do that, but there are a few people in America who can.

Next, my personal education history is interesting because its deficiencies and my peculiarities eventually created advantages. For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn't stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else's discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that. I was just born with that yend. I also was born with a huge craving for synthesis. And when it didn't come easily, which was often, I would rag the problem. And then when I failed, I would put it aside, and I'd come back to it and rag it again. It took me 20 years to figure out how and why cult conversion methods worked, but the psychology departments haven't figured it out yet, so I'm ahead of them. But anyway, I have this tendency to want to rag the problems. Because World War II caught me, I drifted into some physics and the Airore sent me to Caltech where I did a little more physics as part of being made into a meteorologist. And there at a very young age, I absorbed what I call the fundamental full attribution ethos of hard science. That was enormously useful to me. Let me explain that ethos. Under this ethos, you've got to know all the big ideas in all the disciplines more fundamental than your own. You can never make any explanation that can be made in a more fundamental way in any other way than the most fundamental way. And you always take them with full attribution to the most fundamental ideas that you are required to use. When you're using physics, you say you're using physics. when you're using biology, you say you're using biology, and so on and so on. I could early see that that ethos would act as a fine organizing system for my thought, and I strongly suspected that it would work really well in the soft sciences as well as the hard sciences. So, I just grabbed it and used it all through my life in soft science as well as hard science. That was a very lucky idea for me.

Let me explain how extreme that ethos is in hard science. There is a constant, one of the fundamental constants in physics known as Boltzman's constant. You probably all know it very well. The interesting thing about Boltzman's constant is that Ludvig Boltzman didn't discover it. So why is Boltzman's constant now named for Boltzman? Well, the answer is that Boltzman derived that constant from basic physics in a more fundamental way than the poor forgotten fellow who found the constant in the first place in some less fundamental way. The ethos of hard science is so strong in favor of reductionism to the more fundamental body of knowledge that you can wash the discoverer right out of history when somebody else handles his discovery in a more fundamental way. I think that is correct. I think Boltzman's constant should be named for Boltzman. At any rate, in my history and Bergkshire's history, Berkshire went on and on into considerable economic success while ignoring the hard form efficient markets doctrine once very popular in academic economics and ignoring the descendants of that doctrine in corporate finance where the results became even sillier than they were in economics. This naturally encouraged me. Finally, with my peculiar history, I'm also bold enough to be here today because, at least when I was young, I wasn't a total klutz. For one year at the Harvard Law School, I was ranked second in a very large group. And I always figured that while there were always a lot of people much smarter than I was, I didn't have to hang back totally in the thinking game.

Let me begin by discussing the obvious strengths of academic economics. The first obvious strength and this is true of a lot of places that get repute is that it was in the right place at the right time. 200 years ago, aided by the growth of technology and the growth of other developments in civilization, the real output per capita of the civilized world started going up at about 2% peranom compounded. Before that, for the previous thousands of years, it had gone up at a rate that hovered just a hair's breadth above zero. And of course, economics grew up amidst this huge success. Partly it helped the success and partly it explained it. So naturally academic economics grew and lately with the collapse of all the communist economies as the free market economies or partially free market economies flourished that added to the reputation of economics. Economics has been a very favorable place to be if you're in academia. Economics was always more multidisciplinary than the rest of soft science. It just reached out and grabbed things as it needed to. And that tendency to just grab whatever you need from the rest of knowledge if you're an economist has reached a fairly high point in N Gregory Manu's new textbook. I checked out that textbook. I must have been one of the few businessmen in America who bought it immediately when it came out because it had gotten such a big advance. I wanted to figure out what this guy was doing where he could get an advance that great. So this is how I happened to riffle through Manq's freshman textbook and there I found laid out as principles of economics. Opportunity cost is a superpower to be used by all people who have any hope of getting the right answer. Also incentives are superpowers. And lastly the tragedy of the commons model popularized by my longtime friend UCSB's Garrett Harden. Harden caused the delightful introduction into economics alongside Smith's beneficent invisible hand of Harden's wicked evildoing invisible foot. Well, I thought that the Harden model made economics more complete and I knew when Harden introduced me to his model, the tragedy of the commons, that it would be in the economics textbooks eventually. And lo and behold, it finally made it about 20 years later. And it's right for Manq to reach out into other disciplines and grab Harden's model and anything else that works well.

Another thing that helped economics is that from the beginning it attracted the best brains in soft science. Its denisens also interacted more with the practical world than was at all common in soft science and the rest of academia. And that resulted in very credable outcomes like the three cabinet appointments of economics PhD George Schultz and the cabinet appointment of Larry Summers. So this has been a very favored part of academia. Also, economics early on attracted some of the best writers of language in the history of the earth. You start out with Adam Smith. Adam Smith was so good a thinker and so good a writer that in his own time, Emanuel Kant, then the greatest intellectual in Germany, simply announced that there was nobody in Germany to equal Adam Smith. Well, Voltater being an even pathier speaker than Kant, which wouldn't be that hard, immediately said, "Oh, well, France doesn't have anybody who can even be compared to Adam Smith. So economics started with some very great men and great writers and then there have been later great writers like John Maynard Kanes whom I quote all the time and who has added a great amount of illumination to my life and finally even in the present era if you take Paul Krugman and read his essays you will be impressed by his fluency. I can't stand his politics. I'm on the other side but I love this man's essays. I think Paul Krugman is one of the best essayists alive. So, economics has constantly attracted these fabulous writers and they are so good that they have this enormous influence far outside their economic discipline and that's very uncommon in other academic departments.

Okay, now it's time to extend criticism instead of praise. We've recognized that economics is better than other soft science academic departments in many ways and one of the glories of civilization. Now, it's only fair that we outline a few things that are wrong with academic economics. One, fatal unconnectedness leading to man with a hammer syndrome often causing overweighing of what can be counted. I think I've got eight, no nine objections, some being logical subdivisions of a big general objection. The big general objection to economics was the one early described by Alfred North Whitehead when he spoke of the fatal unconnectedness of academic disciplines, wherein each professor didn't even know the models of the other disciplines, much less try to synthesize those disciplines with his own. I think there's a modern name for this approach that Whitehead didn't like and that name is bonkers. This is a perfectly crazy way to behave. Yet economics, like much else in academia, is too insular. The nature of this failure is that it creates what I always call man with a hammer syndrome. That's taken from the folk saying to the man with only a hammer, every problem looks pretty much like a nail. that works marvelously to gum up all professions and all departments of academia and indeed most practical life. The only antidote for being an absolute klutz due to the presence of a man with a hammer syndrome is to have a full kit of tools. You don't have just a hammer. You've got all the tools. And you've got to have one more trick. You've got to use those tools checklist style because you'll miss a lot if you just hope that the right tool is going to pop up unaded whenever you need it. But if you've got a full list of tools and go through them in your mind checklist style, you will find a lot of answers that you won't find any other way. So limiting this big general objection that so disturbed Alfred North Whitehead is very important. And there are mental tricks that help do the job. A special version of this man with a hammer syndrome is terrible not only in economics, but practically everywhere else, including business. It's really terrible in business. You've got a complex system, and it spews out a lot of wonderful numbers that enable you to measure some factors, but there are other factors that are terribly important. Yet, there's no precise numbering you can put to these factors. You know they're important, but you don't have the numbers. Well, practically everybody one overweighs the stuff that can be numbered because it yields to the statistical techniques they're taught in academia and two doesn't mix in the hard to measure stuff that may be more important. That is a mistake I've tried all my life to avoid and I have no regrets for having done that. The late great Thomas Hunt Morgan who was one of the greatest biologists who ever lived when he got the Caltech he had a very interesting extreme way of avoiding some mistakes from overounting what could be measured and underounting what couldn't. At that time there were no computers and the computer substitute then available to science and engineering was the Frerieden calculator and Caltech was full of Freeden calculators. Thomas Hunt Morgan banned the Frerieden calculator from the biology department and when they said what the hell are you doing Dr. Morgan? He said well I am like a guy who was prospecting for gold along the banks of the Sacramento River in 1849. With a little intelligence, I can reach down and pick up big nuggets of gold. And as long as I can do that, I'm not going to let any people in my department waste scarce resources in placer mining. And that's the way Thomas Hunt Morgan got through life. I've adopted the same technique. And here I am in my 80th year. I haven't had to do any placer mining yet, and it begins to look like I'm going to get all the way through, as I'd always hoped, without doing any of that damned placer mining. Of course, if I were a physician, particularly an academic physician, I'd have to do the statistics, do the placer mining. But it's amazing what you can do in life without the placer mining if you've got a few good mental tricks and just keep ragging the problems the way Thomas Hunt Morgan did.

Two, failure to follow the fundamental full attribution ethos of hard science. What's wrong with the way Manu does economics is that he grabs from other disciplines without attribution. He doesn't label the grabbed items as physics or biology or psychology or game theory or whatever they really are fully attributing the concept to the basic knowledge from which it came. If you don't do that, it's like running a business with a sloppy filing system. It reduces your power to be as good as you can be. Now, Mu is so smart. He does pretty well even when his technique is imperfect. He got the largest advance any textbook writer ever got. But nonetheless, he'd be better if he had absorbed a hard science ethos, which has been helpful to me. I have names for Manu's approach, grabbing whatever you need without attribution. Sometimes I call it take what you wish and sometimes I call it Kiplingism. And when I call it Kiplingism, I'm reminding you of Joseph Ruddard Kipling's stanza of poetry, which went something like this. When Homer smoked his blooming liar, he'd heard men sing by land and sea. And what he thought he might require, he went and took the same as me. Well, that's the way Manu does it. He just grabs. This is much better than not grabbing. But it is much worse than grabbing with full attribution and full discipline using all knowledge plus extreme reductionism where feasible.

Three, physics envy. The third weakness that I find in economics is what I call physics envy. And of course that term has been borrowed from penis envy as described by one of the world's great idiots, Sigman Freud. But he was very popular in his time and the concept got a wide vogue. One of the worst examples of what physics envy did to economics was cause adoption of hard form efficient market theory. Then when you logically derived consequences from this wrong theory, you would get conclusions such as it can never be correct for any corporation to buy its own stock. Because the stock price by definition is totally efficient, there could never be any advantage QED. And they taught this theory to some partner at McKenzie when he was at some school of business that had adopted this crazy line of reasoning from economics. and the partner became a paid consultant for the Washington Post. And Washington Post stock was selling at a fifth of what an orangutan could figure was the plain value per share by just counting up the values and dividing. But he so believed what he'd been taught in graduate school that he told the Washington Post it shouldn't buy its own stock. Well, fortunately, they put Warren Buffett on the board, and he convinced them to buy back more than half of the outstanding stock, which enriched the remaining shareholders by much more than a billion dollars. So, there was at least one instance of a place that quickly killed a wrong academic theory. It's my view that economics could avoid a lot of this trouble that comes from physics envy. I want economics to pick up the basic ethos of hard science, the full attribution habit, but not the craving for an unattainable precision that comes from physics envy. The sort of precise, reliable formula that includes Boltzman's constant is not going to happen by and large in economics. Economics involves too complex a system and the craving for that physicsstyle precision does little but get you in terrible trouble like the poor fool from McKenzie. I think that economists would be way better off if they paid more attention to Einstein and Sharon Stone. Well, Einstein is easy because Einstein is famous for saying everything should be made as simple as possible but no more simple. Now the saying is a tautology but it's very useful and some economist it may have been Herb Stein had a similar tautological saying that I dearly love. If a thing can't go on forever it will eventually stop. Sharon Stone contributed to the subject because someone once asked her if she was bothered by penis envy and she said absolutely not. I have more trouble than I can handle with what I've got. When I talk about this false precision, this great hope for reliable, precise formulas, I'm reminded of Arthur Lafer, who's in my political party and who takes a mistaken approach sometimes when it comes to doing economics. His trouble is his craving for false precision, which is not an adult way of dealing with his subject matter. The situation of people like Laugher reminds me of a rustic legislator, and this really happened in America. I don't invent these stories. Reality is always more ridiculous than what I'm going to tell you. At any rate, this rustic legislator proposed a new law in his state. He wanted to pass a law rounding pi to an even 3.2 so it would be easier for the school children to make the computations. Well, you can say that this is too ridiculous and it can't be fair to liken economics professors like laugher to a rustic legislator like this. I say I'm undercriticizing the professors. At least when this rustic legislator rounded pi to an even number, the error was relatively small. But once you try to put a lot of false precision into a complex system like economics, the errors can compound to the point where they're worse than those of the McKenzie partner when he was incompetently advising the Washington Post. So economics should emulate physics's basic ethos, but its search for precision in physics-like formulas is almost always wrong in economics.

Four, too much emphasis on macroeconomics. My fourth criticism is that there's too much emphasis on macroeconomics and not enough on microeconomics. I think this is wrong. It's like

Trying to master medicine without knowing anatomy and chemistry. Also, the discipline of microeconomics is a lot of fun. It helps you correctly understand macroeconomics and it's a perfect circus to do. In contrast, I don't think macroeconomics people have all that much fun. For one thing, they are often wrong because of extreme complexity in the system they wish to understand.

Let me demonstrate the power of microeconomics by solving two microeconomic problems. One simple and one a little harder. The first problem is this. Berkshire Hathaway just opened a furniture and appliance store in Kansas City, Kansas. At the time Berkshire opened it, the largest selling furniture and appliance store in the world was another Berkshire Hathaway store selling $350 million worth of goods per year. The new store in a strange city opened up selling at the rate of more than $500 million a year. From the day it opened, the 3,200 spaces in the parking lot were full. The women had to wait outside the lady's restroom because the architects didn't understand biology. It's hugely successful. Well, I've given you the problem. Now, tell me, what explains the runaway success of this new furniture and appliance store that is out selling everything else in the world?

Let me do it for you. Is this a low-priced store or a high-priced store? It's not going to have runaway success in a strange city as a high-priced store. That would take time. Number two, if it's moving $500 million worth of furniture through it, it's one hell of a big store. Furniture being as bulky as it is. And what does a big store do? It provides a big selection. So, what could this possibly be except a low-priced store with a big selection? But you may wonder, why wasn't it done before, preventing it being done first? Now, again, the answer just pops into your head. It costs a fortune to open a store this big, so nobody's done it before. So, you quickly know the answer. With a few basic concepts, these microeconomic problems that seemed hard can be solved much as you put a hot knife through butter. I like such easy ways of thought that are very remunerative and I suggest that you people should also learn to do microeconomics better.

Now I'll give you a harder problem. There's a tire store chain in the Northwest that has slowly succeeded over 50 years. The Les Schwab tire store chain. It just ground ahead. It started competing with the stores that were owned by the big tire companies that made all the tires. the Goodyears and so forth. And of course, the manufacturers favored their own stores. Their tire stores had a big cost advantage. Later, Les Schwab rose in competition with the huge price discounters like Costco and Sam's Club. And before that, Sears Roebuck and so forth. And yet, here is Schwab now with hundreds of millions of dollars in sales. And here's Les Schwab in his 80s with no education, having done the whole thing. How did he do it? I don't see a whole lot of people looking like a light bulb has come on.

Well, let's think about it with some microeconomic fluency. Is there some wave that Schwab could have caught? The minute you ask the question, the answer pops in. The Japanese had a zero position in tires and they got big. So, this guy must have ridden that wave some in the early times. Then the slow following success has to have some other causes. And what probably happened here obviously is this guy did one hell of a lot of things right. And among the things that he must have done right is he must have harnessed what Manu calls the superpower of incentives. He must have a very clever incentive structure driving his people and a clever personnel selection system etc. And he must be pretty good at advertising which he is. He's an artist. So, he had to get a wave in the Japanese tire invasion. The Japanese being as successful as they were. And then a talented fanatic had to get a hell of a lot of things right and keep them right with clever systems. Again, not that hard of an answer. But what else would be a likely cause of the peculiar success? We hire business school graduates, and they're no better at these problems than you were. Maybe that's the reason we hire so few of them.

Well, how did I solve those problems? Obviously, I was using a simple search engine in my mind to go through checklist style. And I was using some rough algorithms that work pretty well in a great many complex systems. And these algorithms run something like this. Extreme success is likely to be caused by some combination of the following factors. One, extreme maximization or minimization of one or two variables. Example, Costco or our furniture and appliance store. Two, adding success factors so that a bigger combination drives success often in nonlinear fashion as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass and you get a La Palooa result. And of course, I've been searching for La Palooa results all my life. So I'm very interested in models that explain their occurrence. Three, an extreme of good performance over many factors. Example, Toyota or Les Schwab. Four, catching and riding some sort of big wave. Example, Oracle. By the way, I cited Oracle before I knew that the Oracle CFO Jeff Henley was a big part of the proceedings here today.

Generally, I recommend and use in problem-solving cut-to-the-quick algorithms and I find you have to use them both forward and backward. Let me give you an example. Irritate my family by giving them little puzzles. And one of the puzzles that I gave my family not very long ago was when I said there's an activity in America with one-on-one contests and a national championship. The same person won the championship on two occasions about 65 years apart. Now I said, name the activity. Again, I don't see a lot of light bulbs going on and in my family not a lot of light bulbs were flashing. But I have a physicist son who has been trained more in the type of thinking I like. And he immediately got the right answer. And here's the way he reasoned. It can't be anything requiring a lot of hand-eye coordination. Nobody 85 years of age is going to win a national billiard's tournament, much less a national tennis tournament. It just can't be. Then he figured it couldn't be chess, which this physicist plays very well, because it's too hard. The complexity of the system and the stamina required are too great. But that led into checkers. And he thought, "Aha, there's a game where vast experience might guide you to be the best even though you're 85 years of age." Anyway, I recommend that sort of mental puzzle-solving to all of you, flipping one's thinking both backward and forward. And I recommend that academic economics get better at very small-scale microeconomics as demonstrated here.

Five. Too little synthesis in economics. My fifth criticism is there is too little synthesis in economics. Not only with matter outside traditional economics, but also within economics. I have posed before two different business school classes the following problem. I say you have studied supply and demand curves. You have learned that when you raise the price, ordinarily the volume you can sell goes down and when you reduce the price, the volume you can sell goes up. Is that right? That's what you've learned. They all nod yes. And I say, "Now tell me several instances when if you want the physical volume to go up, the correct answer is to increase the price." And there's this long and ghastly pause. And finally, in each of the two business schools in which I've tried this, maybe one person in 50 could name one instance. They come up with the idea that under certain circumstances, a higher price acts as a rough indicator of quality and thereby increases sales volumes. This happened in the case of my friend Bill Ballhouse. When he was head of Beckman Instruments, it produced some complicated product where if it failed, it caused enormous damage to the purchaser. It wasn't a pump at the bottom of an oil well, but that's a good mental example. And he realized that the reason this thing was selling so poorly, even though it was better than anybody else's product, was because it was priced lower. It made people think it was a low-quality gizmo. So he raised the price by 20% or so, and the volume went way up. But only one in 50 can come up with this sole instance in a modern business school. One of the business schools being Stanford, which is hard to get into, and nobody has yet come up with the main answer that I like. Suppose you raise that price and use the extra money to bribe the other guy's purchasing agent. Is that going to work? And are there functional equivalents in economics, microeconomics, of raising the price and using the extra sales proceeds to drive sales higher? And of course, there are a zillion once you've made that mental jump. It's so simple. One of the most extreme examples is in the investment management field. Suppose you're the manager of a mutual fund and you want to sell more. People commonly come to the following answer. You raise the commissions, which of course reduces the number of units of real investments delivered to the ultimate buyer. So, you're increasing the price per unit of real investment that you're selling the ultimate customer, and you're using that extra commission to bribe the customer's purchasing agent. You're bribing the broker to betray his client and put the client's money into the high-commission product. This has worked to produce at least a trillion dollars of mutual fund sales. This tactic is not an attractive part of human nature. And I want to tell you that I pretty much completely avoided it in my life. I don't think it's necessary to spend your life selling what you would never buy. Even though it's legal, I don't think it's a good idea. But you shouldn't accept all my notions because you'll risk becoming unemployable. You shouldn't take my notions unless you're willing to risk being unemployable by all but a few. I think my experience with my simple question is an example of how little synthesis people get even in advanced academic settings considering economic questions. Obvious questions with such obvious answers. Yet people take four courses in economics, go to business school, have all these IQ points, and write all these essays, but they can't synthesize worth a damn. This failure is not because the professors know all this stuff and they're deliberately withholding it from the students. This failure happens because the professors aren't all that good at this kind of synthesis. They were trained in a different way. I can't remember if it was Keynes or Galbraith who said that economics professors are most economical with ideas. They make a few they learned in graduate school last a lifetime.

The second interesting problem with synthesis involves two of the most famous examples in economics. Number one is David Ricardo's principle of comparative advantage in trade and the other is Adam Smith's pin factory. And both of these of course work to vastly increase economic output per person. And they're similar in that each somehow directs functions into the hands of people who are very good at doing the functions. Yet they're radically different examples in that one of them is the ultimate example of central planning, the pin factory, where the whole system was planned by somebody. While the other example, Ricardo's, happens automatically as a natural consequence of trade. And of course, once you get into the joys of synthesis, you immediately think, do these things interact? Of course, they interact beautifully. And that's one of the causes of the power of a modern economic system. I saw an example of that kind of interaction years ago. Berkshire had this former savings and loan company and it had made this loan on a hotel right opposite the Hollywood Park racetrack. In due time, the neighborhood changed and it was full of gangs, pimps, and dope dealers. They tore copper pipe out of the wall for dope fixes and there were people hanging around the hotel with guns and nobody would come. We foreclosed on it two or three times and the loan value went down to nothing. We seemed to have an unsolvable economic problem, a microeconomic problem. Now, we could have gone to McKinsey or maybe to a bunch of professors from Harvard and we would have gotten a report about 10 inches thick about the ways we could approach this failing hotel in this terrible neighborhood. But instead, we put a sign on the property that said "For Sale or Rent." And in response to that sign came a man who said, "I'll spend $200,000 fixing up your hotel and buy it at a high price on credit if you can get zoning so I can turn the parking lot into a putting green." You've got to have a parking lot in a hotel. We said, "What do you have in mind?" He said, "No, my business is flying seniors in from Florida, putting them near the airport, and then letting them go out to Disneyland and various places by bus and coming back. I don't care how bad the neighborhood is going to be because my people are self-contained behind walls. All they have to do is get on the bus in the morning and come home in the evening. They don't need a parking lot. They need a putting green." So, we made the deal with the guy. The whole thing worked beautifully and the loan got paid off and it all worked out. Obviously, that's an interaction of Ricardo and the pin factory examples. The odd system that this guy had designed to amuse seniors was pure pin factory and finding the guy with this system was pure Ricardo. So, these things are interacting.

Well, I've taken you partway through the synthesis. It gets harder when you want to figure out how much activity should be within private firms and how much should be within the government and what are the factors that determine which functions are where and why do the failures occur and so on and so on. It's my opinion that anybody with a high IQ who graduated in economics ought to be able to sit down and write a 10-page synthesis of all these ideas that's quite persuasive. And I would bet a lot of money that I could give this test in practically every economics department in the country and get a perfectly lousy bunch of synthesis. They'd give me Ronald Coase. They'd talk about transaction costs. They'd click off a little something that their professors gave them and spit it back. But in terms of really understanding how it all fits together, I would confidently predict that most people couldn't do it very well. By the way, if any of you want to try and do this, go ahead. I think you'll find it hard. In this connection, one of the interesting things that I want to mention is that Max Planck, the great Nobel laureate who found Planck's constant, tried once to do economics. He gave it up. Now, why did Max Planck, one of the smartest people who ever lived, give up economics? The answer is, he said, it's too hard. The best solution you can get is messy and uncertain. It didn't satisfy Planck's craving for order, and so he gave it up. And if Max Planck early on realized he was never going to get perfect order, I will confidently predict that all the rest of you are going to have exactly the same result. By the way, there's a famous story about Max Planck that is apocryphal. After he won his prize, he was invited to lecture everywhere. And he had this chauffeur who drove him around to give public lectures all through Germany. And the chauffeur memorized the lecture. So one day he said, "Gee, Professor Planck, why don't you let me try it by switching places?" So he got up and gave the lecture. At the end of it, some physicist stood up and posed a question of extreme difficulty. But the chauffeur was up to it. Well, he said, I'm surprised that a citizen of an advanced city like Munich is asking so elementary a question. So, I'm going to ask my chauffeur to respond.

Six. Extreme and counterproductive psychological ignorance. All right, I'm down to the sixth main defect, and this is a subdivision of the lack of adequate multidisciplinarity. Extreme and counterproductive psychological ignorance in economics. Here I want to give you a very simple problem. I specialize in simple problems. You own a small casino in Las Vegas. It has 50 standard slot machines. Identical in appearance, they're identical in function. They have exactly the same payout ratios. The things that cause the payouts are exactly the same. They occur in the same percentages. But there's one machine in this group of slot machines that no matter where you put it among the 50, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine. Now, surely I'm not going to have a failure here. What is different about the heavy-winning machine? Can anybody do it? Audience member? More people play it? No. No. I want to know why more people play it. What's different about that machine is people have used modern electronics to give a higher ratio of near misses. That machine is going "bar lemon bar grapefruit" way more often than normal machines, and that will cause heavier play. How do you get an answer like that? Easy. Obviously, there's a psychological cause. That machine is doing something to trigger some basic psychological response. If you know the psychological factors, if you've got them on a checklist in your head, you just run down the factors and boom, you get to one that must explain this occurrence. There isn't any other way to do it effectively. These answers are not going to come to people who don't learn these problem-solving methods. If you want to go through life like a one-legged man in an ass-kicking contest, why be my guest? But if you want to succeed like a strong man with two legs, you have to pick up these methods, including doing micro and macroeconomics while knowing psychology.

In this vein, I next want to mention a strange Latin American case of a dysfunctional economy that got fixed. In this little subdivision of Latin America, a culture had arisen wherein everybody stole everything. They embezzled from the company. They stole everything that was loose in the community. And of course, the economy came practically to a halt. And this thing got fixed. Now, where did I read about this case? I'll give you a hint. It wasn't in the annals of economics. I found this case in the annals of psychology. Clever people went down and used a bunch of psychological tricks and they fixed it. Well, I think there's no excuse if you're an economist when there are wonderful cases like that of the dysfunctional economy becoming fixed and these simple tricks that solve so many problems and you don't know how to do the fixes and understand the problems. Why be so ignorant about psychology that you don't even know psychology's tricks that will fix your own dysfunctional economic systems? Here I want to give you an extreme injunction. This is even tougher than the fundamental organizing ethos of hard science. This has been attributed to Samuel Johnson. He said in substance that if an academic maintains in place an ignorance that can be easily removed with a little work, the conduct of the academic amounts to treachery. That was his word, treachery. You can see why I love this stuff. He says you have a duty if you're an academic to be as little of a klutz as you can possibly be and therefore you have got to keep grinding out of your system as much removable ignorance as you can remove.

Seven. Too little attention to second and higher order effects. Onto the next, the seventh defect. Too little attention in economics to second-order and even higher-order effects. This defect is quite understandable because the consequences have consequences and the consequences of the consequences have consequences and so on. It gets very complicated. When I was a meteorologist, I found this stuff very irritating and economics makes meteorology look like a tea party. Extreme economic ignorance was displayed when various experts, including PhD economists, forecast the cost of the original Medicare law. They did simple extrapolations of past costs, while the cost forecast was off by a factor of more than 1,000%. The cost they projected was less than 10% of the cost that happened. Once they put in place various new incentives, the behavior changed in response to the incentives and the numbers became quite different from their projection and medicine invented new and expensive remedies as it was sure to do. How could a great group of experts make such a silly forecast? Answer: They oversimplified to get easy figures like the rube rounding pi to 3.2. They chose not to consider effects of effects of effects and so on.

One good thing about this common form of misthinking from the viewpoint of academia is that business people are even more foolish about microeconomics. The business version of the Medicare type insanity is when you own a textile plant and a guy comes in and says, "Oh, isn't this wonderful? They invented a new loom. It'll pay for itself in 3 years at current prices because it adds so much efficiency to the production of textiles." And you keep buying these looms and their equivalent for 20 years and you keep making 4% on capital. You never go anywhere. And the answer is it wasn't that the technology didn't work. It's that the laws of economics caused the benefit from the new looms to go to the people that bought the textiles, not to the guy who owned the textile plant. How could anybody not know that if he'd taken freshman economics or been through business school? I think the schools are doing a lousy job. Otherwise, such insanities wouldn't happen so often. Usually, I don't use formal projections. I don't let people do them for me because I don't like throwing up on the desk, but I see them made in a very foolish way all the time. And many people believe in them, no matter how foolish they are. It's an effective sales technique in America to put a foolish projection on a desk. And if you're an investment banker, it's an art form. I don't read their projections either. Once Warren and I bought a company and the seller had a big study done by an investment banker. It was about this thick. We just turned it over as if it were a diseased carcass. He said, "We paid $2 million for that." I said, "We don't use them. Never look at them."

Anyway, as the Medicare example showed, all human systems are gamed for reasons rooted deeply in psychology. And great skill is displayed in the gaming because game theory has so much potential. That's what's wrong with the workers' comp system in California. Gaming has been raised to an art form. In the course of gaming the system, people learn to be crooked. Is this good for civilization? Is it good for economic performance? Hell no. The people who design easily gameable systems belong in the lowest circle of hell. I've got a friend whose family controls about 8% of the truck trailer market. He just closed his last factory in California and he had one in Texas that was even worse. The workers' comp cost in his Texas plant got to be double-digit percentages of payroll. Well, there's no such profit in making truck trailers. He closed his plant and moved it to Ogden, Utah, where a bunch of believing Mormons are raising big families and don't game the workers' comp system. The workers' comp expense is 2% of payroll. Are the Latinos who are peopleling his plant in Texas intrinsically dishonest or bad compared to the Mormons? No. It's just the incentive structure that so rewards all this fraud is put in place by these ignorant legislatures, many members of which have been to law school, and they just don't think about what terrible things they're doing to civilization because they don't take into account the second-order effects and the third-order effects in lying and cheating. So this happens everywhere and when economics is full of it, it is just like the rest of life.

There was a wonderful example of gaming a human system in the career of Victor Niederhoffer in the economics department of Harvard. Victor Niederhoffer was the son of a police lieutenant and he needed to get A's at Harvard. But he didn't want to do any serious work at Harvard because what he really liked doing was one, playing world-class checkers, two, gambling in high-stakes card games at which he was very good all hours of the day and night. Three, being the squash champion of the United States, which he was for years, and four, being about as good a tennis player as a part-time tennis player could be. This did not leave much time for getting A's at Harvard. So he went into the economics department. You'd think he would have chosen French poetry, but remember this was a guy who could play championship checkers. He thought he was up to outsmarting the Harvard economics department. And he was. He noticed that the graduate students did most of the boring work that would otherwise go to the professors. And he noticed that because it was so hard to get to be a graduate student at Harvard, they were all very brilliant and organized and hardworking as well as much needed by grateful professors. And therefore, by custom, and as would be predicted from the psychological force called reciprocity tendency, in a really advanced graduate course, the professors always gave an A. So, Victor Niederhoffer signed up for nothing but the most advanced graduate courses in the Harvard economics department. And of course, he got A after A after A and was hardly ever near a class. And for a while, some people at Harvard may have thought it had a new prodigy on its hands. That's a ridiculous story, but the scheme will work still. And Niederhoffer is famous. They call his style "Niederhoffing the curriculum." This shows how all human systems are gamed.

Another example of not thinking through the consequences of the consequences is the standard reaction in economics to Ricardo's law of comparative advantage, giving benefit on both sides of trade. Ricardo came up with a wonderful non-obvious explanation that was so powerful that people were charmed with it and they still are because it's a very useful idea. Everybody in economics understands that comparative advantage is a big deal when one considers first-order advantages in trade from the Ricardo effect. But suppose you've got a very talented ethnic group like the Chinese, and they're very poor, and you're an advanced nation, and you create free trade with China, and it goes on for a long time. Now let's follow second and third-order consequences. You are more prosperous than you would have been if you hadn't traded with China in terms of average well-being in the United States. Right? Ricardo proved it. But which nation is going to be growing faster in economic terms? It's obviously China. They're absorbing all the modern technology of the world through this great facilitator in free trade. And like the Asian tigers have proved, they will get ahead fast. Look at Hong Kong. Look at Taiwan. Look at early Japan. So, you start in a place where you've got a weak nation of a billion and a quarter people, and in the end, they're going to be a much bigger, stronger nation than you are, maybe even having more and better atomic bombs. Well, Ricardo did not prove that that's a wonderful outcome for the former leading nation. He didn't try to determine second-order and higher-order effects. If you try to talk like this to economics professors, and I've done this three times, they shrink in horror and defense because they don't like this kind of talk. It really gums up this nice discipline of theirs, which is so much simpler when you ignore second and third-order consequences. The best answer I ever got on that subject in three tries was from George Shultz. He said, "Charlie, the way I figure it is, if we stop trading with China, the other advanced nations will do it anyway. We wouldn't stop the ascent of China compared to us, and we'd lose the Ricardo-diagnosed advantages of trade." Which is obviously correct. I said, "Well, George, you've just invented a new form of the tragedy of the commons. You're locked in this system, and you can't fix it. You're going to go to a tragic hell in a handbasket." If going to hell involves being once the great leader of the world and finally going to the shallows in terms of leadership. And he said, "Charlie, I do not want to think about this." I think he's wise. He's even older than I am, and maybe I should learn from him.

Eight. Not enough attention to the concept of fbezzlement. Okay, now I'm down to my eighth objection. Too little attention within economics to the simplest and most fundamental principle of algebra. Now, this sounds outrageous that economics doesn't do algebra, right? Well, I want to try an example. I may be wrong on this. I'm old and I'm a classic, but I throw it out anyway. I say that economics doesn't pay enough attention to the concept of fbezzlement. And that I derive from Galbraith's idea. Galbraith's idea was that if you have an undisclosed embezzlement, it has a wonderful Keynesian stimulating effect on the economy because the guy who's been embezzled thinks he is as rich as he always was and spends accordingly and the guy who has stolen the money gets all this new purchasing power. I think that's correct analysis on Galbraith's part. The trouble with his notion is that he's described a minor phenomenon because when embezzlement is discovered, as it almost surely will be, the effect will quickly reverse. So the effect quickly cancels out. But suppose you paid a lot of attention to algebra, which I guess Galbraith didn't, and you think, well, the fundamental principle of algebra is if a is equal to b and b is equal to c, then a is equal to c. You've then got a fundamental principle that demands that you look for functional equivalents all you can find. So suppose you ask the question, is there such a thing in economics as fbezzlement? By the way, Galbraith invented the word "bezzle" to describe the amount of undisclosed embezzlement. So I invented the word "fbezzlement," the functional equivalent of embezzlement. This happened after I asked the question, "Is there a functional equivalent of embezzlement?" I came up with a lot of wonderful affirmative answers. Some were in investment management. After all, I'm near investment management. I considered the billions of dollars totally wasted in the course of investing common stock portfolios for American owners. As long as the market keeps going up, the guy who's wasting all this money doesn't feel it because he's looking at these steadily rising values. And to the guy who is getting the money for investment advice, the money looks like well-earned income when he's really selling detriment for money. Surely the functional equivalent of undisclosed embezzlement. You can see why I don't get invited to many lectures. So I say if you look in the economy for fbezzlement, the functional equivalent of embezzlement, you'll find some enormously powerful factors. They create some wealth effect that is on steroids compared to the old wealth effect. But practically nobody thinks as I do, and I quick claim my idea to any hungry graduate student who has independent means which he will need before his thesis topic is approved.

Nine. Not enough attention to virtue and vice effects. Okay, my ninth objection, not enough attention to virtue and vice effects in economics. It has been plain to me since early life that there are enormous virtue effects in economics and also enormous vice effects. But economists get very uncomfortable when you talk about virtue and vice. It doesn't lend itself to a lot of columns of numbers. But I would argue that there are big virtue effects in economics. I would say that the spreading of double-entry bookkeeping by the monk Fra Luca Pacioli was a big virtue effect in economics. It made business more controllable and it made it more honest. Then the cash register. The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better. Just as in reverse, a system that can be easily defrauded ruins a civilization. A system that's very hard to defraud, like a cash register-based system, helps the economic performance of a civilization by reducing vice. But very few people within economics talk about it in those terms. I'll go further. I say economic systems work better when there's an extreme reliability ethos. The traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt. We have a charming Irish Catholic priest in our neighborhood and he loves to say, "Those old Jews may have invented guilt, but we perfected it." This guilt derived from religion has been a huge driver of a reliability ethos which has been very helpful to economic outcomes for man. Many bad effects from vice are clear. You've got the crazy booms and crooked promotions. All you have to do is read the paper over the last 6 months. There's enough vice to make us all choke. And by the way, everybody's angry about unfair compensation at the top of American corporations, and people should be. We now face various crazy governance nostrums invented by lawyers and professors that won't give us a fix for unfair compensation. Yet, a good partial solution is obvious. If directors were significant shareholders who got a pay of zero, you'd be amazed what would happen to unfair compensation of corporate executives as we dampened effects from reciprocity tendency. A roughly similar equivalent of this no-pay system has been tried in a strange place. In England, lay magistrates staff the lower criminal courts, which can send you to prison for a year or fine you substantially. You've got three judges sitting up there and they all get a pay of zero. Their expenses are reimbursed but not too liberally and they work about 40 half-days a year as volunteers. It's worked beautifully for about 700 years. Able and honest people compete to become magistrates to perform the duty and get the significance but no pay. This is the system Benjamin Franklin near the end of his life wanted for the U.S. government. He didn't want the high executives of government to be paid but to be like himself or the entirely unpaid well-off ministers and rulers of the Mormon church. And when I see what's happened in California, I'm not sure he wasn't right. At any rate, no one now drifts in Franklin's direction. For one thing, professors, and most of them need money, get appointed directors. It is not always recognized that to function best, morality should sometimes appear unfair. Like most worldly outcomes, 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. Thus, there can be virtue in apparent non-fairness. 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. 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. Tolerating a little unfairness to some to get a greater fairness for all is a model I recommend to all of you. But again, I wouldn't put it in your assigned college work if you want to be graded well, particularly in a modern law school wherein there is usually an overlove of fairness-seeking process.

There are of course enormous vice effects in economics. You have these bubbles with so much fraud and folly. The aftermath is frequently very unpleasant, and we've had some of that lately. One of the first big bubbles, of course, was the huge and horrible South Sea bubble in England. The aftermath was interesting. Many of you probably don't remember what happened after the South Sea bubble, which caused an enormous financial contraction and a lot of pain. Except in certain rare cases, they banned publicly traded stock in England. For decades, Parliament passed a law that said, "You can have a partnership with a few partners, but you can't have publicly traded stock." And by the way, England continued to grow without publicly traded stock. The people who are in the business of prospering because there's a lot of stock being traded in casino-like frenzy wouldn't like this example if they studied it enough. It didn't ruin England to have a long period when they didn't have publicly traded shares. Just as in real estate, we had all the shopping centers and auto dealerships and so on we needed for years when we didn't have publicly traded real estate shares. It's a myth that once you've got some capital market, economic considerations demand that it has to be as fast and efficient as a casino. It doesn't.

Another interesting problem is raised by vice effects involving envy. Envy wisely got a very strong condemnation in the laws of Moses. You remember how they laid it on with a trowel. You couldn't covet thy neighbor's ass. You couldn't covet thy neighbor's servant girl. You couldn't covet. Those old Jews knew how envious people are and how much trouble it caused. They really laid it on hard and they were right. But Bernard de Mandeville, remember his Fable of the Bees? He demonstrated convincingly to me, anyway, that envy was a great driver of proclivity to spend. And so here's this terrible vice which is forbidden in the Ten Commandments. And here it's driving all these favorable results in economics. There's some paradox in economics that nobody's going to get out. When I was young, everybody was excited by Kurt Gödel, who came up with proof that you couldn't have a mathematical system without a lot of irritating incompleteness in it. Well, since then, my betters tell me that they've come up with more irremovable defects in mathematics and have decided that you're never going to get mathematics without some paradox in it. No matter how hard you work, you're going to have to live with some paradox if you're a mathematician. Well, if the mathematicians can't get the paradox out of their system when they're creating it themselves, the poor economists are never going to get rid of paradoxes, nor are any of the rest of us. It doesn't matter. Life is interesting with some paradox. When I run into a paradox, I think either I'm a total horse's ass to have gotten to this point or I'm fruitfully near the edge of my discipline. It adds excitement to life to wonder which it is.

As I conclude, I want to tell one more story demonstrating how awful it is to get a wrong idea from a limited repertoire and just stick to it. This is the story of Hyman Liebowitz who came to America from the old country. In the new country, as in the old, he tried to make his way in the family trade which was manufacturing nails. And he struggled and he struggled and finally his little nail business got to vast prosperity. and his wife said to him, "You are old, Hyman. It's time to go to Florida and turn the business over to your son." So down he went to Florida, turning his business over to the son, but he got weekly financial reports. And he hadn't been in Florida very long before they turned sharply negative. In fact, they were terrible. So he got on an airplane and he went back to New Jersey where the factory was. As he left the airport on the way to the factory, he saw this enormous outdoor advertising sign lighted up. There was Jesus spread out on the cross, and under it was a big legend. "They used Liebowitz's nails." So he stormed into the factory and said, "You dumb son. What do you think you're doing? It took me 50 years to create this business." "Papa," the son said, "Trust me, I will fix it." So back he went to Florida and while he was in Florida he got more reports and the results kept getting worse. So he got on the airplane again, left the airport, drove by the sign, looked up at this big lighted sign and now there's a vacant cross. And lo and behold, Jesus is crumpled on the ground under the cross and the sign said "They didn't use Liebowitz's nails." Well, you can laugh at that. It is ridiculous. But it's no more ridiculous than the way a lot of people cling to failed ideas. Keynes said, "It's not bringing in the new ideas that's so hard. It's getting rid of the old ones." And Einstein said it better, attributing his mental success to curiosity, concentration, perseverance, and self-criticism. By self-criticism, he meant becoming good at destroying your own best-loved and hardest-won ideas. If you can get really good at destroying your own wrong ideas, that is a great gift.

Well, it's time to repeat the big lesson in this little talk. What I've urged is the use of a bigger multidisciplinary bag of tricks mastered to fluency to help economics and everything else. And I also urged that people not be discouraged by irremovable complexity and paradox. It just adds more fun to the problems. My inspiration again is Keynes: better roughly right than precisely wrong. And so I end by repeating what I said once before on a similar occasion. If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands. Well, that's the end. I'll take questions as long as people can endure me.

Audience question. The question was garbled, but the person asked about derivatives, which Buffett has called financial weapons of mass destruction. Buffett said that the genie's out of the bottle and the hangover may be proportionate to the binge. Would you speculate for us how that scenario can play out?

Well, of course, catastrophe predictions have always been quite difficult to make with success, but I confidently predict that there are big troubles to come. The system is almost insanely irresponsible. And what people think are fixes aren't really fixes. It's so complicated. I can't do it justice here. But you can't believe the trillions of dollars involved. You can't believe the complexity. You can't believe how difficult it is to do the accounting. You can't believe how big the incentives are to have wishful thinking about values and wishful thinking about ability to clear. Running off a derivative book is agony and takes time. You saw what happened when they tried to run off the derivative books at Enron. Its certified net worth vanished. In the derivative books of America, there are a lot of reported profits that were never earned and assets that never existed. There are large fbezzlement effects and some ordinary embezzlement effects that come from derivative activity. And the reversal of these is going to cause pain. How big the pain will be and how well it will be handled, I can't tell you. But you would be disgusted if you had a fair mind and spent a month really delving into a big derivative operation. You would think it was Lewis Carroll. You would think it was the Mad Hatter's Tea Party. And the false precision of these people is just unbelievable. They make the worst economics professors look like gods. Moreover, there is depravity augmenting the folly. Read the book Fiasco by law professor and former derivatives trader Frank Partnoy, an insider account of depravity and derivative trading at one of the biggest and best-regarded Wall Street firms. The book will turn your stomach.

Could you describe Warren's reaction to the negative reaction he got from musing about the defects of California's Prop 13? Was he shocked, surprised? It's hard to shock Warren. He's past 70. He's seen a lot. And his brain works quickly. He generally avoids certain subjects before elections. And that is what I am going to do here.

Talk 9 Revisited. This waggish talk on economics given in 2003 gave me pleasure as I put it together. But I hope it provided more than harmless fun. I even hope that some shred of my ideas eventually gets into academic economics. Not because I want recognition, but because I think academic economics needs some improvement. Since the talk was given, I came across a book published by Alfred A. Knopf in 2005. It was written by a distinguished Harvard economics professor, Benjamin M. Friedman, and dealt with the interplay of economics and morals much as I wished to in my talk. The title of this book is The Moral Consequences of Economic Growth. As readers will note from the title, Professor Friedman is particularly interested in the impact of economic growth on morals, whereas my interest is mostly in the reverse direction, the impact of morals on economic growth. This difference is not a big deal because every educated person can see reciprocal effects for good or ill between the two factors, creating what is often called either a virtuous circle or a vicious circle. Professor Friedman supplies a marvelous quotation on this subject from Rabbi Eleazar Ben Azariah: "Where there is no bread, there is no law. Where there is no law, there is no bread."

Talk 10. USC Gould School of Law Commencement Address. May 13th, 2007, University of Southern California. On a warm late spring day in 2007, Charlie addressed 194 Juris Doctor, 89 Master of Laws, and three Master of Comparative Laws degree recipients in the University of Southern California's Alumni Park. He offered his insights into the practices that have contributed to his success and to his standing as one of the wealthiest people in the world. He observed that the acquisition of wisdom is a moral duty and he stressed that while attending law school he realized the best road to success in life and learning would be a multidisciplinary one. Following the audience's enthusiastic reaction to this speech, USC Law Dean

Edward J. McAffrey awarded Charlie honorary admission into the Order of the Koif, a scholastic society founded to encourage excellence in legal education.

No doubt many of you were wondering why this speaker is so old. Well, the answer is obvious. He hasn't died yet. And why was this speaker chosen? Well, I don't know that. I'd like to think that the development department had nothing to do with it.

Whatever the reason, I think it's fitting that I'm speaking here because I see a crowd of older people in the rear not wearing robes. And I know from having educated an army of descendants who it is that really deserves a lot of the honors that are being given today to the robewearing students in front. The sacrifices and the wisdom and the value transfer that come from one generation to the next should always be appreciated.

I also take pleasure from the sea of Asian faces to my left. All my life I have admired Confucious. I like the idea of filial piety of ideas or values that are taught and duties that come naturally that should be passed on to the next generation. You people who don't think there's anything in this idea, please note how fast Asian people are rising in American life. I think they have something.

All right, I've scratched out a few notes and I'm going to try and give an account of certain ideas and attitudes that have worked well for me. I don't claim that they're perfect for everybody, but I think many of them contain universal values and that many of them are can't fail ideas.

What are the core ideas that helped me? Well, luckily I had the idea at a very early age that the safest way to try to get what you want is to try to deserve what you want. It's such a simple idea. It's the golden rule. You want to deliver to the world what you would buy if you were on the other end. There is no ethos in my opinion that is better for any lawyer or any other person to have.

By and large the people who have had this ethos win in life and they don't win just money and honors. They win the respect the deserved trust of the people they deal with. And there is huge pleasure in life to be obtained from getting deserved trust. Now, occasionally you will find a perfect rogue of a person who dies rich and widely known, but mostly these people are fully understood as despicable by the surrounding civilization. If the cathedral is full of people at the funeral ceremony, most of them are there to celebrate the fact that the person is dead. That reminds me of the story of the time when one of these people died and the minister said, "It's now time to say something nice about the deceased." And nobody came forward and nobody came forward and nobody came forward and finally one man came up and said well his brother was worse. That is not where you want to go. A life ending in such a funeral is not the life you want to have.

The second idea that I developed very early is that there's no love that's so right as admiration-based love and such love should include the instructive dead. Somehow I picked up that idea and I've lived with it all my life. It's been very useful to me. A love like that described by William Somerset Mo in his book of human bondage is a sick kind of love. It's a disease. And if you find yourself with a disease like that, you should eliminate it.

Another idea, and this may remind you of Confucious 2, is that the acquisition of wisdom is a moral duty. It's not something you do just to advance in life. And there's a correlary to that idea that is very important. It requires that you're hooked on lifetime learning. Without lifetime learning, you people are not going to do very well. You are not going to get very far in life based on what you already know. You're going to advance in life by what you learn after you leave here.

Consider Berkshire Hathway one of the best regarded corporations in the world. It may have the best long-term big assets involving investment record in the history of civilization. The skill that got Berkshire through one decade would not have sufficed to get it through the next decade with comparable levels of achievement. Warren Buffett had to be a continuous learning machine. The same requirement exists in lower walks of life. I constantly see people rise in life who are not the smartest, sometimes not even the most diligent, but they are learning machines. They go to bed every night a little wiser than they were that morning. And boy does that habit help, particularly when you have a long run ahead of you.

Alfred North Whitehead correctly said at one time that the rapid advance of civilization came only when man invented the method of invention. He was referring to the huge growth in GDP per capita and many other good things we now take for granted. Big-time progress started a few hundred years ago. Before that, progress per century was almost nil. Just as civilization can progress only when it invents the method of invention, you can progress only when you learn the method of learning. I was very lucky. I came to law school having learned the method of learning. And nothing has served me better in my long life than continuous learning.

Consider Warren Buffett again. If you watched him with a time clock, you'd find that about half of his waking time is spent reading. Then a big chunk of the rest of his time is spent talking one-on-one, either on the telephone or personally with highly gifted people whom he trusts and who trust him. Viewed up close, Warren looks quite academic as he achieves worldly success. Academia has many wonderful values in it.

I came across an example not too long ago. In my capacity as a hospital board chairman, I was dealing with a medical school academic named Joseph M. Meera, MD. This man over years of disciplined work made himself know more about bone tumor pathology than almost anyone else in the world. He wanted to pass this knowledge on to help treat bone cancer. How was he going to do it? Well, he decided to write a textbook. And even though I don't think a textbook like this sells more than a few thousand copies, they do end up in cancer treatment centers all over the world. He took a sabbatical year and sat down at his computer with all his slides carefully saved and organized. He worked 17 hours a day, 7 days a week for a year, some sbatical. At the end of the year, he had created one of the two great bone tumor pathology textbooks of the world. When you're around values like mirrors, you want to pick up as much as you can.

Another idea that was hugely useful to me was one I obtained when I listened in law school when some waggish professor said, "A legal mind is a mind that considers it feasible and useful when two things are all twisted up together and interacting to try to think about one thing without considering the other." Well, I could see from that indirectly porative sentence that any such legal approach was ridiculous. And this pushed me further along in my natural drift, which was toward learning all the big ideas and all the big disciplines, so I wouldn't be the perfect damn fool the professor described. And because the really big ideas carry about 95% of the freight, it wasn't at all hard for me to pick up about 95% of what I needed from all the disciplines and to include use of this knowledge as a standard part of my mental routines.

Once you have the ideas, of course, you must continuously practice their use. Like a concert pianist, if you don't practice, you can't perform well. So, I went through life constantly practicing a multidisciplinary approach. Well, this habit has done a lot for me. It's made life more fun. It's made me more constructive. It's made me more helpful to others. It's made me richer than can be explained by any genetic gifts. My mental routine properly practiced really helps.

Now, there are dangers in it because it works so well. If you use it, you will frequently find when you're with some expert from another discipline, maybe even an expert who is your employer with a vast ability to harm you, that you know more than he does about fitting his specialty to the problem at hand. You'll sometimes see the correct answer when he's missed it. That is a very dangerous position to be in. You can cause enormous offense by being right in a way that causes somebody else to lose face in his own discipline or hierarchy. I never found the perfect way to avoid harm from this serious problem. Even though I was a good poker player when I was young, I wasn't good enough at pretending when I thought I knew more than my supervisors did. and I didn't try as hard at pretending as would have been prudent. So I gave a lot of offense. Now I'm generally tolerated as a harmless eccentric who will soon be gone. But coming up I had a difficult period to go through. My advice to you is to be better than I was at keeping insights hidden.

One of my colleagues who graduated as number one in his class in law school and clerked at the US Supreme Court tended as a young lawyer to show that he knew a lot. One day the senior partner he was working under called him in and said, "Listen, Chuck. I want to explain something to you. Your duty is to behave in such a way that the client thinks he's the smartest person in the room. If you have any energy or insight available after that, use it to make your senior partner look like the second smartest person in the room. And only after you've satisfied those two obligations do you want your light to shine at all." Well, that was a good system for rising in many a large law firm, but it wasn't what I did. I usually moved with the drift of my nature and if some other people didn't like it, well, I didn't need to be adored by everybody.

Let me further develop the idea that a multidisciplinary attitude is required if maturity is to be effective. Here I'm following a key idea of the greatest lawyer of antiquity, Marcus Tullus Cicero. Cicero is famous for saying that a man who doesn't know what happened before he's born goes through life like a child. That is a very correct idea. Cicero is right to ridicule somebody so foolish as not to know history. But if you generalize Cicero as I think one should, there are a lot of other things that one should know in addition to history. And those other things are the big ideas in all the disciplines. And it doesn't help you much just to know something well enough so that on one occasion you can prattle your way to an A in an exam. You have to learn many things in such a way that they're in a mental lattice work in your head and you automatically use them the rest of your life. If many of you try that, I solemnly promise that one day most will correctly come to think somehow I've become one of the most effective people in my whole age cohort. In contrast, if no effort is made towards such multidisiplinarity, many of the brightest of you who choose this course will live in the middle ranks or in the shallows.

Another idea that I discovered was encapsulated by that story Dean McAffrey recounted earlier about the rustic who wanted to know where he was going to die so he wouldn't go there. The rustic who had that ridiculous sounding idea had a profound truth in his possession. The way complex adaptive systems work and the way mental constructs work, problems frequently become easier to solve through inversion. If you turn problems around into reverse, you often think better. For instance, if you want to help India, the question you should consider asking is not how can I help India. Instead, you should ask how can I hurt India? You find what will do the worst damage and then try to avoid it. Perhaps the two approaches seem logically the same thing. But those who have mastered algebra know that inversion will often and easily solve problems that otherwise resist solution. And in life, just as in algebra, inversion will help you solve problems that you can't otherwise handle.

Let me use a little inversion. Now, what will really fail in life? What do we want to avoid? Some answers are easy. For example, sloth and unreliability will fail. If you're unreliable, it doesn't matter what your virtues are. You're going to crater immediately. So, faithfully doing what you've engaged to do should be an automatic part of your conduct. Of course, you want to avoid sloth and unreliability.

Another thing to avoid is extremely intense ideology because it cabbages up one's mind. You see a lot of it in the worst of the TV preachers. They have different intense inconsistent ideas about technical theology and a lot of them have minds reduced to cabbage. That can happen with political ideology. And if you're young, it's particularly easy to drift into intense and foolish political ideology and never get out. When you announce that you're a loyal member of some cultlike group and you start shouting out the orthodox ideology, what you're doing is pounding it in, pounding it in, pounding it in. You're ruining your mind, sometimes with startling speed. So, you want to be very careful with intense ideology. It presents a big danger for the only mind you're ever going to have.

Darwin formulated his theories on the transmutation of species in the late 1830s, but it was not until 1859 that he published his seinal work on the origin of species by means of natural selection. Darwin accepted that any scientific theory profering an alternative explanation to human origins would be met with widespread prejudice and that therefore prudence dictated he become fully versed in every possible counterargument before publishing his ideas. Accordingly he spent 20 years painstakingly cultivating his theory and preparing for its defense. There is a warning example I use whenever I feel threatened by a drift toward intense political ideology. Some Scandinavian canoists succeeded in getting through all the rapids of Scandinavia and they thought they would continue their success by tackling the big whirlpools in Northwest America. The death rate was 100%. A big whirlpool is something you want to avoid. And I think the same is true about intense ideology, particularly when your companions are all true believers.

I have what I call an iron prescription that helps me keep sane when I drift toward preferring one intense ideology over another. I feel that I'm not entitled to have an opinion unless I can state the arguments against my position better than the people who are in opposition. I think that I am qualified to speak only when I've reached that state. This sounds almost as extreme as the iron prescription Dean Aerson was fond of attributing to William the Silent of Orange, who roughly said, "It's not necessary to hope in order to persevere." That probably is too tough for most people, although I hope it won't ever become too tough for me. My way of avoiding over intensity and ideology is easier than Aches's injunction and worth learning. This business of not drifting into extreme ideology is very very important in life. If you want to end up wise, heavy ideology is very likely to prevent that outcome.

Another thing that often causes folly and ruin is the self-serving bias, often subconscious, to which we're all subject. You think that the true little me is entitled to do what it wants to do. For instance, why shouldn't the true little me get what it wants by overspending its income? Well, there once was a man who became the most famous composer in the world, but he was utterly miserable most of the time. One of the reasons was that he always overspent his income. That was Mozart. If Mozart couldn't get by with this kind of asinine conduct, I don't think you should try it.

Generally speaking, envy, resentment, revenge, and self-pity are disastrous modes of thought. Self-pity can get pretty close to paranoia. Paranoia is one of the very hardest things to reverse. You do not want to drift into self-pity. I had a friend who carried a thick stack of linen-based cards. When somebody would make a comment that reflected self-pity, he would slowly and portentously pull out his huge stack of cards, take the top one, and hand it to the person. The card said, "Your story has touched my heart. Never have I heard of anyone with as many misfortunes as you." Well, you can say that's waggery, but I suggest it can be mental hygiene. Every time you find you're drifting into self-pity, whatever the cause, even if your child is dying of cancer, self-pity is not going to help. Just give yourself one of my friends cards. Self-pity is always counterproductive. It's the wrong way to think. And when you avoid it, you get a great advantage over everybody else or almost everybody else because self-pity is a standard response and you can train yourself out of it.

Of course, you also want to get self-serving bias out of your mental routines, thinking that what's good for you is good for the wider civilization. And rationalizing foolish or evil conduct based on your subconscious tendency to serve yourself is a terrible way to think. You want to drive that out of yourself because you want to be wise, not foolish, and good, not evil. You also have to allow in your own cognition and conduct for the self-serving bias of everybody else because most people are not going to be very successful at removing such bias. The human condition being what it is if you don't allow for self-serving bias in the conduct of others. You are again a fool.

I watched the brilliant and worthy Harvard Law Review trained General Counsel of Solomon Brothers lose his career there. When the able CEO was told that an underling had done something wrong, the general counsel said, "Gee, we don't have any legal duty to report this, but I think it's what we should do. It's our moral duty." The general counsel was technically and morally correct, but his approach didn't persuade. He recommended a very unpleasant thing for the busy CEO to do, and the CEO quite understandably put the issue off and put it off, not with any intent to do wrong. In due course, when powerful regulators resented not having been promptly informed, down went the CEO and the general counsel with him. The correct persuasive technique in situations like that was given by Ben Franklin. He said, "If you would persuade, appeal to interest, not to reason." The self-serving bias of man is extreme and should have been used in attaining the correct outcome. So the general council should have said, "Look, this is likely to erupt into something that will destroy you, take away your money, take away your status, grossly impair your reputation. My recommendation will prevent a likely disaster from which you can't recover." That approach would have worked. You should often appeal to interest, not to reason, even when your motives are lofty.

Another thing to avoid is being subjected to perverse incentives. You don't want to be in a perverse incentive system that's rewarding you if you behave more and more foolishly or worse and worse. Perverse incentives are so powerful as controllers of human cognition and human behavior that one should avoid their influence. One of the things you're going to find in at least a few modern law firms is high billable hour quotas. I could not have lived under billable hour quotas of 2,400 hours a year. That would have caused too many problems for me. I wouldn't have done it. I don't have a solution for the situation some of you will face. You'll have to figure out for yourselves how to handle such significant problems.

Perverse associations are also to be avoided. You particularly want to avoid working directly under somebody you don't admire and don't want to be liked. It's dangerous. We're all subject to control to some extent by authority figures, particularly authority figures who are rewarding us. Dealing properly with this danger requires both some talent and will. I coped in my time by identifying people I admired and by maneuvering mostly without criticizing anybody, so that I was usually working under the right sort of people. A lot of law firms will permit that if you're shrewd enough to work it out with some tact. Generally, your outcome in life will be more satisfactory if you work under people you correctly admire.

Engaging in routines that allow you to maintain objectivity are, of course, very helpful to cognition. We all remember that Darwin paid special attention to disconfirming evidence, particularly when it disconfirmed something he believed and loved. Routines like that are required if a life is to maximize correct thinking. One also needs checklist routines. They prevent a lot of errors and not just for pilots. You should not only possess wide ranging elementary wisdom but also go through mental checklist routines in using it. There is no other procedure that will work as well.

Another idea that I found important is that maximizing non-egality will often work wonders. What do I mean? Well, John Wooden of UCLA presented an instructive example when he was the number one basketball coach in the world. He said to the bottom five players, "You don't get to play. You are practice partners." The top seven did almost all the playing. Well, the top seven learned more. Remember the importance of the learning machine because they were doing all the playing. And when he adopted that non-egalitarian system, Wooden won more games than he had won before. I think the game of competitive life often requires maximizing the experience of the people who have the most aptitude and the most determination as learning machines. If you want the very highest reaches of human achievement, that's where you have to go. You don't want to choose a brain surgeon for your child by drawing straws to select one of 50 applicants, all of whom take turns doing procedures. You don't want your airplanes designed in too egalitarian a fashion. You don't want your Berkshire Hathaways run that way either. You want to provide a lot of playing time for your best players.

I frequently tell the apocryphal story about how Mox Plancc after he won the Nobel Prize went around Germany giving the same standard lecture on the new quantum mechanics. Over time, his chauffeur memorized the lecture and said, "Would you mind, Professor Plunk, because it's so boring to stay in our routine if I gave the lecture in Munich and you just sat in front wearing my chauffeur's hat?" Plunk said, "Why not?" and the chauffeur got up and gave this long lecture on quantum mechanics after which a physics professor stood up and asked a perfectly ghastly question. The speaker said, "Well, I'm surprised that in an advanced city like Munich, I get such an elementary question. I'm going to ask my chauffeur to reply." Well, the reason I tell that story is not to celebrate the quick-wittedness of the protagonist. In this world, I think we have two kinds of knowledge. One is plank knowledge, that of the people who really know. They've paid the dues. They have the aptitude. Then we've got chauffeur knowledge. They have learned to prattle the talk. They may have a big head of hair. They often have a fine tambber in their voices. They make a big impression. But in the end, what they've got is chauffeur knowledge masquerading as real knowledge. I think I've just described practically every politician in the United States. You're going to have the problem in your life of getting as much responsibility as you can to the people with the plank knowledge and away from the people who have the chauffeur knowledge. And there are huge forces working against you. My generation has failed you to some extent. More and more we're delivering to you in California a legislature in which mostly the certified nuts from the left and the certified nuts from the right are the ones allowed to serve and none of them are removable. That's what my generation has done for you. But you wouldn't like it to be too easy, would you?

Another thing that I have found is that intense interest in any subject is indispensable if you're really going to excel in it. I could force myself to be fairly good in a lot of things, but I couldn't excel in anything in which I didn't have an intense interest. So, to some extent, you're going to have to do as I did. If at all feasible, you want to maneuver yourself into doing something in which you have an intense interest.

Another thing you have to do is have a lot of aciduity. I like that word because to me it means sit down on your ass until you do it. I've had marvelous partners full of aciduity all my life. I think I got them partly because I tried to deserve them and partly because I was shrewd enough to select them and partly there was some luck. Two partners that I chose for one phase in my life made the following simple agreement when they created a little design and build construction team in the middle of the Great Depression. Twoman partnership they said and divide everything equally. and whenever we're behind in our commitments to other people, we will both work 14 hours a day, 7 days a week until we're caught up. Well, needless to say, that firm didn't fail, and my partners were widely admired. Simple, old-fashioned ideas like theirs are almost sure to provide a good outcome.

Another thing to cope with is that life is very likely to provide terrible blows, unfair blows. Some people recover and others don't. There I think the attitude of Epictitus helps guide one to the right reaction. He thought that every mischave well. He believed every misch provided an opportunity to learn something useful and one's duty was not to become immersed in self-pity but to utilize each terrible blow in a constructive fashion. His ideas were very sound, influencing the best of the Roman emperors, Marcus Aurelius and many others over many centuries. And you may remember the epitap that Epictitus made for himself. Here lies Epictitus, a slave maimed in body, the ultimate in poverty and favored by the gods. Well, that's the way Epictitus is now remembered. Favored by the gods. He was favored because he became wise, became manly, and instructed others both in his own time and over following centuries.

I have another idea to emphasize in a brief account. My grandfather Munger was the only federal judge in his city for nearly 40 years. I admired him. I'm his namesake. And I'm confusion enough that even now as I speak, I'm thinking, well, Judge Munger would be pleased to have me here. All these years after my grandfather is dead, I conceive myself as duty bound to carry the torch for my grandfather's values. One such value was prudence as the servant of duty. Grandfather Munger was a federal judge at a time when there were no pensions for widows of federal judges. So if he didn't save from his income, my grandmother would become a destitute widow. And besides, net worth would enable him to serve others better. Being the kind of man he was, he underspent his income all his life and left his widow in comfortable circumstances. But that was not all that his prudence enabled. Along the way, in the 30s, my uncle's tiny bank failed and couldn't reopen without help. My grandfather saved the bank by exchanging over a third of his good assets for horrible bank assets. I've always remembered the event. It reminds me of A.E. Houseman's little poem that went something like this. The thoughts of others were light and fleeting, of lovers meeting or luck or fame. Mine were of trouble and mine were steady and I was ready when trouble came. You may well say, "Who wants to go through life anticipating trouble?" Well, I did, trained as I was. I've gone through a long life anticipating trouble. And here I am now, well along in my 84th year. Like Epictitus, I've had a favored life. It didn't make me unhappy to anticipate trouble all the time and be ready to perform adequately if trouble came. It didn't hurt me at all. In fact, it helped me. So I quit claim to you houseman and judge mer.

The last idea that I want to give you as you go out into a profession that frequently puts a lot of procedure and some mumbo jumbo into what it does is that complex bureaucratic procedure does not represent the highest form civilization can reach. One higher form is a seamless nonbureaucratic web of deserved trust. Not much fancy procedure, just totally reliable people correctly trusting one another. That's the way an operating room works at the Mayo Clinic. If lawyers would introduce a lot of lawyerlike process, more patients would die. So, never forget when you're a lawyer that while you may have to sell procedure, you don't always have to buy. In your own life, what you want to maximize is a seamless web of deserved trust. And if your proposed marriage contract has 47 pages, my suggestion is that you not enter.

Well, that's enough for one graduation. I hope these ruminations of an old man are useful to you. In the end, I'm speaking toward the only feasible outcome for old valiant for truth in pilgrims progress. My sword I leave to him who can wield it.

Talk 11. The Psychology of Human Misjudgment, 2005. Selections from three of Charlie's talks combined into one talk never made after revisions by Charlie in 2005 that included considerable new material. In the run-up to publishing this book, Charlie remarked that one of the most important talks in our list, the psychology of human misjudgment, could use a little revising to bring it in line with his most current views on the subject. Little did we know Charlie's little revision would amount to a full-scale rewrite with loads of new material and a stop the press completion schedule. The talk features Charlie's original concept of behavioral finance, which has now burgeoned into its own academic field of study. As attendee Donald Hall recalls, Charlie was espousing his well-reasoned views on behavioral finance before the term was even coined. Charlie also addresses the importance of recognizing patterns to determine how humans behave both rationally and irrationally. He shares with us his checklist of 25 standard causes of human misjudgment which contains observations that are ingenious, counterintuitive, and important values Charlie treasures in the work of other great thinkers throughout history. He also emphasizes the la palooa power of psychological misjudgments in combination. Here then written exclusively for poor Charlie's almanac is Charlie's magnumopus on why we behave the way we do. We wish you success in the application of these ideas in your own personal and business endeavors.

Selections from three of Charlie's talks combined into one talk never made after revisions by Charlie in 2005 that included considerable new material. The three talks were one the Bray lecture at the Caltech faculty club February 2nd 1992. two talk under the sponsorship of the Cambridge Center for Behavioral Studies at the Harvard Faculty Club, October 6th, 1994. Three, talk under the sponsorship of the Cambridge Center for Behavioral Studies at the Boston Harbor Hotel, April 24th, 1995. The extensive revision by Charlie in 2005, made from memory and unassisted by any research, occurred because Charlie thought he could do better at age 81 than he did more than 10 years earlier when he, one, knew less and was more harried by a crowded life, and two, was speaking from rough notes instead of revising transcripts.

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Preface. When I read transcripts of my psychology talks given about 15 years ago, I realized that I could now create a more logical but much longer talk, including most of what I had earlier said. But I immediately saw four big disadvantages. First, the longer talk, because it was written out with more logical completeness, would be more boring and confusing to many people than any earlier talk. This would happen because I would use idiosyncratic definitions of psychological tendencies in a manner reminiscent of both psychology textbooks and Uklid. And who reads textbooks for fun or revisits Uklid? Second, because my formal psychological knowledge came only from skimming three psychology textbooks about 15 years ago, I know virtually nothing about any academic psychology later developed. Yet, in a longer talk containing guesses, I would be criticizing much academic psychology. This sort of intrusion into a professional territory by an amateur would be sure to be resented by professors who would rejoice in finding my errors and might be prompted to respond to my published criticism by providing theirs. Why should I care about new criticism? Well, who likes new hostility from articulate critics with an information advantage? Third, a longer version of my ideas would surely draw some disapproval from people formerly disposed to liking me. Not only would there be stylistic and substantive objections, but also there would be perceptions of arrogance in an old man who displayed much disregard for conventional wisdom while popping off on a subject in which he had never taken a course. My old Harvard law classmate Ed Rothschild, always called such a popping off the shoe button complex, named for the condition of a family friend who spoke in a style on all subjects after becoming dominant in the shoe button business. Fourth, I might make a fool of myself. Despite these four very considerable objections, I decided to publish the much expanded version. Thus, after many decades in which I have succeeded mostly by restricting my action to jobs and methods in which I was unlikely to fail, I have now chosen a course of action in which, one, I have no significant personal benefit to gain, two, I will surely give some pain to family members and friends, and three, I may make myself ridiculous. Why am I doing this? One reason may be that my nature makes me inclined toward diagnosing and talking about errors in conventional wisdom. And despite years of being smoothed out by the hard knocks that were inevitable for one with my attitude, I don't believe life ever knocked all the boy's brashness out of the man. A second reason for my decision is my approval of the attitude of Dioynes when he asked of what use is a philosopher who never offends anybody. My third and final reason is the strongest. I have fallen in love with my way of laying out psychology because it has been so useful for me. And so before I die, I want to imitate to some extent the bequest practices of three characters. the protagonist in John Bunan's Pilgrim's Progress, Benjamin Franklin, and my first employer, Ernest Buffett. Bunan's character, the night wonderfully named Old Valiant for truth, makes the only practical bequest available to him when he says at the end of his life, "My sword I leave to him who can wear it." And like this man, I don't mind if I have misappraised my sword, provided I have tried to see it correctly, or if many will not wish to try it, or if some who try to wield it may find it serves them not. Ben Franklin, to my great benefit, left behind his autobiography, his almanac, and much else. and Ernest Buffett did the best he could in the same mode when he left behind how to run a grocery store and a few things I have learned about fishing. Whether or not this last contribution to the genre was the best, I will not say, but I will report that I have now known four generations of Ernest Buffett's descendants and that the results have encouraged my imitation of the founder.

The Psychology of Human Misjudgment. I have long been very interested in standard thinking errors. However, I was educated in an era wherein the contributions of non-patient treating psychology to an understanding of misjudgment met approval from members of the mainstream elite. Instead, interest in psychology was pretty well confined to a group of professors who talked and published mostly for themselves with much natural detriment from isolation and group think. And so, right after my time at Caltech and Harvard Law School, I possessed a vast ignorance of psychology. Those institutions failed to require knowledge of the subject. And of course, they couldn't integrate psychology with their other subject matter when they didn't know psychology. Also, like the Nietze character who was proud of his lame leg, the institutions were proud of their willful avoidance of fuzzy psychology and fuzzy psychology professors. I shared this ignorant mindset for a considerable time, and so did a lot of other people. What are we to think, for instance, of the Caltech course catalog that for years listed just one psychology professor, self-described as a professor of psychoanalytical studies, who taught both abnormal psychology and psychoanalysis in literature. Soon after leaving Harvard, I began a long struggle to get rid of the most dysfunctional part of my psychological ignorance. Today I will describe my long struggle for elementary wisdom and a brief summary of my ending notions. After that I will give examples, many quite vivid and interesting to me of both psychology at work and antidotes to psychology-based dysfunction. Then I will end by asking and answering some general questions raised by what I have said. This will be a long talk.

When I started law practice, I had respect for the power of genetic evolution and an appreciation of man's many evolution-based resemblances to less cognitively gifted animals and insects. I was aware that man was a social animal, greatly and automatically influenced by behavior he observed in men around him. I also knew that man lived like barnyard animals and monkeys in limited size dominance hierarchies, wherein he tended to respect authority and to like and cooperate with his own hierarchy members while displaying considerable distrust and dislike for competing men not in his own hierarchy. But this generalized evolution-based theory structure was inadequate to enable me to cope properly with the cognition I encountered. I was soon surrounded by much extreme irrationality displayed in patterns and subpatterns. 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. By then, my craving for more theory had a long history. Partly, I had always loved theory as an aid in puzzle solving and as a means of satisfying my monkeylike curiosity, and partly I had found that theory structure was a superpower in helping one get what one wanted. As I had early discovered in school, wherein I had excelled without labor, guided by theory, while many others, without mastery of theory, failed despite monstrous effort. Better theory, I thought, had always worked for me, and if now available, could make me acquire capital and independence faster, and better assist everything I loved. So I slowly developed my own system of psychology, more or less in the self-help style of Ben Franklin. And with the determination displayed in the refrain of the nursery story, "Then I'll do it myself," said the little red hen. "I was greatly helped in my quest by two turns of mind. First, I had long looked for insight by inversion in the intense manner counseledled by the great algebraist Jacobe. invert. Always invert. I sought good judgment mostly by collecting instances of bad judgment, then pondering ways to avoid such outcomes. Second, I became so avid a collector of instances of bad judgment that I paid no attention to boundaries between professional territories. After all, why should I search for some tiny, unimportant, hard to find new stupidity in my own field when some large, important, easy to find stupidity was just over the fence in the other fellow's professional territory. Besides, I could already see that real world problems didn't neatly lie within territorial boundaries. They jumped right across. and I was dubious of any approach that when two things were inextricably intertwined and interconnected would try and think about one thing but not the other. I was afraid if I tried any such restricted approach that I would end up in the immortal words of John L. Lewis with no brain at all just a neck that had haird over. Pure curiosity somewhat later made me wonder how and why destructive cults were often able over a single long weekend to turn many tolerably normal people into brainwashed zombies and thereafter keep them in that state indefinitely. I resolved that I would eventually find a good answer to this cult question if I could do so by general reading and much musing. I also got curious about social insects. It fascinated me that both the fertile female honeybee and the fertile female harvester ant could multiply their quite different normal life expectancies by exactly 20 by engaging in one orgy in the sky. The extreme success of the ants also fascinated me. How a few behavioral algorithms caused such extreme evolutionary success, grounded in extremes of cooperation within the breeding colony, and almost always extremes of lethal hostility toward ants outside the breeding colony, even ants of the same species. motivated as I was by midlife I should probably have turned to psychology text books but I didn't displaying my share of the outcome predicted by the German folk saying we are too soon old and too late smart however as I later found out I may have been lucky to avoid for so long the academic psychology that was then laid out in most textbooks these would not have guided me well with respect to cults and raw often written as if the authors were collecting psychology experiments as a boy collects butterflies with a passion for more butterflies and more contact with fellow collectors and little craving for synthesis in what is already possessed. When I finally got to the psychology texts, I was reminded of the observation of Jacob Viner, the great economist, that many an academic is like the truffle hound, an animal so trained and bred for one narrow purpose that it is no good at anything else. I was also appalled by the hundreds of pages of extremely nonscientific musing about comparative weights of nature and nurture in human outcomes. And I found that introductory psychology texts by and large didn't deal appropriately with a fundamental issue. Psychological tendencies tend to be both numerous and inseparably intertwined now and forever as they interplay in life. Yet the complex parsing out of effects from intertwined tendencies was usually avoided by the writers of the elementary texts. Possibly the authors did not wish through complexity to repel entry of new devotees to their discipline. And possibly the cause of their inadequacy was the one given by Samuel Johnson in response to a woman who inquired as to what accounted for his dictionary's misdef. Pure ignorance, Johnson replied. Finally, the text writers showed little interest in describing standard antidotes to standard psychologydriven folly, and they thus avoided most discussion of exactly what most interested me. But academic psychology has some very important merits alongside its defects. I learned this eventually in the course of general reading from a book influence aimed at a popular audience by a distinguished psychology professor Robert Chaldini at Arizona State a very big university. Chaldini had made himself into a super tenured regent professor at a very young age by devising, describing, and explaining a vast group of clever experiments in which manipulated man to his detriment, with all of this made possible by man's intrinsic thinking flaws. I immediately sent copies of Chaldini's book to all my children. I also gave Chaldini a share of Berkshire stock class A to thank him for what he had done for me and the public. Incidentally, the sale by Chaldini of hundreds of thousands of copies of a book about social psychology was a huge feat, considering that Chaldini didn't claim that he was going to improve your sex life or make you any money. Part of Chaldini's large book buying audience came because like me, it wanted to learn how to become less often tricked by salesmen and circumstances. However, as an outcome not sought by Chaldini, who is a profoundly ethical man, a huge number of his books were bought by salesmen who wanted to learn how to become more effective in misleading customers. Please remember this perverse outcome when my discussion comes to incentive caused bias as a consequence of the superpower of incentives. With the push given by Chaldini's book, I soon skimmed through three muchused textbooks covering introductory psychology. I also pondered considerably while craving synthesis and taking into account all my previous training and experience. The result was Munger's partial summary of the non-patient treating non-Neature versus nurture weighing parts of non-developmental psychology. This material was stolen from its various discoverers, most of whose names I did not even try to learn. often with new descriptions and titles selected to fit Munger's notion of what makes recall easy for Munger, then revised to make Munger's use easy as he seeks to avoid errors. I will start my summary with a general observation that helps explain what follows. This observation is grounded in what we know about social insects. The limitations inherent in evolution's development of the nervous system cells that control behavior are beautifully demonstrated by these insects, which often have a mere 100,000 or so cells in their entire nervous systems compared to man's multiple billions of cells in his brain alone. Each ant like each human is composed of a living physical structure plus behavioral algorithms in its nerve cells. In the ant's case, the behavioral algorithms are few in number and almost entirely genetic in origin. The ant learns a little behavior from experiences, but mostly it merely responds to 10 or so stimuli with a few simple responses programmed into its nervous system by its genes. Naturally, the simple ant behavior system has extreme limitations because of its limited nerve system repertoire. For instance, one type of ant when it smells a pheromone given off by a dead ant's body in the hive, immediately responds by cooperating with other ants in carrying the dead body out of the hive. Harvard's great EO Wilson performed one of the best psychology experiments ever done when he painted dead ant pheromone on a live ant. Quite naturally, the other ants dragged this useful live ant out of the hive, even though it kicked and otherwise protested throughout the entire process. Such is the brain

of the ant. It has a simple program of responses that generally work out all right, but which are imprudently used by wrote in many cases.

Another type of ant demonstrates that the limited brain of ants can be misled by circumstances as well as by clever manipulation from other creatures. The brain of this ant contains a simple behavioral program that directs the ant when walking to follow the ant ahead. And when these ants stumble into walking in a big circle, they sometimes walk round and round until they perish.

It seems obvious to me at least that the human brain must often operate counterproductively just like the ants from unavoidable oversimplicity in its mental process albeit usually in trying to solve problems more difficult than those faced by ants that don't have to design airplanes. The perception system of man clearly demonstrates just such an unfortunate outcome. Man is easily fooled either by the cleverly thoughtout manipulation of man, by circumstances occurring by accident, or by very effective manipulation practices that man has stumbled into during practice evolution and kept in place because they work so well.

One such outcome is caused by a quantum effect in human perception. If stimulus is kept below a certain level, it does not get through. And for this reason, a magician was able to make the Statue of Liberty disappear after a certain amount of magician lingo expressed in the dark. The audience was not aware that it was sitting on a platform that was rotating so slowly below man's sensory threshold that no one could feel the acceleration implicit in the considerable rotation. When a surrounding curtain was then opened in the place on the platform where the statue had earlier appeared, it seemed to have disappeared.

Even when perception does get through to man's brain, it is often mised. Because what is registered in perception is in the shockingness of apparent contrast, not the standard scientific units that make possible science and good engineering. A magician demonstrates this sort of contrastbased error in your nervous system when he removes your wristwatch without your feeling it. As he does this, he applies pressure of touch on your wrist that you would sense if it was the only pressure of touch you were experiencing. But he has concurrently applied other intense pressure of touch on your body but not on your wrist, swamping the wrist pressure by creating a high contrast touch pressure elsewhere. This high contrast takes the wrist pressure below perception.

Some psychology professors like to demonstrate the inadequacy of contrastbased perception by having students put one hand in a bucket of hot water and one hand in a bucket of cold water. They are then suddenly asked to remove both hands and place them in a single bucket of room temperature water. Now with both hands in the same water, one hand feels as if it has just been put in cold water and the other hand feels as if it has just been placed in hot water.

When one thus sees perception so easily fooled by mere contrast, where a simple temperature gauge would make no error, and realizes that cognition mimics perception in being misled by mere contrast, he is well on the way toward understanding not only how magicians fool one, but also how life will fool one. This can occur through deliberate human manipulation or otherwise if one doesn't take certain precautions against often wrong effects from generally useful tendencies in his perception and cognition.

Man's often wrong but generally useful psychological tendencies are quite numerous and quite different. The natural consequence of this profusion of tendencies is the grand general principle of social psychology. Cognition is ordinarily situation dependent so that different situations often cause different conclusions even when the same person is thinking in the same general subject area.

With this introductory instruction from ants, magicians, and the grand general principle of social psychology, I will next simply number and list psychology- based tendencies that while generally useful, often mislead. Discussion of errors from each tendency will come later together with a description of some antidotes to these errors followed by some general discussion. Here are the tendencies.

One, reward and punishment super response tendency.

Two, liking loving tendency.

Three, disliking hating tendency.

Four, doubt avoidance tendency.

Five, inconsistency avoidance tendency.

Six, curiosity tendency.

Seven, Contean fairness tendency.

Eight, envy, jealousy tendency.

Nine, reciprocation tendency.

10, influence from mere association tendency.

11. Simple pain avoiding psychological denial.

12. Excessive self-regard tendency.

13. Overoptimism tendency.

14. Deprival super reaction tendency.

15. Social proof tendency.

16. Contrast misreaction tendency.

17. Stress influence tendency.

18. Availability misweighing tendency.

19. Use it or lose it tendency.

20. Drug misinfluence tendency.

21. Scinsessence misinfluence tendency

22. Authority misinfluence tendency

23. Twaddle tendency

24. Reason respecting tendency

25. La Palooa tendency. The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome.

One reward and punishment super response tendency. I place this tendency first in my discussion because almost everyone thinks he fully recognizes how important incentives and disincentives are in changing cognition and behavior. But this is not often so. For instance, I think I've been in the top 5% of my age cohort almost all my adult life and understanding the power of incentives. Yet, I've always underestimated that power. Never a year passes, but I get some surprise that pushes a little further my appreciation of incentive superpower.

One of my favorite cases about the power of incentives is the Federal Express case. The integrity of the Federal Express system requires that all packages be shifted rapidly among airplanes in one central airport each night. The system has no integrity for the customers if the night work shift can't accomplish its assignment fast. And Federal Express had one hell of a time getting the night shift to do the right thing. They tried moral persuasion. They tried everything in the world without luck. And finally, somebody got the happy thought that it was foolish to pay the night shift by the hour when what the employer wanted was not maximized billable hours of employee service, but fault-free rapid performance of a particular task. Maybe this person thought if they paid the employees per shift and let all night shift employees go home when all the planes were loaded, the system would work better. And lo and behold, that solution worked.

Early in the history of Xerox, Joe Wilson, who was then in the government, had a similar experience. He had to go back to Xerox because he couldn't understand why its new machine was selling so poorly in relation to its older and inferior machine. When he got back to Xerox, he found out that the commission arrangement with the salesman gave a large and perverse incentive to push the inferior machine on customers who deserved a better result.

Then there is the case of Mark Twain's cat that after a bad experience with a hot stove never again sat on a hot stove or a cold stove either. We should also heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard's Almanac. If you would persuade, appeal to interest and not to reason. This maxim is a wise guide to a great and simple precaution in life. Never ever think about something else when you should be thinking about the power of incentives.

I once saw a very smart house council for a major investment bank lose his job with no moral fault because he ignored the lesson in this maxim of Franklin. This council failed to persuade his client because he told him his moral duty as correctly conceived by the council without also telling the client in vivid terms that he was very likely to be clobbered to smitherines if he didn't behave as his council recommended. As a result, both client and council lost their careers.

We should also remember how a foolish and willful ignorance of the superpower of rewards caused Soviet communists to get their final result as described by one employee. They pretend to pay us and we pretend to work. Perhaps the most important rule in management is get the incentives right.

But there is some limit to a desirable emphasis on incentive superpower. One case of excess emphasis happened at Harvard where BF Skinner, a psychology professor, finally made himself ridiculous. At one time, Skinner may have been the best known psychology professor in the world. He partly deserved his peak reputation because his early experiments using rats and pigeons were ingenious and his results were both counterintuitive and important. With incentives, he could cause more behavior change culminating in conditioned reflexes in his rats and pigeons than he could in any other way. He made obvious the extreme stupidity in dealing with children or employees of rewarding behavior one didn't want more of using food rewards. He even caused strong superstitions predesigned by himself in his pigeons. He demonstrated again and again a great recurring generalized behavior algorithm in nature. Repeat behavior that works. He also demonstrated that prompt rewards worked much better than delayed rewards in changing and maintaining behavior. And once his rats and pigeons had conditioned reflexes caused by food rewards, he found what withdrawal pattern of rewards kept the reflexive behavior longest in place. Random distribution. With this result, Skinner thought he had pretty well explained man's misgambling compulsion, where he often foolishly proceeds to ruin. But as we shall later see when we discuss other psychological tendencies that contribute to misgambling compulsion, he was only partly right.

Later, Skinner lost most of his personal reputation by one, overclaiming for incentive superpower, to the point of thinking he could create a human utopia with it, and two, displaying hardly any recognition of the power of the rest of psychology. He thus behaved like one of Jacob Viner's truffle hounds, as he tried to explain everything with incentive effects. Nonetheless, Skinner was right in his main idea. Incentives are superpowers. The outcome of his basic experiments will always remain in high repute in the annals of experimental science.

When I was at Harvard Law School, the professors sometimes talked about an overfocused Skinner-like professor at Yale Law School. They used to say, "Poor old Eddie Blanchard. He thinks declaratory judgments will cure cancer." Well, that's the way Skinner got with his very extreme emphasis on incentive superpower. I always call the Johnny one note turn of mind that eventually so diminished Skinner's reputation the man with a hammer tendency after the folk saying to a man with only a hammer every problem looks pretty much like a nail. Man with a hammer tendency does not exempt smart people like Blanchard and Skinner. and it won't exempt you if you don't watch out. I will return to man with a hammer tendency at various times in this talk because fortunately there are effective antidotes that reduce the ravages of what pretty much ruined the personal reputation of the brilliant Skinner.

One of the most important consequences of incentive superpower is what I call incentivecaused bias. 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. A result he facilitates by rationalizing his bad behavior, like the salesmen at Xerox who harmed customers in order to maximize their sales commissions.

here. My early education involved a surgeon who over the years sent bushell baskets full of normal gallbladders down to the pathology lab in the leading hospital in Lincoln, Nebraska, my grandfather's town. And with that permissive quality control for which community hospitals are famous, many years after this surgeon should have been removed from the medical staff, he was one of the doctors who participated in the removal was a family friend. And I asked him, did this surgeon think, "Here's a way for me to exercise my talents." This guy was very skilled technically and make a high living by doing a few mamings and murders every year in the course of routine fraud. And my friend answered, "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.

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 and it causes perfectly terrible behavior. Consider the presentations of brokers selling commercial real estate and businesses. I've never seen one that I thought was even within hailing distance of objective truth. In my long life, I have never seen a management consultants report that didn't end with the same advice. This problem needs more management consulting services.

Widespread incentive caused bias requires that one should often distrust or take with a grain of salt the advice of one's professional advisor, even if he is an engineer. The general antidotes here are one, especially fear professional advice when it is especially good for the adviser. Two, learn and use the basic elements of your advisor's trade as you deal with your advisor. And three, doublech checkck disbelieve or replace much of what you're told to the degree that seems appropriate after objective thought.

The power of incentives to cause rationalized terrible behavior is also demonstrated by defense department procurement history. After the defense department had much truly awful experience with misbehaving contractors motivated under contracts paying on a cost plus percentage of cost basis. 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. And by the way, although the government was right to create this new felony, much of the way the rest of the world is run, including the operation of many law firms and a lot of other firms, is still under what is in essence a cost plus percentage of cost reward system. Human nature beddled by incentive-caused bias causes a lot of ghastly abuse under these standard incentive patterns of the world. And many of the people who are behaving terribly you would be glad to have married into your family compared to what you're otherwise likely to get.

Now there are huge implications from the fact that the human mind is put together this way. One implication is that people who create things like cash registers, which make dishonest behavior hard to accomplish, are some of the effective saints of our civilization. Because, as Skinner so well knew, bad behavior is intensely habit forming when it is rewarded. And so, the cash register was a great moral instrument when it was created. And by the way, Patterson, the great evangelist of the cash register, knew that from his own experience. He had a little store and his employees were stealing him blind so that he never made any money. Then people sold him a couple of cash registers and his store went to profit immediately. He promptly closed the store and went into the cash register business creating what became the mighty National Cash Register Company, one of the glories of its time. Repeat behavior that works is a behavioral guide that really succeeded for Patterson after he applied one added twist. So did high moral cognition. An eccentric ineterate dogooder except when destroying competitors, all of which he regarded as would be patent thieves. Patterson, like Andrew Carnegi, pretty well gave away all his money to charity before he died, always pointing out that shrouds have no pockets. So great was the contribution of Patterson's cash register to civilization, and so effectively did he improve the cash register and spread its use, that in the end he probably deserved the epitap chosen for the Roman poet Horus. I did not completely die.

The strong tendency of employees to rationalize bad conduct in order to get rewards requires many antidotes in addition to the good cash control promoted by Patterson. Perhaps the most important of these antidotes is the use of sound accounting theory and practice. This was seldom better demonstrated than at Westinghouse, which had a subsidiary that made loans having no connection to the rest of Westinghouse's businesses. The officers of Westinghouse, perhaps influenced by envy of General Electric, wanted to expand profits from loans to outsiders. Under Westinghouse's accounting practice, provisions for future credit losses on these loans depended largely on the past credit experience of its lending subsidiary, which mainly made loans unlikely to cause massive losses.

Now there are two special classes of loans that naturally cause much trouble for lenders. The first is 95% of value construction loans to any kind of real estate developer. And the second is any kind of construction loan on a hotel. So naturally, if one was willing to loan approximately 95% of the real cost to a developer constructing a hotel, the loan would bear a much higher than normal interest rate because the credit loss danger would be much higher than normal. So sound accounting for Westinghouse in making a big new mass of 95% of value construction loans to hotel developers would have been to report almost no profit or even a loss on each loan until years later the loan became clearly worth par. But Westinghouse instead plunged into big-time construction lending on hotels using accounting that made its lending officers look good because it showed extremely high starting income from loans that were very inferior to the loans from which the company had suffered small credit losses in the past. This terrible accounting was allowed by both international and outside accountants for Westinghouse as they displayed the conduct predicted by the refrain, "Whose bread I eat, his song I sing?" The result was billions of dollars of losses.

Who was at fault? the guy from the refrigerator division or some similar division who as lending officer was suddenly in charge of loans to hotel developers or the accountants and other senior people who tolerated a nearly insane incentive structure almost sure to trigger incentive-caused bias in a lending officer. My answer puts the most blame on the accountants and other senior people who created the accounting system. These people became the equivalent of an armored car cash carrying service that suddenly decided to dispense with vehicles and have unarmed children handry its customers cash through slums in open bushell baskets.

I wish I could tell you that this sort of thing no longer happens but this is not so. After Westinghouse blew up, General Electric's Kder Peabody subsidiary put a silly computer program in place that allowed a bond trader to show immense fictional profits. And after that, much accounting became even worse, perhaps reaching its nater at Enron. So incentive caused bias is a huge important thing with highly important antidotes like the cash register and a sound accounting system. But when I came years ago to the psychology texts, I found that while they were about 1,000 pages long, there was little therein that dealt with incentive-caused bias and no mention of Patterson or sound accounting systems. Somehow incentive-caused bias and its antidotes pretty well escaped the standard survey courses in psychology. Even though incentive-caused bias had long been displayed prominently in much of the world's great literature, and antidotes to it had long existed in standard business routines. In the end, I concluded that when something was obvious in life but not easily demonstrable in certain kinds of easy to do repeatable academic experiments, the truffle hounds of psychology very often missed it.

In some cases, other disciplines showed more interest in psychological tendencies than did psychology, at least as explicated in psychology textbooks. For instance, economists speaking from the employer's point of view have long had a name for the natural results of incentive caused bias, agency cost. As the name implies, economists have typically known that just as grain is always lost to rats, employers always lose to employees who improperly think of themselves first. Employer installed antidotes include tough internal audit systems and severe public punishment for identified miscreants as well as misbehavior preventing routines and such machines as cash registers.

From the employees point of view, incentive caused bias quite naturally causes opposing abuse from the employer, the sweat shop, the unsafe workplace, etc. And these bad results for employees have antidotes not only in pressure from unions but also in government action such as wage and hour laws, workplace safety rules, measures fostering unionization and workers compensation systems. Given the opposing psychologyinduced strains that naturally occur in employment because of incentive caused bias on both sides of the relationship, it is no wonder the Chinese are so much into yin and yang.

The inevitable ubiquity of incentive caused bias has vast generalized consequences. For instance, a sales force living only on commissions will be much harder to keep moral than one under less pressure from the compensation arrangement. On the other hand, a purely commissioned salesforce may well be more efficient per dollar spent. Therefore, difficult decisions involving tradeoffs are common in creating compensation arrangements in the sales function.

The extreme success of free market capitalism as an economic system owes much to its prevention of many bad effects from incentive caused bias. Most capitalist owners in a vast web of free market economic activity are selected for ability by surviving in a brutal competition with other owners and have a strong incentive to prevent all waste and operations within their ownership. After all, they live on the difference between their competitive prices and their overall costs, and their businesses will perish if costs exceed sales. Replace such owners by salaried employees of the state and you will normally get a substantial reduction in overall efficiency as each employee who replaces an owner is subject to incentive caused bias as he determines what service he will give in exchange for his salary and how much he will yield to peer pressure from any fellow employees who do not desire his creation of any strong performance model.

Another generalized consequence of incentive caused bias is that man tends to game all human systems, often displaying great ingenuity in wrongly serving himself at the expense of others. Anti-gaming features, therefore, constitute a huge and necessary part of almost all system design. Also needed in system design is an admonition. dread and avoid as much as you can rewarding people for what can be easily faked. Yet our legislators and judges, usually including many lawyers educated in eminent universities, often ignore this injunction. Society consequently pays a huge price in the deterioration of behavior and efficiency as well as the incurrence of unfair costs and wealth transfers. If education were improved with psychological reality becoming better taught and assimilated, better system design might well come out of our legislatures and courts.

Of course, money is now the main reward that drives habits. A monkey can be trained to seek and work for an intrinsically worthless token as if it were a banana if the token is routinely exchangeable for a banana. So it is with humans working for money only more so because human money is exchangeable for many desired things in addition to food and one ordinarily gains status from either holding or spending it. Moreover, a rich person will often through habit work or connive energetically for more money long after he has almost no real need for more. Averaged out, money is a mainspring of modern civilization, having little precedent in the behavior of nonhuman animals. Money rewards are also intertwined with other forms of reward. For instance, some people use money to buy status and others use status to get money while none sort of do both things at the same time. Although money is the main driver among rewards, it is not the only reward that works. People also change their behavior and cognition for sex, friendship, companionship, advancement in status, and other non-monetary items.

Granny's rule provides another example of reward superpower, so extreme in its effects that it must be mentioned here. You can successfully manipulate your own behavior with this rule, even if you are using as rewards items that you already possess. Indeed, consultant PhD psychologists often urge business organizations to improve their reward systems by teaching executives to use Granny's rule to govern their own daily behavior. Granny's rule, to be specific, is the requirement that children eat their carrots before they get dessert. The business version requires that executives force themselves daily to first do their unpleasant and necessary tasks before rewarding themselves by proceeding to their pleasant tasks. Given reward superpower, this practice is wise and sound. Moreover, the rule can also be used in the non-b businessiness part of life. The emphasis on daily use of this practice is not accidental. The consultants well know after the teaching of Skinner that prompt rewards work best.

Punishments of course also strongly influence behavior and cognition although not so flexibly and wonderfully as rewards. For instance, 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. Military and naval organizations have very often been extreme in using punishment to change behavior, probably because they needed to cause extreme behavior. Around the time of Caesar, 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. And George Washington hanged farmboy deserters 40 ft high as an example to others who might contemplate desertion.

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Two, liking loving tendency. A newly hatched baby goose is programmed through the economy of its genetic program to love and follow the first creature that is nice to it, which is almost always its mother. But if the mother goose is not present right after the hatching and a man is there instead, the goling will love and follow the man who becomes a sort of substitute mother. Somewhat similarly, a newly arrived human is born to like and love under the normal and abnormal triggering outcomes for its kind. Perhaps the strongest inborn tendency to love, ready to be triggered, is that of the human mother for its child. On the other hand, the similar child-loving behavior of a mouse can be eliminated by the deletion of a single gene, which suggests there is some sort of triggering gene in a mother mouse as well as in a goling.

Each child, like a go, will almost surely come to like and love, not only as driven by its sexual nature, but also in social groups not limited to its genetic or adoptive family. Current extremes of romantic love almost surely did not occur in man's remote past. Our early human ancestors were surely more like apes triggered into mating in a pretty mundane fashion. And what will a man naturally come to like and love apart from his parent, spouse, and child? Well, he will like and love being liked and loved. So many a courtship competition will be won by a person displaying exceptional devotion and man will generally strive lifelong for the affection and approval of many people not related to him.

One very practical consequence of liking loving tendency is that it acts as a conditioning device that makes the liker or lover tend to one ignore the faults of and comply with the wishes of the object of his affection. Two favor people products and actions merely associated with the object of his affection as we shall see when we get to influence from mere association tendency. and three distort other facts to facilitate love.

The phenomenon of liking and loving causing admiration also works in reverse. Admiration also causes or intensifies liking or love. With this feedback mode in place, the consequences are often extreme, sometimes even causing deliberate self-destruction to help what is loved. Liking or loving intertwined with admiration in a feedback mode often has vast practical consequences in areas far removed from sexual attachments. For instance, a man who is so constructed that he loves admirable persons and ideas with a special intensity has a huge advantage in life. This blessing came to both Buffett and myself in large measure, sometimes from the same persons and ideas. One common beneficial example for us both was Warren's uncle, Fred Buffett, who cheerfully did the endless grocery store work that Warren and I ended up admiring from a safe distance. Even now, after I've known so many other people, I doubt it is possible to be a nicer man than Fred Buffett was, and he changed me for the better. There are large social policy implications in the amazingly good consequences that ordinarily come from people likely to trigger extremes of love and admiration boosting each other in a feedback mode. For instance, it is obviously desirable to attract a lot of lovable, admirable people into the teaching profession.

Three, disliking hating tendency. In a pattern obverse to liking loving tendency, the newly arrived human is also born to dislike and hate as triggered by normal and abnormal triggering forces in its life. It is the same with most apes and monkeys. As a result, the long history of man contains almost continuous war. For instance, most American Indian tribes wared incessantly, and some tribes would occasionally bring captives home to women so that all could join in the fun of torturing captives to death. Even with the spread of religion and the advent of advanced civilization, much modern war remains pretty savage. But we also get what we observe in present- day Switzerland and the United States wherein the clever political arrangements of man channel the hatreds and dislikings of individuals and groups into non-lethal patterns including elections. But the dislikings and hatreds never go away completely. Born into man, these driving tendencies remain strong. Thus we get maxims like the one from England. Politics is the art of marshalling hatreds. And we also get the extreme popularity of very negative political advertising in the United States.

At the family level, we often see one sibling hate his other siblings and litigate with them endlessly if he can afford it. Indeed, a wag named Buffett has repeatedly explained to me that a major difference between rich and poor people is that the rich people can spend their lives suing their relatives. My father's law practice in Omaha was full of such intrafamily hatreds. When I got to the Harvard Law School and its professors taught me property law with no mention of sibling rivalry in the family business, I appraised the school as a pretty unrealistic place that wore blinders like the milkwagon horses of your. My current guess is that sibling rivalry has not yet made it into property law as taught at Harvard.

Disliking hating tendency also acts as a conditioning device that makes the disliker hater tend to one ignore virtues in the object of dislike two dislike people products and actions merely associated with the object of his dislike and three distort other facts to facilitate hatred.

Four, doubt avoidance tendency. The brain of man is programmed with a tendency to quickly remove doubt by reaching some decision. It is easy to see how evolution would make animals over the eons drift toward such quick elimination of doubt. After all, the one thing that is surely counterproductive for a prey animal that is threatened by a predator is to take a long time in deciding what to do. So, man's doubt avoidance tendency is quite consistent with the history of his ancient nonhuman ancestors. So pronounced is the tendency in man to quickly remove doubt by reaching some decision that behavior to counter the tendency is required from judges and jurors. Here delay before decisionmaking is forced and one is required to comport himself prior to conclusion time so that he is wearing a mask of objectivity. And the mask works to help real objectivity along as we shall see when we next consider man's inconsistency avoidance tendency.

Of course, once one has recognized that man has a strong doubt avoidance tendency, it is logical to believe that at least some leaps of religious faith are greatly boosted by this tendency. Even if one is satisfied that his own faith comes from revelation, one must still account for the inconsistent faiths of others. And man's doubt avoidance tendency is almost surely a big part of the answer. What triggers doubt avoidance tendency? Well, an unthreatened man thinking of nothing in particular is not being prompted to remove doubt through rushing to some decision. As we shall see later, when we get to social proof tendency and stress influence tendency, what usually triggers doubt avoidance tendency is some combination of one puzzlement and two stress. And both of these factors naturally occur in facing religious issues. Thus, the natural state of most men is in some form of religion. And this is what we observe.

Five, inconsistency avoidance tendency. The brain of man conserves programming space by being reluctant to change, which is a form of inconsistency avoidance. We see this in all human habits, constructive and destructive. Few people can list a lot of bad habits that they have eliminated, and some people cannot identify even one of these. Instead, practically everyone has a great many bad habits he has long maintained, despite their being known as bad. Given this situation, it is not too much in many cases to appraise early formed habits as destiny. When Marley's miserable ghost in A Christmas Carol says, "I wear the chains I forged in life, he is talking about the chains of habit that were too light to be felt before they became too strong to be broken." The rare life that is wisely lived has in it many good habits maintained and many bad habits avoided or cured. The great rule that helps here is again from Franklin's Poor Richard's Almanac. An ounce of prevention is worth a pound of cure. What Franklin here is indicating in part is that inconsistency avoidance tendency makes it much easier to prevent a habit than to change it.

Also tending to be maintained in place by the anti-change tendency of the brain are one's previous conclusions. human loyalties, reputational identity, commitments, accepted role in a civilization, etc. It is not entirely clear why evolution would program into man's brain an anti-change mode alongside his tendency to quickly remove doubt. My guess is the anti-change mode was significantly caused by a combination of the following factors. One, it facilitated faster decisions when speed of decision was an important contribution to the survival of non-human ancestors that were prey. Two, it facilitated the survival advantage that our ancestors gained by cooperating in groups, which would have been more difficult to do if everyone was always changing responses. Three, it was the best form of solution that evolution could get to in the limited number of generations between the start of literacy and today's complex modern life.

It is easy to see that a quickly reached conclusion triggered by doubt avoidance tendency when combined with a tendency to resist any change in that conclusion will naturally cause a lot of errors in cognition for modern man. And so it observably works out. We all deal much with others whom we correctly diagnose as imprisoned in poor conclusions that are maintained by mental habits they formed early and will carry to their graves. So great is the bad decision problem caused by inconsistency avoidance tendency that our courts have adopted important strategies against it. For instance, before making decisions, judges and juries are required to hear long and skillful presentations of evidence and arguments from the side they will not naturally favor given their ideas in place. This helps prevent considerable bad thinking from first conclusion bias. Similarly, other modern decision makers will often force groups to consider skillful counterarguments before making decisions. Proper education is one long exercise in the augmentation of high cognition so that our wisdom becomes strong enough to destroy wrong thinking maintained by resistance to change.

As Lord Kaines pointed out about his exalted intellectual group at one of the greatest universities in the world, it was not the intrinsic difficulty of new ideas that prevented their acceptance. Instead, the new ideas were not accepted because they were inconsistent with old ideas in place. What Keynes was reporting is that the human mind works a lot like the human egg. When one sperm gets into a human egg, there's an automatic shut off device that bars any other sperm from getting in. The human mind tends strongly toward the same sort of result. And so people tend to accumulate large mental holdings of fixed conclusions and attitudes that are not often re-examined or changed even though there is plenty of good evidence that they are wrong. Moreover, this doesn't just happen in social science departments like the one that once thought Freud should serve as the only choice as a psychology teacher for Caltech. Holding to old errors even happens although with less frequency and severity in hard science departments. We have no less an authority for this than Mox Planck, Nobel laureate finder of Planck's constant. Planck is famous not only for his science but also for saying that even in physics the radically new ideas are seldom really accepted by the old guard. Instead, said Planck, progress is made by a new generation that comes along, less brain blocked by its previous conclusions. Indeed, precisely this sort of brain blocking happened to a degree in Einstein. At his peak, Einstein was a great destroyer of his own ideas, but an older Einstein never accepted the full implications of quantum mechanics.

One of the most successful users of an antidote to first conclusion bias was Charles Darwin. He trained himself early to intensively consider any evidence, tending to disisconfirm any hypothesis of his, more so if he thought his hypothesis was a particularly good one. The opposite of what Darwin did is now called confirmation bias, a term of appropri. Darwin's practice came from his acute recognition of man's natural cognitive faults arising from inconsistency avoidance tendency. He provides a great example of psychological insight correctly used to advance some of the finest mental work ever done.

Inconsistency avoidance tendency has many good effects in civilization. For instance, rather than act inconsistently with public commitments, new or old public identities, etc., most people are more loyal in their roles in life as priests, physicians, citizens, soldiers, spouses, teachers, employees, etc. One correlary of inconsistency avoidance tendency is that a person making big sacrifices in the course of assuming a new identity will intensify his devotion to the new identity. After all, it would be quite inconsistent behavior to make a large sacrifice for something that was no good. Thus, civilization has invented many tough and solemn initiation ceremonies, often public in nature, that intensify new commitments made. Tough initiation ceremonies can intensify bad conduct as well as good. The loyalty of the new made man mafia member or of the military officer making the required blood oath of loyalty to Hitler was boosted through the triggering of inconsistency avoidance tendency. Moreover, the tendency will often make man a pathy of manipulative compliance practitioners who gain advantage from triggering his subconscious inconsistency avoidance tendency. Few people demonstrated this process better than Ben Franklin. As he was rising from obscurity in Philadelphia and wanted the approval of some important man, Franklin would often maneuver that man into doing Franklin some unimportant favor, like lending Franklin a book. Thereafter, the man would admire and trust Franklin more because a non-admired and non-rusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book. During the Korean War, this technique of Franklin's was the most important feature of the Chinese brainwashing system that was used on enemy prisoners. small step by small step, the technique often worked better than torture in altering prisoner cognition in favor of Chinese captives.

The practice of Franklin, where under he got approval from someone by maneuvering him into treating Franklin favorably, works viciously well in reverse. When one is maneuvered into deliberately hurting some other person, one will tend to disapprove of or even hate that person. This effect from inconsistency avoidance tendency accounts for the insight implicit in the saying, "A man never forgets where he has buried the hatchet." The effect accounts for much prisoner abuse by guards, increasing their dislike and hatred for prisoners that exists as a consequence of the guards reciprocation of hostility from prisoners who are treated like animals. Given the psychology- based hostility natural in prisons between guards and prisoners, an intense continuous effort should be made to one prevent prisoner abuse from starting and two stop it instantly when it starts because it will grow by feeding on itself like a cluster of infectious disease. More psychological acuity on this subject, aided by more insightful teaching, would probably improve the overall effectiveness of the US Army.

So strong is inconsistency avoidance tendency that it will often prevail after one has merely pretended to have some identity, habit, or conclusion. Thus for a while many an actor sort of believes he is Hamlet, Prince of Denmark, and many a hypocrite is improved by his pretensions of virtue. And many a judge and juror, while pretending objectivity is gaining objectivity, and many a trial lawyer or other advocate comes to believe what he formerly only pretended to believe. While inconsistency avoidance tendency with its status quo bias immensely harms sound education, it also causes much benefit. For instance, a near ultimate inconsistency would be to teach something to others that one did not believe true. So in clinical medical education, the learner is forced to see one, do one, then teach one, with the teaching pounding the learning into the teacher. Of course, the power of teaching to influence the cognition of the teacher is not always a benefit to society. When such power flows into political and cult evangelism, there are often bad consequences. For instance, modern education often does much damage when young students are taught dubious political notions and then enthusiastically push these notions on the rest of us. The pushing seldom convinces others. But as students pound into their mental habits what they are pushing out, the students are often permanently damaged. Educational institutions that create a climate where much of this goes on are, I think, irresponsible. It is important not to thus put one's brain in chains before one has come anywhere near his full potentiality as a rational person.

Six. Curiosity tendency. There is a lot of innate curiosity in mammals, but its non-human version is highest among apes and monkeys. Man's curiosity, in turn, is much stronger than that of his Simeon relatives. In advanced human civilization, culture greatly increases the effectiveness of curiosity in advancing knowledge. For instance, Athens, including its colony Alexandria, developed much math and science out of pure curiosity, while the Romans made almost no contribution to either math or science. They instead concentrated their attention on the practical engineering of mines, roads, aqueducts, etc. Curiosity enhanced by the best of modern education which is by definition a minority part in many places much helps man to prevent or reduce bad consequences arising from other psychological tendencies. The curious are also provided with much fun and wisdom long after formal education has ended.

Seven Kian fairness tendency. Kant was famous for his categorical imperative, a sort of golden rule that required humans to follow those behavior patterns that if followed by all others would make the surrounding human system work best for everybody. It is not too much to say that modern acculturated man displays and expects from others a lot of fairness as thus defined by Kant. In a small community having a one-way bridge or tunnel for autos, it is the norm in the United States to see a lot of reciprocal courtesy despite the absence of signs or signals. And many freeway drivers, including myself, will often let other drivers come in front of them in lane changes or the like because that is the courtesy they desire when roles are reversed. Moreover, there is in modern human culture a lot of courteous lining up by strangers so that all are served on a first come firsts served basis. Also, strangers often voluntarily share equally an unexpected unearned good and bad fortune. And as an obverse consequence of such fair sharing conduct, much reactive hostility occurs when fair sharing is expected yet not provided. It is interesting how the world's slavery was pretty well abolished during the last three centuries after being tolerated for a great many previous centuries during which it coexisted with the world's major religions. My guess is that contean fairness tendency was a major contributor to this result.

Eight, envy, jealousy tendency. A member of a species designed through evolutionary process to want often scarce food is going to be driven strongly toward getting food when it first sees food. This is going to occur often and will tend to create some conflict when the food is seen in the possession of another member of the same species. This is probably the evolutionary origin of the envy jealousy tendency that lies so deep in human nature. Sibling jealousy is clearly very strong and usually greater in children than adults. It is often stronger than jealousy directed at strangers. Contian fairness tendency probably contributes to this result. Envy, jealousy is extreme in myth, religion, and literature, wherein in account after account, it triggers hatred and injury. It was regarded as so pernitious by the Jews of the civilization that preceded Christ that it was forbidden by phrase after phrase in the laws of Moses. You were even warned by the prophet not to covet your neighbor's donkey.

Envy, jealousy is also extreme in modern life. For instance, university communities often go bananas when some university employee in money management or some professor in surgery gets annual compensation in multiples of the standard professorial salary. And in modern investment banks, law firms etc. the envy jealousy effects are usually more extreme than they are in university faculties. Many big law firms, fearing disorder from envy, jealousy, have long treated all senior partners alike in compensation, no matter how different their contributions to firm welfare. As I have shared the observation of life with Warren Buffett over decades, I have heard him wisely say on several occasions, "It is not greed that drives the world, but envy." Because this is roughly right, one would expect a vast coverage of envy, jealousy in psychology textbooks. But no such vast coverage existed when I read my three textbooks. Indeed, the very words envy and jealousy were often absent from indexes. Non-disussion of envy, jealousy is not a phenomenon confined to psychology texts. When did any of you last engage in any large group discussion of some issue wherein adult envy jealousy was identified as the cause of someone's argument? There seems to be a general taboo against any such claim. If so, what accounts for the taboo? My guess is that people widely and generally sense that labeling some position as driven by envy, jealousy, will be regarded as extremely insulting to the position taker, possibly more so when the diagnosis is correct than when it is wrong. And if calling a position envydriven is perceived as the equivalent of describing its holder as a childish mental basket case, then it is quite understandable how a general taboo has arisen. But should this general taboo extend to psychology texts when it creates such a large gap in the correct psychological explanation of what is widespread and important? My answer is no.

Nine. Reciprocation tendency. The automatic tendency of

Humans to reciprocate both favors and disfavors has long been noticed. As extreme as it is in apes, monkeys, dogs, and many less cognitively gifted animals, the tendency clearly facilitates group cooperation for the benefit of members. In this respect, it mimics much genetic programming of the social insects.

We see the extreme power of the tendency to reciprocate disfavors in some wars wherein it increases hatred to a level causing very brutal conduct. For long stretches in many wars, no prisoners were taken; the only acceptable enemy being a dead one. And sometimes that was not enough, as in the case of Jenghis Khan, who was not satisfied with corpses. He insisted on their being hacked into pieces.

One interesting mental exercise is to compare Jenghis Khan, who exercised extreme lethal hostility toward other men, with ants that display extreme lethal hostility toward members of their own species that are not part of their breeding colony. Jenghis Khan looks sweetly lovable when compared to the ants. The ants are more disposed to fight and fight with more extreme cruelty. Indeed, E.O. Wilson once waggishly suggested that if ants were suddenly to get atom bombs, all ants would be dead within 18 hours.

What both human and ant history suggest is that:

One, nature has no general algorithm making intraspecies "turn the other cheek" behavior a booster of species survival.

Two, it is not clear that a country would have good prospects for it to abandon all reciprocated disfavor tendency directed at outsiders.

And three, if "turn the other cheek" behavior is a good idea for a country as it deals with outsiders, man's culture is going to have to do a lot of heavy lifting because his genes won't be of much help.

I next turn to man's reciprocated hostility that falls well short of war. Peacetime hostility can be pretty extreme, as in many modern cases of road rage or injury-producing temper tantrums on athletic fields. The standard antidote to one's overreactive hostility is to train oneself to defer reaction. As my smart friend Tom Murphy so frequently says, "You can always tell the man off tomorrow if it is such a good idea."

Of course, the tendency to reciprocate favor for favor is also very intense. So much so that it occasionally reverses the course of reciprocated hostility. Weird pauses in fighting have sometimes occurred right in the middle of wars, triggered by some minor courtesy or favor on the part of one side, followed by favor reciprocation from the other side, and so on until fighting stopped for a considerable period. This happened more than once in the trench warfare of World War I over big stretches of the front and much to the dismay of the generals.

It is obvious that commercial trade, a fundamental cause of modern prosperity, is enormously facilitated by man's innate tendency to reciprocate favors. In trade, enlightened self-interest joining with reciprocation tendency results in constructive conduct. Daily interchange in marriage is also assisted by reciprocation tendency, without which marriage would lose much of its allure.

Reciprocation tendency, in so much as it causes good results, does not join forces only with the superpower of incentives. It also joins inconsistency avoidance tendency in helping cause one the fulfillment of promises made as part of a bargain, including loyalty promises in marriage ceremonies, and to correct behavior expected from persons serving as priests, shoemakers, physicians, and all else.

Like other psychological tendencies and also man's ability to turn somersaults, reciprocate favor tendency operates to a very considerable degree at a subconscious level. This helps make the tendency a strong force that can sometimes be used by some men to mislead others, which happens all the time. For instance, when an automobile salesman graciously steers you into a comfortable place to sit and gives you a cup of coffee, you are very likely being tricked by this small courtesy alone into parting with an extra $500. This is far from the most extreme case of sales success that is rooted in a salesman dispensing minor favors. However, in this scenario of buying a car, you are going to be disadvantaged by parting with an extra $500 of your own money. This potential loss will protect you to some extent.

But suppose you are the purchasing agent of someone else, a rich employer for instance. Now, the minor favor you receive from the salesman is less opposed by the threat of extra cost to you because someone else is paying the extra cost. Under such circumstances, the salesman is often able to maximize his advantage, particularly when the government is the purchaser. Wise employers, therefore, try to oppose the reciprocate favor tendencies of employees engaged in purchasing. The simplest antidote works best: Don't let them accept any favors from vendors. Sam Walton agreed with this idea of absolute prohibition. He wouldn't let purchasing agents accept so much as a hot dog from a vendor. Given the subconscious level at which much reciprocation tendency operates, this policy of Walton's was profoundly correct. If I controlled the defense department, its policies would mimic Walton's.

In a famous psychology experiment, Cialdini brilliantly demonstrated the power of compliance practitioners to mislead people by triggering their subconscious reciprocation tendency. Carrying out this experiment, Cialdini asked his compliance practitioners to wander around his campus and ask strangers to supervise a bunch of juvenile delinquents on a trip to a zoo. Because this happened on a campus, one person in six out of a large sample actually agreed to do this. After accumulating this one-in-six statistic, Cialdini changed his procedure. His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for 2 years to the supervision of juvenile delinquents. This ridiculous request got him a 100% rejection rate. But the practitioner had a follow-up question: "Will you at least spend one afternoon taking juvenile delinquents to a zoo?" This raised Cialdini's former acceptance rate of 1 in 6 to 1 in 2, a tripling.

What Cialdini's compliance practitioners had done was make a small concession, which was reciprocated by a small concession from the other side. This subconscious reciprocation of a concession by Cialdini's experimental subjects actually caused a much increased percentage of them to end up irrationally agreeing to go to a zoo with juvenile delinquents. Now, a professor who can invent an experiment like that, which so powerfully demonstrates something so important, deserves much recognition in the wider world, which he indeed got to the credit of many universities that learned a great deal from Cialdini.

Why is reciprocation tendency so important? Well, consider the folly of having law students graduate and go out in the world representing clients in negotiations, not knowing the nature of the subconscious processes of the mind, as exhibited in Cialdini's experiment. Yet such folly was prevalent in the law schools of the world for decades, in fact, generations. The correct name for that is educational malpractice. The law schools didn't know or care to teach what Sam Walton so well knew.

The importance and power of reciprocate favor tendency was also demonstrated in Cialdini's explanation of the foolish decision of the Attorney General of the United States to authorize the Watergate burglary. There, an aggressive subordinate made some extreme proposal for advancing Republican interests through the use of some combination of [unclear] and a gigantic yacht. When this ridiculous request was rejected, the subordinate backed off in gracious concession to merely asking for consent to a burglary, and the Attorney General went along. Cialdini believes that subconscious reciprocation tendency thus became one important cause of the resignation of a United States president in the Watergate debacle. And so do I. Reciprocation tendency subtly causes many extreme and dangerous consequences, not just on rare occasions, but pretty much all the time.

Man's belief in reciprocate favor tendency, following eons of his practicing it, has done some queer and bad things in religions. The ritualized murder of the Phoenicians and the Aztecs, in which they sacrificed human victims to their gods, was a particularly egregious example. And we should not forget that as late as the Punic Wars, the civilized Romans, out of fear of defeat, returned in a few instances to the practice of human sacrifice. On the other hand, the reciprocity-based religion idea of obtaining help from God in reciprocation for good human behavior has probably been vastly constructive. Overall, both inside and outside religions, it seems clear to me that reciprocation tendency's constructive contributions to man far outweigh its destructive effects. In cases of psychological tendencies being used to counter or prevent bad results from one or more other psychological tendencies, for instance, in the case of interventions to end chemical dependency, you will usually find reciprocation tendency performing strongly on the constructive side. And the very best part of human life probably lies in relationships of affection wherein parties are more interested in pleasing than being pleased. A not uncommon outcome in display of reciprocate favor tendency.

Before we leave reciprocate favor tendency, the final phenomenon we will consider is widespread human misery from feelings of guilt. To the extent the feeling of guilt has an evolutionary base, I believe the most plausible cause is the mental conflict triggered in one direction by reciprocation tendency and in the opposite direction by reward super-response tendency pushing one to 100% of some good thing. Of course, human culture has often greatly boosted the genetic tendency to suffer from feelings of guilt. Most especially religious culture has imposed hard-to-follow ethical and devotional demands on people. There is a charming Irish Catholic priest in my neighborhood who, with rough accuracy, often says, "The old Jews may have invented guilt, but we Catholics perfected it." And if you, like me and this priest, believe that averaged doubt feelings of guilt do more good than harm, you may join in my special gratitude for reciprocate favor tendency.

No matter how unpleasant you find feelings of guilt, influence from mere association tendency in the standard conditioned reflexes studied by Skinner and most common in the world, responsive behavior creating a new habit is directly triggered by rewards previously bestowed. For instance, a man buys a can of branded shoe polish, has a good experience with it when shining his shoes, and because of this reward, buys the same shoe polish when he needs another can.

But there is another type of conditioned reflex wherein mere association triggers a response. For instance, consider the case of many men who have been trained by their previous experience in life to believe that when several similar items are presented for purchase, the one with the highest price will have the highest quality. Knowing this, some seller of an ordinary industrial product will often change his product's trade dress and raise its price significantly, hoping that quality-seeking buyers will be tricked into becoming purchasers by mere association of his product and its high price. This industrial practice frequently is effective in driving up sales and even more so in driving up profits. For instance, it worked wonderfully with high-priced power tools for a long time. And it would work better yet with high-priced pumps at the bottom of oil wells. With luxury goods, the process works with a special boost because buyers who pay high prices often gain extra status from thus demonstrating both their good taste and their ability to pay.

Even association that appears to be trivial, if carefully planned, can have extreme and peculiar effects on purchasers of products. The target purchaser of shoe polish may like pretty girls, so he chooses the polish with the pretty girl on the can, or the one with the pretty girl in the last ad for shoe polish that he saw. Advertisers know about the power of mere association. You won't see Coke advertised alongside some account of the death of a child. Instead, Coke ads picture life as happier than reality. Similarly, it is not from mere chance that military bands play such impressive music. That kind of music appearing in mere association with military service helps to attract soldiers and keep them in the army. Most armies have learned to use mere association in this successful way.

However, the most damaging miscalculations from mere association do not ordinarily come from advertisers and music providers. Some of the most important miscalculations come from what is accidentally associated with one's past success or one's liking and loving or one's disliking and hating, which includes a natural hatred for bad news. To avoid being misled by the mere association of some fact with past success, use this memory clue: Think of Napoleon and Hitler when they invaded Russia after using their armies with much success elsewhere. And there are plenty of mundane examples of results like those of Napoleon and Hitler. For instance, a man foolishly gambles in a casino and yet wins. This unlikely correlation causes him to try the casino again and again and again, to his horrid detriment. Or a man gets lucky in an odds-against venture headed by an untalented friend. So influenced, he tries again what worked before, with terrible results. The proper antidotes to being made such a psy by past success are:

One, to carefully examine each past success, looking for accidental non-causative factors associated with such success that will tend to mislead as one appraises the odds implicit in a proposed new undertaking.

And two, to look for dangerous aspects of the new undertaking that were not present when past success occurred.

The damage to the mind that can come from liking and loving was once demonstrated by obviously false testimony given by an otherwise very admirable woman, the wife of a party in a jury case. The famous opposing counsel wanted to minimize his attack on such an admirable woman, yet destroy the credibility of her testimony. And so, in his closing argument, he came to her testimony last. He then shook his head sadly and said, "What are we to make of such testimony? The answer lies in the old rhyme: 'As the husband is, so the wife is.' She is married to a clown, and the grossness of his nature drags her down." The jury disbelieved the woman's testimony. They easily recognized the strong misinfluence of love on her cognition. And we now often see even stronger misinfluence from love, as tearful mothers with heartfelt conviction declare before TV cameras the innocence of their obviously guilty sons. People disagree about how much blindness should accompany the association called love. In Poor Richard's Almanack, Franklin counseled, "Keep your eyes wide open before marriage and half shut thereafter." Perhaps this "eyes half shut" solution is about right, but I favor a tougher prescription: See it like it is and love anyway.

Hating and disliking also cause miscalculation triggered by mere association. In business, I commonly see people underappraise both the competency and morals of competitors they dislike. This is a dangerous practice, usually disguised because it occurs on a subconscious basis. Another common bad effect from the mere association of a person and a hated outcome is displayed in Persian messenger syndrome. Ancient Persians actually killed some messengers whose sole fault was that they brought home truthful bad news, say, of a battle lost. It was actually safer for the messenger to run away and hide instead of doing his job as a wiser boss would have wanted it done. Persian messenger syndrome is alive and well in modern life, albeit in less lethal versions. It is actually dangerous in many careers to be a carrier of unwelcome news. Union negotiators and employer representatives often know this, and it leads to many tragedies in labor relations. Sometimes lawyers, knowing their clients will hate them if they recommend an unwelcome but wise settlement, will carry on to disaster. Even in places well known for high cognition, one will sometimes find Persian messenger syndrome. For instance, years ago, two major oil companies litigated in a Texas trial court over some ambiguity in an operating agreement covering one of the largest oil reservoirs in the Western Hemisphere. My guess is that the cause of the trial was some general counsel's unwillingness to carry bad news to a strong-minded CEO. CBS, in its late heyday, was famous for the occurrence of Persian messenger syndrome because Chairman Paley was hostile to people who brought him bad news. The result was that Paley lived in a cocoon of unreality from which he made one bad deal after another, even exchanging a large share of CBS for a company that had to be liquidated shortly thereafter. The proper antidote to creating Persian messenger syndrome and its bad effects like those at CBS is to develop, through exercise of will, a habit of welcoming bad news. At Berkshire, there is a common injunction: "Always tell us the bad news promptly. It is only the good news that can wait." It also helps to be so wise and informed that people fear not telling you bad news because you are so likely to get it elsewhere.

Influence from mere association tendency often has a shocking effect that helps swamp the normal tendency to return favor for favor. Sometimes, when one receives a favor, his condition is unpleasant due to poverty, sickness, subjugation, or something else. In addition, the favor may trigger an envy-driven dislike for the person who was in so favorable a state that he could easily be a favor-giver. Under such circumstances, the favor receiver, prompted partly by mere association of the favor-giver with past pain, will not only dislike the man who helped him, but also try to injure him. This accounts for a famous response sometimes dubiously attributed to Henry Ford: "Why does that man hate me so? I never did anything for him." I have a friend whom I will now call Glattz who had an amusing experience in favor-giving. Glattz owned an apartment building that he had bought because he wanted eventually to use the land in a different development. Pending this outcome, Glattz was very lenient in collecting below-market rents from tenants. When at last there was a public hearing on Glattz's proposal to tear down the building, one tenant who was far behind in his rent payments was particularly angry and hostile. He came to the public hearing and said, "This proposal is outrageous. Glattz doesn't need any more money. I know this because I was supported in college by Glatt Fellowships."

A final serious clump of bad thinking caused by mere association lies in the common use of classification stereotypes. Because Pete knows that Joe is 90 years old and that most 90-year-old persons don't think very well, Pete appraises old Joe as a thinking klutz, even if old Joe still thinks very well. Or because Jane is a white-haired woman and Pete knows no old women good at higher math, Pete appraises Jane as no good at it, even if Jane is a wiz. This sort of wrong thinking is both natural and common. Pete's antidote is not to believe that on average 90-year-olds think as well as 40-year-olds or that there are as many females as males among PhDs in math. Instead, just as he must learn that trend does not always predict destiny, he must learn that the average dimension in some group will not reliably guide him to the dimension of some specific item. Otherwise, Pete will make many errors, like that of the fellow who drowned in a river that averaged out to only 18 inches deep.

11. Simple, pain-avoiding psychological denial. This phenomenon first hit me hard in World War II when the super-athlete, super-student son of a family friend flew off over the Atlantic Ocean and never came back. His mother, who was a very sane woman, then refused to believe he was dead. That's simple, pain-avoiding psychological denial. The reality is too painful to bear, so one distorts the facts until they become bearable. We all do that to some extent, often causing terrible problems. The tendency's most extreme outcomes are usually mixed up with love, death, and chemical dependency. Where denial is used to make dying easier, the conduct meets almost no criticism. Who would begrudge a fellow man such help at such a time? But some people hope to leave life clinging to the iron prescription. It is not necessary to hope in order to persevere. And there is something admirable in anyone able to do this.

In chemical dependency, wherein morals usually break down horribly, addicted persons tend to believe that they remain in respectable condition with respectable prospects. They thus display an extremely unrealistic denial of reality as they go deeper and deeper into deterioration. In my youth, Freudian remedies failed utterly in reversing chemical dependency. But nowadays, Alcoholics Anonymous routinely achieves a 50% cure rate by causing several psychological tendencies to act together to counter addiction. However, the cure process is typically difficult and draining, and a 50% success rate implies a 50% failure rate. One should stay far away from any conduct at all likely to drift into chemical dependency. Even a small chance of suffering so great a damage should be avoided.

12. Excessive self-regard tendency. We all commonly observe the excessive self-regard of man. He mostly misappraises himself on the high side, like the 90% of Swedish drivers who judge themselves to be above average. Such misappraisals also apply to a person's major possessions. One spouse usually overappraises the other spouse, and a man's children are likewise appraised higher by him than they are likely to be in a more objective view. Even man's minor possessions tend to be overappraised. Once owned, they suddenly become worth more to him than he would pay if they were offered for sale to him and he didn't already own them. There is a name in psychology for this "overappraise your own possessions" phenomenon: the endowment effect. All man's decisions are suddenly regarded by him as better than would have been the case just before he made them.

Man's excess of self-regard typically makes him strongly prefer people like himself. Psychology professors have had much fun demonstrating this effect in lost wallet experiments. Their experiments all show that the finder of a lost wallet containing identity clues will be most likely to return the wallet when the owner most closely resembles the finder. Given this quality and psychological nature, cliquish groups of similar persons will always be a very influential part of human culture, even after we wisely try to dampen the worst effects. Some of the worst consequences in modern life come when dysfunctional groups of cliquish persons, dominated by excessive self-regard tendency, select as new members of their organizations persons who are very much like themselves. Thus, if the English department at an elite university becomes mentally dysfunctional, or the sales department of a brokerage firm slips into routine fraud, the problem will have a natural tendency to get worse and be quite resistant to change for the better. So also with a police department or prison guard unit or political group gone sour, and countless other places mired in evil and folly, such as the worst of our big-city teachers' unions that harm our children by preventing the discharge of ineffective teachers. Therefore, some of the most useful members of our civilization are those who are willing to clean house when they find a mess under their ambit of control.

Well, naturally, all forms of excess self-regard cause much error. How could it be otherwise? Let us consider some foolish gambling decisions. In lotteries, the play is much lower when numbers are distributed randomly than when the player picks his own number. This is quite irrational. The odds are almost exactly the same and much against the player. Because state lotteries take advantage of man's irrational love of self-picked numbers, modern man buys more lottery tickets than he otherwise would have, with each purchase foolish. Intensify man's love of his own conclusions by adding the possessory wallop from the endowment effect, and you will find that a man who has already bought a pork belly future on a commodity exchange now foolishly believes even more strongly than before in the merits of his speculative bet. And foolish sports betting by people who love sports and think they know a lot about the relative merits of teams is a lot more addictive than racetrack betting, partly because of man's automatic overappraisal of his own complicated conclusions. Also extremely counterproductive is a man's tendency to bet time after time in games of skill like golf or poker against people who are obviously much better players. Excessive self-regard tendency diminishes the foolish bettor's accuracy in appraising his relative degree of talent. More counterproductive yet are man's appraisals, typically excessive, of the quality of the future service he is to provide to his business. His overappraisal of these prospective contributions will frequently cause disaster.

Excesses of self-regard often cause bad hiring decisions because employers grossly overappraise the worth of their own conclusions that rely on impressions in face-to-face contact. The correct antidote to this sort of folly is to underweigh face-to-face impressions and overweigh the applicant's past record. I once chose exactly this course of action while I served as chairman of an academic search committee. I convinced fellow committee members to stop all further interviews and simply appoint a person whose achievement record was much better than that of any other applicant. And when it was suggested to me that I wasn't giving academic due process, I replied that I was the one being true to academic values because I was using academic research showing the poor predictive value of impressions from face-to-face interviews. Because man is likely to be over-influenced by face-to-face impressions that by definition involve his active participation, a job candidate who is a marvelous presenter often causes great danger under modern executive search practice. In my opinion, Hewlett-Packard faced just such a danger when it interviewed the articulate, dynamic Carly Fiorina in its search for a new CEO. I believe that:

One, Hewlett-Packard made a bad decision when it chose Ms. Fiorina, and

Two, this bad decision would not have been made if Hewlett-Packard had taken the methodological precautions it would have taken if it knew more psychology.

There is a famous passage somewhere in Tolstoy that illuminates the power of excessive self-regard tendency. According to Tolstoy, the worst criminals don't appraise themselves as all that bad. They come to believe either that:

One, they didn't commit their crimes, or

Two, considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became.

The second half of the Tolstoy effect, wherein the man makes excuses for his fixable poor performance instead of providing the fix, is enormously important because a majority of mankind will try to get along by making way too many unreasonable excuses for fixable poor performance. It is very important to have personal and institutional antidotes limiting the ravages of such folly.

On the personal level, a man should try to face the two simple facts:

One, fixable but unfixed bad performance is bad character and tends to create more of itself, causing more damage to the excuse-giver with each tolerated instance.

And two, in demanding places like athletic teams and General Electric, you are almost sure to be discarded in due course if you keep giving excuses instead of behaving as you should.

The main institutional antidotes to this part of the Tolstoy effect are:

One, a fair, meritocratic, demanding culture plus personnel handling methods that build up morale, and

Two, severance of the worst offenders.

Of course, when you can't sever, as in the case of your own child, you must try to fix the child as best you can. I once heard of a child-teaching method so effective that the child remembered the learning experience over 50 years later. The child later became dean of the USC School of Music and then related to me what his father said when he saw his child taking candy from the stock of his employer with the excuse that he intended to replace it later. The father said, "Son, it would be better for you to simply take all you want and call yourself a thief every time you do it."

The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn't easy to do well and won't work perfectly, but it will work much better than simply letting psychological nature take its normal course.

While an excess of self-regard is often counterproductive in its effects on cognition, it can cause some weird successes from overconfidence that happens to cause success. This factor accounts for the adage, "Never underestimate the man who overestimates himself." Of course, some high self-appraisals are correct and serve better than false modesty. Moreover, self-regard in the form of a justified pride in a job well done or a life well-lived is a large constructive force. Without such justified pride, many more airplanes would crash. Pride is another word generally left out of psychology textbooks. And this omission is not a good idea. It is also not a good idea to construe the Bible's parable about the Pharisee and the publican as condemning all pride. Of all forms of useful pride, perhaps the most desirable is a justified pride in being trustworthy. Moreover, the trustworthy man, even after allowing for the inconveniences of his chosen course, ordinarily has a life that averages out better than he would have if he provided less reliability.

13. Over-optimism tendency. About three centuries before the birth of Christ, Demosthenes, the most famous Greek orator, said, "What a man wishes, that also will he believe." Demosthenes parsed out was thus saying that man displays not only simple pain-avoiding psychological denial but also an excess of optimism even when he is already doing well. The Greek orator was clearly right about an excess of optimism being the normal human condition, even when pain or the threat of pain is absent. Witness happy people buying lottery tickets or believing that credit-furnishing, delivery-making grocery stores were going to displace a great many super-efficient cash-and-carry supermarkets. One standard antidote to foolish optimism is trained habitual use of the simple probability math of FMA and Pascal taught in my youth to high school sophomores. The mental rules of thumb that evolution gives you to deal with risk are not adequate. They resemble the dysfunctional golf grip you would have if you relied on a grip driven by evolution instead of golf lessons.

14. Deprival super-reaction tendency. The quantity of man's pleasure from a $10 gain does not exactly match the quantity of his displeasure from a $10 loss. That is, the loss seems to hurt much more than the gain seems to help. Moreover, if a man almost gets something he greatly wants and has it jerked away from him at the last moment, he will react much as if he had long owned the reward and had it jerked away. I include the natural human reactions to both kinds of loss experience: the loss of the possessed reward and the loss of the almost-possessed reward under one description: deprival super-reaction tendency.

In displaying deprival super-reaction tendency, man frequently incurs disadvantage by misjudging his problems. He will often compare what is near instead of what really matters. For instance, a man with $10 million in his brokerage account will often be extremely irritated by the accidental loss of $100 out of the $300 in his wallet. The Mongers once owned a tame and good-natured dog that displayed the canine version of deprival super-reaction tendency. There was only one way to get bitten by this dog, and that was to try and take some food away from him after he already had it in his mouth. If you did that, this friendly dog would automatically bite. He couldn't help it. Nothing could be more stupid than for the dog to bite his master. But the dog couldn't help being foolish. He had an automatic deprival super-reaction tendency in his nature.

Humans are much the same as this Monger dog. A man ordinarily reacts with irrational intensity to even a small loss or threatened loss of property, love, friendship, dominated territory, opportunity, status, or any other valued thing. As a natural result, bureaucratic infighting over the threatened loss of dominated territory often causes immense damage to an institution as a whole. This factor, among others, accounts for much of the wisdom of Jack Welch's long fight against bureaucratic ills at General Electric. Few business leaders have ever conducted wiser campaigns.

Deprival super-reaction tendency often protects ideological or religious views by triggering dislike and hatred directed toward vocal non-believers. This happens in part because the ideas of the non-believers, if they spread, will diminish the influence of views that are now supported by a comfortable environment, including a strong belief-maintenance system. University liberal arts departments, law schools, and business organizations all display plenty of such ideology-based groupthink that rejects almost all conflicting inputs. When the vocal critic is a former believer, hostility is often boosted both by:

One, a concept of betrayal that triggers additional deprival super-reaction tendency because a colleague is lost, and

Two, fears that conflicting views will have extra persuasive power when they come from a former colleague.

The foregoing considerations help account for the old idea of heresy, which for centuries justified much killing of heretics, frequently after torture and frequently accomplished by burning the victim alive. It is almost everywhere the case that extremes of ideology are maintained with great intensity and with great antipathy to non-believers, causing extremes of cognitive dysfunction. This happens, I believe, because two psychological tendencies are usually acting concurrently toward this same sad result:

One, inconsistency avoidance tendency, plus

Two, deprival super-reaction tendency.

One antidote to intense deliberate maintenance of groupthink is an extreme culture of courtesy kept in place despite ideological differences, like the behavior of the justices now serving on the U.S. Supreme Court. Another antidote is to deliberately bring in able and articulate disbelievers of incumbent groupthink. Successful corrective measures to evil examples of groupthink maintenance have included actions like that of Derek Bok when, as president of Harvard, he started disapproving tenure appointments proposed by ideologues at Harvard Law School. Even a one-degree loss from a 180° view will sometimes create enough deprival super-reaction tendency to turn a neighbor into an enemy, as I once observed when I bought a house from one of two neighbors locked into hatred by a tiny tree newly installed by one of them. As the case of these two neighbors illustrated, the clamor of almost any group of neighbors displaying irrational extreme deprival super-reaction over some trifle in a zoning hearing is not a pretty thing to watch. Such bad behavior drives some people from the zoning field. I once bought some golf clubs from an artisan who was formerly a lawyer. When I asked him what kind of law he had practiced, I expected to hear him say divorce law, but his answer was zoning law.

Deprival super-reaction tendency has ghastly effects in labor relations. Most of the deaths in the labor strife that occurred before World War I came when employers tried to reduce wages. Nowadays, we see fewer deaths and more occasions when whole companies disappear as competition requires either takeaways from labor, which it will not consent to, or the death of the business. Deprival super-reaction tendency causes much of this labor resistance, often in cases where it would be in labor's interest to make a different decision. In contexts other than labor relations, takeaways are also difficult to get. Many tragedies therefore occur that would have been avoided had there been more rationality and less subconscious heed of the imperative from deprival super-reaction tendency.

Deprival super-reaction tendency is also a huge contributor to ruin from the compulsion to gamble. First, it causes the gambler to have a passion to get even once he has suffered a loss, and the passion grows with the loss. Second, the most addictive forms of gambling provide a lot of near misses, and each one triggers deprival super-reaction tendency. Some slot machine creators are vicious in exploiting this weakness of man. Electronic machines enable these creators to produce a lot of meaningless "bar, bar, lemon" results that greatly increase play by fools who think they have very nearly won large rewards.

Deprival super-reaction tendency often does much damage to man in open-outcry auctions. The social proof that we will next consider tends to convince man that the last price from another bidder was reasonable, and then deprival super-reaction tendency prompts him strongly to top the last bid. The best antidote to being thus triggered into paying foolish prices at open-outcry auctions is the simple Buffett practice: Don't go to such auctions.

Deprival super-reaction tendency and inconsistency avoidance tendency often join to cause one form of business failure. In this form of ruin, a man gradually uses up all his good assets in a fruitless attempt to rescue a big venture going bad. One of the best antidotes to this folly is good poker skill learned young. The teaching value of poker demonstrates that not all effective teaching occurs on a standard academic path. I myself, the would-be instructor here, many decades ago, made a big mistake, caused in part by the subconscious operation of my deprival super-reaction tendency. A friendly broker called and offered me 300 shares of ridiculously underpriced, very thinly traded Belridge Oil at $115 per share, which I purchased using cash I had on hand. The next day, he offered me 1,500 more shares at the same price, which I declined to buy, partly because I could only have made the purchase had I sold something or borrowed the required $173,000. This was a very irrational decision. I was a well-to-do man with no debt. There was no risk of loss, and similar no-risk opportunities were not likely to come along. Within two years, Belridge Oil sold out to Shell at a price of about $3,700 per share, which made me about $5.4 million poorer than I would have been had I then been psychologically acute. As this tale demonstrates, psychological ignorance can be very expensive.

Some people may question my defining deprival super-reaction tendency to include reaction to profit barely missed, as in the well-documented responses of slot machine players. However, I believe that I haven't defined the tendency as broadly as I should. My reason for suggesting an even broader definition is that many Berkshire Hathaway shareholders I know never sell or give away a single share after immense gains in market value have occurred. Some of this reaction is caused by rational calculation, and some is no doubt attributable to some combination of:

One, reward super-response,

Two, status quo bias from inconsistency avoidance tendency, and

Three, the endowment effect from excessive self-regard tendency.

But I believe the single strongest irrational explanation is a form of deprival super-reaction tendency. Many of these shareholders simply can't stand the idea of having their Berkshire Hathaway holdings smaller. Partly they dislike facing what they consider an impairment of identity, but mostly they fear missing out on future gains from stock sold or given away.

15. Social proof tendency. The otherwise complex behavior of man is much simplified when he automatically thinks and does what he observes to be thought and done around him. Such followership often works fine. For instance, what simpler way could there be to find out how to walk to a big football game in a strange city than by following the flow of the crowd? For some such reason, man's evolution left him with social proof tendency, an automatic tendency to think and act as he sees others around him thinking and acting.

Psychology professors love social proof tendency because in their experiments, it causes ridiculous results. For instance, if a professor arranges for some stranger to enter an elevator wherein 10 compliance practitioners are all silently standing so that they face the rear of the elevator, the stranger will often turn around and do the same. The psychology professors can also use social proof tendency to cause people to make large and ridiculous measurement errors. And of course, teenagers' parents usually learn more than they would like about teenagers' cognitive errors from social proof tendency. This phenomenon was recently involved in a breakthrough by Judith Rich Harris, who demonstrated that super-respect by young people for their peers, rather than for parents or other adults, is ordained to some considerable extent by the genes of the young people. This makes it wise for parents to rely more on manipulating the quality of the peers than on exhortations to their own offspring. A person like Ms. Harris, who can provide an insight of this quality and utility backed by new reasons, has not lived in vain.

In the highest reaches of business, it is not uncommon to find leaders who display followership akin to that of teenagers. If one oil company foolishly buys a mine, other oil companies often quickly join in buying mines. So too, if the purchased company makes fertilizer, both of these oil company buying fads actually bloomed with bad results. Of course, it is difficult to identify and correctly weigh all the possible ways to deploy the cash flow of an oil company. So oil company executives, like everyone else, have made many bad decisions that were quickly triggered by discomfort from doubt. Going along with social proof provided by the action of other oil companies ends this discomfort in a natural way.

When will social proof tendency be most easily triggered? Here the answer is clear from many experiments. Triggering most readily occurs in the presence of puzzlement or stress, and particularly when both exist, because stress intensifies social proof tendency. Disreputable sales organizations, engaged for instance in such actions as selling swamp land to school teachers, manipulate targets into situations combining isolation and stress. The isolation strengthens the social proof provided by both the knaves and the people who buy first. And the stress, often increased by fatigue, augments the targets' susceptibility to the social proof. And of course, the techniques of our worst religious cults imitate those of the navish salesmen. One cult even used rattlesnakes to heighten the stress felt by conversion targets.

Because both bad and good behavior are made contagious by social proof tendency, it is highly important that human societies:

One, stop any bad behavior before it spreads, and

Two, foster and display all good behavior.

My father once told me that just after commencing law practice in Omaha, he went with a large group from Nebraska to South Dakota to hunt pheasants. A South Dakota hunting license was, say, $2 for South Dakota residents and $5 for non-residents. All the Nebraska residents one by one signed up for South Dakota licenses with phony South Dakota addresses until it was my father's turn. Then, according to him, he barely prevented himself from doing what the others were doing, which was some sort of criminal offense. Not everyone so resists the social contagion of bad behavior. And therefore, we often get Serpico syndrome, named to commemorate the state of a near totally corrupt New York police division joined by Frank Serpico. He was then nearly murdered by gunfire because of his resistance to going along with the corruption in the division. Such corruption was being driven by social proof plus incentives, the combination that creates Serpico syndrome. The Serpico story should be taught more than it is because the didactic power of its horror is aimed at a very important evil driven substantially by a very important force: social proof.

In social proof, it is not only action by others that misleads, but also their inaction. In the presence of doubt, inaction by others becomes social proof that inaction is the right course. Thus, the inaction of a great many bystanders led to the death of Kitty Genovese in a famous incident much discussed in introductory psychology courses. In the ambit of social proof, the outside directors on a corporate board usually display the near ultimate form of inaction. They fail to object to anything much short of an axe murder until some public embarrassment of the board finally causes their intervention. A typical board of directors' culture was once well described by my friend Joe Rosenfeld, as he said, "They asked me if I wanted to become a director of Northwest Bell, and it was the last thing they ever asked me."

In advertising and sales promotion, social proof tendency is about as strong a factor as one could imagine. "Monkey see, monkey do" is the old phrase that reminds one of how strongly John will often wish to do something or have something just because Joe does or has it. One interesting consequence is that an advertiser will pay a lot to have its soup can, instead of someone else's, in a movie scene involving soup consumption only in a peripheral way. Social proof tendency often interacts in a perverse way with envy, jealousy, and deprival super-reaction tendency. One such interaction amused my family for years, as people recalled the time when my cousin Russ and I, at ages 3 and 4, fought and howled over a single surplus shingle while surrounded by a virtual sea of surplus shingles. But the adult versions of this occasion, boosted by psychological tendencies preserving ideologies, are not funny and can bring down whole civilizations. The Middle East now presents just such a threat. By now, the resources spent by Jews, Arabs, and all others over a small amount of disputed land, if divided arbitrarily among land claimants, would have made everyone better off, even before taking into account any benefit from reduced threat of war, possibly nuclear.

Outside domestic relations, it is rare now to try to resolve disputes by techniques, including the discussion of impacts from psychological tendencies. Considering the implications of childishness that would be raised by such inclusion, and the defects of psychology as it is now taught, this result may be sound. But given the nuclear stakes now involved and the many failures in important negotiations lasting decades, I often wonder if someday, in some way, more use of psychological insight will eventually improve outcomes. If so, correct teaching of psychology matters a lot. And if old psychology professors are even less likely than old physics professors to learn new ways, which seems nearly certain, then we may, as Max Planck predicted, need a new generation of psychology professors who have grown up to think in a different way. If only one lesson is to be chosen from a package of lessons involving social proof tendency and used in self-improvement, my favorite would be: Learn how to ignore the examples from others when they are wrong, because few skills are more worth having.

16. Contrast misreaction tendency. Because the nervous system of man does not naturally measure in absolute scientific units, it must instead rely on something simpler. The eyes have a solution that limits their programming needs: the contrast in what is seen is registered. And as in sight, so does it go largely in the other senses. Moreover, as perception goes, so goes cognition. The result is man's contrast misreaction tendency. Few psychological tendencies do more damage to correct thinking. Small-scale damages involve instances such as man's buying an overpriced $1,000 leather dashboard merely because the price is so low compared to his concurrent purchase of a $65,000 car. Large-scale damages often ruin lives, as when a wonderful woman with terrible parents marries a man who would be judged...

Satisfactory only in comparison to her parents. Or as when a man takes wife number two, who would be appraised as all right only in comparison to wife number one.

A particularly reprehensible form of sales practice occurs in the offices of some real estate brokers. A buyer from out of the city, perhaps needing to shift his family there, visits the office with little time available. The salesman deliberately shows the customer three awful houses at ridiculously high prices. Then he shows him a merely bad house at a price only moderately too high and boom, the broker often makes an easy sale.

Contrast misreaction tendency is routinely used to cause disadvantage for customers buying merchandise and services. To make an ordinary price seem low, the vendor will very frequently create a highly artificial price that is much higher than the price always saw it. Then advertise his standard price as a big reduction from his phony price. Even when people know that this sort of customer manipulation is being attempted, it will often work to trigger buying. This phenomenon accounts in part for much advertising in newspapers. It also demonstrates that being aware of psychological ps is not a perfect defense.

When a man's steps are consecutively taken toward disaster, with each step being very small, the brain's contrast misreaction tendency will often let the man go too far toward disaster to be able to avoid it. This happens because each step presents so small a contrast from his present position. A bridge playing pal of mine once told me that a frog tossed into very hot water would jump out, but the same frog would end up dying if placed in room temperature water that was later heated at a very slow rate. My few shreds of physiological knowledge make me doubt this account, but no matter, because many businesses die in just the manner claimed by my friend for the frog. Cognition misled by tiny changes involving low contrast will often miss a trend that is destiny. One of Ben Franklin's best remembered and most useful aphorisms is a small leak will sink a great ship. The utility of the aphorism is large precisely because the brain so often misses the functional equivalent of a small leak in a great ship.

17. Stress influence tendency. Everyone recognizes that sudden stress, for instance, from a threat, will cause a rush of adrenaline in the human body, prompting a faster and more extreme reaction. And everyone who has taken Psych 101 knows that stress makes social proof tendency more powerful. In a phenomenon less well recognized but still widely known, light stress can slightly improve performance, say in examinations, whereas heavy stress causes dysfunction. But few people know more about really heavy stress than that it can cause depression. For instance, most people know that an acute stress depression makes thinking dysfunctional because it causes an extreme of pessimism, often extended in length and usually accompanied by activity stopping fatigue. Fortunately, as most people also know, such a depression is one of mankind's more reversible ailments. Even before modern drugs were available, many people afflicted by depression, such as Winston Churchill and Samuel Johnson, gained great achievement in life.

Most people know very little about non-depressive mental breakdowns influenced by heavy stress. But there is at least one exception involving the work of Pavlov when he was in his 70s and 80s. Pavlov had won a Nobel Prize early in life by using dogs to work out the physiology of digestion. Then he became world famous by working out mere association responses in dogs, initially salivating dogs. So much so that changes in behavior triggered by mere association, like those caused by much modern advertisement, are today often said to come from Pavlovian conditioning.

What happened to cause Pavlov's last work was especially interesting. During the great Leningrad flood of the 1920s, Pavlov had many dogs in cages. Their habits had been transformed by a combination of his Pavlovian conditioning plus standard reward responses into distinct and different patterns. As the waters of the flood came up and receded, many dogs reached a point where they had almost no airspace between their noses and the tops of their cages. This subjected them to maximum stress. Immediately thereafter, Pavlov noticed that many of the dogs were no longer behaving as they had. The dog that formerly had liked his trainer now disliked him, for example. This result reminds one of modern cognition reversals in which a person's love of his parents suddenly becomes hate as new love has been shifted suddenly to a cult.

The unanticipated extreme changes in Pavlov's dogs would have driven any good experimental scientist into a near frenzy of curiosity. That was indeed Pavlov's reaction. But not many scientists would have done what Pavlov next did, which was to spend the rest of his long life giving stress induced nervous breakdowns to dogs, after which he would try to reverse the breakdowns, all the while keeping careful experimental records. He found that one, he could classify dogs so as to predict how easily a particular dog would break down. Two, the dogs hardest to break down were also the hardest to return to their pre-breakdown state. Three, any dog could be broken down. And four, he couldn't reverse a breakdown except by reimposing stress.

Now, practically everyone is revolted by such experimental treatment of man's best friend, the dog. Moreover, Pavlov was Russian and did his last work under the communists. Maybe those facts account for the present extreme widespread ignorance of Pavlov's last work. The two Freudian psychiatrists with whom I tried many years ago to discuss this work had never heard of it. And the dean of a major medical school actually asked me several years ago if any of Pavlov's experiments were repeatable in the experiments of other researchers. Obviously, Pavlov is now a sort of forgotten hero in medical science.

I first found a description of Pavlov's last work in a popular paperback written by some Rockefeller financed psychiatrist when I was trying to figure out one how cults worked their horrible mischief and two what the law should say about what parents could do to deprogram children who had become brainwashed zombies. Naturally, mainstream law objected to the zombies being physically captured by their parents and next subjected to stress that would help to deprogram the effects of the stress they had endured in cult conversions. I never wanted to get into the legal controversy that existed about this subject. But I did conclude that the controversy couldn't be handled with maximized rationality without considering whether, as Pavlov's last work suggests, the heavy-handed imposition of stress might be the only reversal method that would work to remedy one of the worst evils imaginable, a stolen mind. I have included this discussion of Pavlov one partly out of general antagonism toward taboos, two partly to make my talk reasonably complete as it considers stress, and three partly because I hope some listener may continue my inquiry with more success.

18. Availability misweighing tendency. This mental tendency echoes the words of the song, "When I'm not near the girl I love, I love the girl I'm near." Man's imperfect, limited capacity brain easily drifts into working with what's easily available to it. And the brain can't use what it can't remember or what it is blocked from recognizing because it is heavily influenced by one or more psychological tendencies bearing strongly on it, as the fellow is influenced by the nearby girl in the song. So the mind overweighs what is easily available and thus displays availability misweighing tendency.

The main antidote to miscues from availability misweighing tendency often involve procedures including the use of checklists which are almost always helpful. Another antidote is to behave somewhat like Darwin did when he emphasized disconfirming evidence. What should be done is to especially emphasize factors that don't produce reams of easily available numbers instead of drifting mostly or entirely into considering factors that do produce such numbers. Still another antidote is to find and hire some skeptical, articulate people with far-reaching minds to act as advocates for notions that are opposite to the incumbent notions. One consequence of this tendency is that extra vivid evidence being so memorable and thus more available in cognition should often consciously be underweighed while less vivid evidence should be overweighed. Still, the special strength of extra vivid images in influencing the mind can be constructively used one, in persuading someone else to reach a correct conclusion, or two, as a device for improving one's own memory by attaching vivid images one after the other to many items one doesn't want to forget. Indeed, such use of vivid images as memory boosters is what enabled the great orators of classical Greece and Rome to give such long organized speeches without using notes. The great algorithm to remember in dealing with this tendency is simple. An idea or a fact is not worth more merely because it is easily available to you.

19. Use it or lose it tendency. [Music] All skills attenuate with disuse. I was a whiz at calculus until age 20, after which the skill was soon obliterated by total non-use. The right antidote to such a loss is to make use of the functional equivalent of the aircraft simulator employed in pilot training. This allows a pilot to continuously practice all of the rarely used skills that he can't afford to lose. Throughout his life, a wise man engages in practice of all his useful, rarely used skills, many of them outside his discipline as a sort of duty to his better self. If he reduces the number of skills he practices, and therefore the number of skills he retains, he will naturally drift into error from man with a hammer tendency. His learning capacity will also shrink as he creates gaps in the lattice work of theory he needs as a framework for understanding new experience. It is also essential for a thinking man to assemble his skills into a checklist that he routinely uses. Any other mode of operation will cause him to miss much that is important. Skills of a very high order can be maintained only with daily practice. The pianist Ignacy Paderewski once said that if he failed to practice for a single day, he could notice his performance deterioration, and that after a week's gap in practice, the audience could notice it as well. The hard rule of use it or lose it tendency tempers its harshness for the diligent. If a skill is raised to fluency instead of merely being crammed in briefly to enable one to pass some test, then the skill one will be lost more slowly and two will come back faster when refreshed with new learning. These are not minor advantages, and a wise man engaged in learning some important skill will not stop until he is really fluent in it.

20. Drug misinfluence tendency. This tendency's destructive power is so widely known to be intense with frequent tragic consequences for cognition and the outcome of life that it needs no discussion here to supplement that previously given under simple pain avoiding psychological denial.

21. Senescence misinfluence tendency. With advanced age, there comes a natural cognitive decay differing among individuals in the earliness of its arrival and the speed of its progression. Practically no one is good at learning complex new skills when very old. But some people remain pretty good at maintaining intensely practiced old skills until late in life, as one can notice in many a bridge tournament. Old people like me get pretty skilled without working at it at disguising age- related deterioration because social convention like clothing hides much decline. Continuous thinking and learning done with joy can somewhat help delay what is inevitable.

22. Authority misinfluence tendency. Living in dominance hierarchies as he does like all his ancestors before him, man was born mostly to follow leaders with only a few people doing the leading. And so human society is formally organized into dominance hierarchies with their culture augmenting the natural follow the leader tendency of man. But automatic as most human reactions are, with the tendency to follow leaders being no exception, man is often destined to suffer greatly when the leader is wrong or when his leader ideas don't get through properly in the bustle of life and are misunderstood. And so we find much miscognition from man's authority misinfluence tendency. Some of the misinfluences are amusing as in a case described by Cialdini. A physician left a written order for a nurse treating an earache as follows. "Two drops twice a day are period ear." The nurse then directed the patient to turn over and put the ear drops in his anus. Other versions of confused instructions from authority figures are tragic. In World War II, a new pilot for a general who sat beside him in the co-pilot's seat was so anxious to please his boss that he misinterpreted some minor shift in the general's position as a direction to do some foolish thing. The pilot crashed the plane and became a paraplegic. Well, naturally, cases like this one get the attention of careful thinkers like Warren Buffett, who always acts like an overcautious person around his pilots. Such cases are also given attention in the simulator training of co-pilots who have to learn to ignore certain really foolish orders from boss pilots because boss pilots will sometimes disastrously even after going through such a training regime. However, co-pilots in simulator exercises will too often allow the simulated plane to crash because of some extreme and perfectly obvious simulated error of the chief pilot.

After Corporal Hitler had risen to dominate Germany, leading a bunch of believing Lutherans and Catholics into orgies of genocide and other mass destruction, one clever psychology professor, Stanley Milgram, decided to do an experiment to determine exactly how far authority figures could lead ordinary people into gross misbehavior. In this experiment, a man posing as an authority figure, namely a professor governing a respectable experiment, was able to trick a great many ordinary people into giving what they had every reason to believe were massive electric shocks that inflicted heavy torture on innocent fellow citizens. This experiment did demonstrate a terrible result contributed to by authority misinfluence tendency, but it also demonstrated extreme ignorance in the psychology professorate right after World War II. Almost any intelligent person with my checklist of psychological tendencies in his hand would by simply going down the checklist have seen that Milgram's experiment involved about six powerful psychological tendencies acting in confluence to bring about his extreme experimental result. For instance, the person pushing Milgram's shock lever was given much social proof from the presence of inactive bystanders, whose silence communicated that his behavior was okay. Yet it took over a thousand psychological papers published before I got to Milgram for the professor to get his experiment only about 90% as well understood as it would have immediately been by any intelligent person who used one any sensible organization of psychology along the lines of this talk plus two a checklist procedure. This outcome displaying the dysfunctional thinking of long dead professors deserves a better explanation. I will later deal with the subject in a very hesitant fashion. We can be pleased that the psychology professorate of a former era wasn't quite as dysfunctional as the angler in my next to last illustration of authority misinfluence tendency.

When I once fished in the Rio Colorado in Costa Rica, my guide, in a state of shock, told me a story about an angler who'd earlier come to the river without ever having fished for tarpon. A fishing guide like the one I had runs the boat and gives fishing advice, establishing himself in this context as the ultimate authority figure. In the case of this guide, his native language was Spanish, while the angler's native language was English. The angler got a big tarpon and began submitting to many directions from this authority figure called a guide. "Tip up, tip down, reel in," etc. Finally, when it was necessary to put more pressure on the fish by causing more bending of the angler's rod, the guide said in English, "Give him the rod. Give him the rod." Well, the angler threw his expensive rod at the fish and when last seen it was going down the Rio Colorado toward the ocean. This example shows how powerful is the tendency to go along with an authority figure and how it can turn one's brain into mush.

My final example comes from business. A psychology PhD once became a CEO of a major company and went wild, creating an expensive new headquarters with a great wine cellar at an isolated site. At some point his underlings remonstrated that money was running short. "Take the money out of the depreciation reserves," said the CEO. Not too easy, because a depreciation reserve is a liability account. So strong is undue respect for authority that this CEO and many even worse examples have actually been allowed to remain in control of important business institutions for long periods after it was clear they should be removed. The obvious implication, be careful whom you appoint to power because a dominant authority figure will often be hard to remove, aided as he will be by authority misinfluence tendency.

23. Twaddle tendency. Man as a social animal who has the gift of language is born to prattle and pour out twaddle that does much damage when serious work is being attempted. Some people produce copious amounts of twaddle and others very little. Trouble from the honeybee version of twaddle was once demonstrated in an interesting experiment. A honeybee normally goes out and finds nectar and then comes back and does a dance that communicates to the other bees where the nectar is. The other bees then go out and get it. Well, some scientist clever like B.F. Skinner decided to see how well a honeybee would do with a handicap. He put the nectar straight up, way up. Well, in a natural setting, there is no nectar a long way straight up. And the poor honeybee doesn't have a genetic program that is adequate to handle what she now has to communicate. You might guess that this honeybee would come back to the hive and slink into a corner, but she doesn't. She comes into the hive and does an incoherent dance. Well, all my life I've been dealing with the human equivalent of that honeybee. It's a very important part of wise administration to keep prattling people pouring out twaddle far away from the serious work. A rightly famous Caltech engineering professor exhibiting more insight than tact once expressed his version of this idea as follows. "The principal job of an academic administration is to keep the people who don't matter from interfering with the work of the people who do." I include this quotation partly because I long suffered from backlash caused by my version of this professor's conversational manner. After much effort, I was able to improve only slightly. So one of my reasons for supplying the quotation is my hope that at least in comparison I will appear tactful.

24. Reasoning tendency. There is in man, particularly one in an advanced culture, a natural love of accurate cognition and a joy in its exercise. This accounts for the widespread popularity of crossword puzzles, other puzzles, and bridge and chess columns, as well as all games requiring mental skill. This tendency has an obvious implication. It makes man especially prone to learn well when a would-be teacher gives correct reasons for what is taught instead of simply laying out the desired belief ex cathedra with no reasons given. Few practices, therefore, are wiser than not only thinking through reasons before giving orders, but also communicating these reasons to the recipient of the order. No one knew this better than Carl Braun, who designed oil refineries with spectacular skill and integrity. He had a very simple rule, one of many in his large Teutonic company. "You had to tell who was to do what, where, when, and why." And if you wrote a communication leaving out your explanation of why the addressee was to do what was ordered, Braun was likely to fire you because Braun well knew that ideas got through best when the reasons for the ideas were meticulously laid out. In general, learning is most easily assimilated and used when lifelong people consistently hang their experience, actual and vicarious, on a lattice work of theory answering the question why. Indeed, the question why is a sort of Rosetta stone opening up the major potentiality of mental life. Unfortunately, reason-respecting tendency is so strong that even a person's giving of meaningless or incorrect reasons will increase compliance with his orders and requests. This has been demonstrated in psychology experiments wherein compliance practitioners successfully jump to the head of the lines in front of copying machines by explaining their reason. "I have to make some copies." This sort of unfortunate byproduct of reason-respecting tendency is a conditioned reflex based on a widespread appreciation of the importance of reasons. Naturally, the practice of laying out various clap trap reasons is much used by commercial and cult compliance practitioners to help them get what they don't deserve.

25. La Palooa tendency. The tendency to get extreme consequences from confluences of psychological tendencies acting in favor of a particular outcome. This tendency was not in any of the psychology texts I once examined, at least in any coherent fashion. Yet, it dominates life. It accounts for the extreme result in the Milgram experiment and the extreme success of some cults that have stumbled through practice evolution into bringing pressure from many psychological tendencies to bear at the same time on conversion targets. The targets vary in susceptibility like the dogs Pavlov worked with in his old age. But some of the minds that are targeted simply snap into zombie under cult pressure. Indeed, that is one cult's name for the conversion phenomenon, "snapping." What are we to make of the extreme ignorance of the psychology textbook writers of yesteryear? How could anyone who had taken a freshman course in physics or chemistry not be driven to consider above all how psychological tendencies combine and with what effects? Why would anyone think his study of psychology was adequate without his having endured the complexity involved in dealing with intertwined psychological tendencies? What could be more ironic than professors using oversimplified notions while studying bad cognitive effects grounded in the mind's tendency to use oversimplified algorithms? I will make a few tentative suggestions. Maybe many of the long dead professors wanted to create a whole science from one narrow type of repeatable psychology experiment that was conductable in a university setting and that aimed at one psychological tendency at a time. If so, these early psychology professors made a massive error in so restricting their approach to their subject. It would be like physics ignoring astrophysics because it couldn't happen in a physics lab plus two all compound effects. What psychological tendencies could account for early psychology professors adopting an overrestricted approach to their own subject matter? One candidate would be availability misweighing tendency grounded in a preference for easy to control data and then the restrictions would eventually create an extreme case of man with a hammer tendency. Another candidate might be envy jealousy tendency through which early psychology professors displayed some weird form of envy of a physics that was misunderstood. This possibility tends to demonstrate that leaving envy, jealousy out of academic psychology was never a good idea. I now quitclaim all these historical mysteries to my betters. Well, that ends my brief description of psychological tendencies.

Questions and answers. Now, as promised, I will ask and answer a few general questions. My first is a compound question. Isn't this list of psychological tendencies tautological to some extent compared to the system of Euclid? That is, aren't there overlaps in the tendencies? And couldn't the system be laid out just as plausibly in a somewhat different way? The answers are yes, yes, and yes, but this matters only moderately. Further refinement of these tendencies while desirable has a limited practical potential because a significant amount of messiness is unfixable in a soft science like psychology.

My second question is, can you supply a real-world model instead of a Milgram type controlled psychology experiment that uses your system to illustrate multiple psychological tendencies interacting in a plausibly diagnosable way? The answer is yes. One of my favorite cases involves the McDonnell Douglas airliner evacuation test. Before a new airliner can be sold, the government requires that it pass an evacuation test, during which a full load of passengers must get out in some short period of time. The government directs that the test be realistic, so you can't pass by evacuating only 20-year-old athletes. So McDonnell Douglas scheduled such a test in a darkened hangar using a lot of old people as evacuees. The passenger cabin was say 20 ft above the concrete floor of the hangar and was to be evacuated through moderately flimsy rubber chutes. The first test was made in the morning. There were about 20 very serious injuries and the evacuation took so long it flunked the time test. So what did McDonnell Douglas do? It repeated the test in the afternoon and this time there was another failure with about 20 more serious injuries including one case of permanent paralysis. What psychological tendencies contributed to this terrible result? Well, using my tendency list as a checklist, I come up with the following explanation. Reward super response tendency drove McDonnell Douglas to act fast. It couldn't sell its airliner until it passed the test. Also pushing the company was doubt avoidance tendency with its natural drive to arrive at a decision and run with it. Then the government's direction that the test be realistic drove authority misinfluence tendency into the mischief of causing McDonnell Douglas to overreact by using what was obviously too dangerous a test method. By now the course of action had been decided. So inconsistency avoidance tendency helped preserve the near idiotic plan. When all the old people got to the dark hangar with its high airline cabin and concrete floor, the situation must have made McDonnell Douglas employees very queasy, but they saw other employees and supervisors not objecting. Social proof tendency, therefore, swamped the queasiness. This allowed continued action as planned, a continuation that was aided by more authority misinfluence tendency. Then came the disaster of the morning test with its failure plus serious injuries. McDonnell Douglas ignored the strong disconfirming evidence from the failure of the first test because confirmation bias aided by the triggering of a strong deprivation super reaction tendency favored maintaining the original plan. McDonnell Douglas's deprivation super reaction tendency was now like that which causes a gambler bent on getting even after a huge loss to make his final big bet. After all, McDonnell Douglas was going to lose a lot if it didn't pass its test as scheduled. More psychology-based explanation can probably be made, but the foregoing discussion is complete enough to demonstrate the utility of my system when used in a checklist mode.

My third question is also compound. In the practical world, what good is the thought system laid out in this list of tendencies? Isn't practical benefit prevented because these psychological tendencies are so thoroughly programmed into the human mind by broad evolution, the combination of genetic and cultural evolution that we can't get rid of them? Well, the answer is that the tendencies are probably much more good than bad. Otherwise, they wouldn't be there working pretty well for man given his condition and his limited brain capacity. So the tendencies can't be simply washed out automatically and shouldn't be. Nevertheless, the psychological thought system described when properly understood and used enables the spread of wisdom and good conduct and facilitates the avoidance of disaster. Tendency is not always destiny, and knowing the tendencies and their antidotes can often help prevent trouble that would otherwise occur. Here is a short list of examples reminding us of the great utility of elementary psychological knowledge. One, Carl Braun's communication practices. Two, the use of simulators in pilot training. Three, the system of Alcoholics Anonymous. Four, clinical training methods in medical schools. Five, the rules of the U.S. Constitutional Convention. Totally secret meetings. No recorded vote by name until the final vote. Votes reversible at any time before the end of the convention. Then just one vote on the whole constitution. These are very clever psychology-respecting rules. If the founders had used a different procedure, many people would have been pushed by various psychological tendencies into inconsistent hardened positions. The elite founders got our constitution through by a whisker only because they were psychologically acute. Six, the use of granny's incentive-driven rule to manipulate oneself toward better performance of one's duties. Seven, the Harvard Business School's emphasis on decision trees. When I was young and foolish, I used to laugh at the Harvard Business School. I said, "They're teaching 28-year-old people that high school algebra works in real life." But later, I wised up and realized that it was very important that they do that to counter some bad effects from psychological tendencies. Better late than never. Eight, the use of autopsy equivalents at Johnson and Johnson. At most corporations, if you make an acquisition and it turns out to be a disaster, all the people, paperwork, and presentations that caused the foolish acquisition are quickly forgotten. Nobody wants to be associated with the poor outcome by mentioning it. But at Johnson and Johnson, the rules make everybody revisit old acquisitions, comparing predictions with outcomes. That is a very smart thing to do. Nine, the great example of Charles Darwin as he avoided confirmation bias which has morphed into the extreme anti-confirmation bias method of the double-blind studies wisely required in drug research by the FDA. Ten, the Warren Buffett rule for open outcry auctions. Don't go.

My fourth question is, what special knowledge problems lie buried in the thought system demonstrated by your list? Well, one answer is paradox. In social psychology, the more people learn about the system, the less it is true. And this is what gives the system its great value as a predictor of bad outcomes and a driver of good outcomes. This result is paradoxical and doesn't remind one of elementary physics. But so what? One can't get all the paradox out of pure math. So why should psychology be shocked by some paradox? There is also some paradox in cognition change that works even when the manipulated person knows he is being manipulated. This creates a sort of paradox in a paradox. But again, so what? I once much enjoyed an occasion of this sort. I drew this beautiful woman as my dinner partner many years ago. I'd never seen her before. She was married to a prominent Los Angeles man. She sat down next to me, turned her beautiful face up, and said, "Charlie, what one word accounts for your remarkable success in life?" I knew I was being manipulated by a practiced routine, and I just loved it. I never see this woman without a little lift in my spirit. And by the way, I told her I was rational. You'll have to judge yourself whether that's true. I may be demonstrating some psychological tendency I hadn't planned on demonstrating.

My fifth question is, don't we need more reconciliation of psychology and economics? My answer is yes, and I suspect that some slight progress is being made. I have heard of one such example. Colin Camerer of Caltech, who works in experimental economics, devised an interesting experiment in which he caused high IQ students playing for real money to pay price A plus B for a security they knew would turn into a dollar at the end of the day. This foolish action occurred because the students were allowed to trade with each other in a liquid market for the security. Some students then paid price A plus B because they hoped to unload on other students at a higher price before the day was over. What I will now confidently predict is that despite Camerer's experimental outcome, most economics and corporate finance professors who still believe in the hard form efficient market hypothesis will retain their original belief. If so, this will be one more indication of how irrational smart people can be when influenced by psychological tendencies.

My sixth question is, don't moral and prudential problems come with knowledge of these psychological tendencies? The answer is yes. For instance, psychological knowledge improves persuasive power. And like other powers, it can be used for good or ill. Captain Cook once played a psychology-based trick on his seamen to cause them to eat sauerkraut and avoid scurvy. In my opinion, this action was both ethical and wise under the circumstances, despite the deliberate manipulation involved. But ordinarily, when you try to use your knowledge of psychological tendencies in the artful manipulation of someone whose trust you need, you will be making both a moral and a prudential error. The moral error is obvious. The prudential error comes because many intelligent people targeted for conscious manipulation are likely to figure out what you are trying to do and resent your action.

My final question is, aren't there factual and reasoning errors in this talk? The answer is yes. Almost surely yes. The final revision was made from memory over about 50 hours by a man 81 years old who never took a course in psychology and has read none of it except one book on developmental psychology for nearly 15 years. Even so, I think the totality of my talk will stand up very well and I hope all my descendants and friends will carefully consider what I have said. I even hope that more psychology professors will join me in one making heavy use of inversion, two driving for a complete description of the psychological system so that it works better as a checklist and three especially emphasizing effects from combinations of psychological tendencies. Well, that ends my talk. If in considering what I have said, you had 10% the fun I had in saying it, you were lucky recipients.

Talk 11 revisited. In this talk made in 2000, I gave favorable mention to Judith Rich Harris's bestselling book, The Nurture Assumption. You will recall that this work demonstrated that peer pressure on the young is far more important and parental nurture much less important than had been commonly recognized. The success of the book with its vast practical implications has an interesting story behind it. Long before the book was published, Harris was kicked out of Harvard's PhD program in psychology because Harvard believed that she lacked qualities ideal in psychological research. Then later, out of illness and obscurity, as she was pretty much housebound throughout adult life by unfixable autoimmune disease, she published an academic paper on which her subsequent book was based. And for that paper, she won a prestigious medal named after the man who signed her dismissal notice from Harvard, awarded annually by the American Psychological Association for distinction in published writing. When I learned from her impressive book that this ironic result had occurred, I wrote to Harvard, my alma mater, urging it to award Harris, whom I did not know, an honorary PhD, or better yet, a real PhD. I cited the example of Oxford. That great university once allowed its best student, Samuel Johnson, to leave without a degree because he was too poor to continue paying tuition. But Oxford later made gracious amends. It gave Johnson a doctorate after he conquered sickness and became famous in a tough climb once described in his own words, "Slow rises worth by poverty oppressed." I failed utterly in my effort to convince Harvard to imitate Oxford in this way. But Harvard did later recruit from MIT one of the most famous living psychology professors, Steven Pinker, and Pinker is a big admirer of Harris. From this step, we can see one reason why its liberal arts division is more highly regarded than most others. The division's extreme depth often allows partial correction of bonehead errors that would flourish unopposed elsewhere.

In 2006, Harris, struggling further through her unfixable illness, published another book, No Two Alike. The title is apt because one central question the author assaults is why identical twins turn out to be so different in important aspects of personality. Her dogged curiosity and rigor in dealing with this question remind me of both Darwin and Sherlock Holmes. And her solution is very plausible as she collects and explains data from professional literature, including an interesting case wherein one of two identical twins became a success in business and family life, while the other twin went to Skid Row. I won't here disclose Harris's desirably generalized answer to her central question, because it would be better for almanac readers to first guess the answer, then read her book. If Harris is roughly right, which seems very likely to me, she has twice from a very handicapped position produced academic insights of great practical importance in child rearing, education, and much else. How could this rare and desirable result happen? Well, by Harris's own account, she was impertinent and skeptical even as a child, and these qualities, plus patient, determined skill, have obviously served her truth-seeking well all the way through to age 67. No doubt she was also assisted by her enthusiasm in destroying her own ideas, as she now demonstrates by apologizing for her former work as a textbook writer who repeated wrong notions, now outgrown.

In this talk, I displayed some impertinence of my own by delivering an extreme-sounding message. It claims nothing less than that one, academic psychology is hugely important. Two, even so, it is usually ill-thought out and ill-presented by its PhD denizens. and three, my way of presenting psychology often has a large superiority in practical utility compared to most textbooks. Naturally, I believe these extreme claims are correct. After all, I assembled the material contained in this talk to help me succeed in practical thinking and not to gain advantage by making public any would-be clever notions. If I am even partly right, the world will eventually see more psychology in roughly the form of this talk. If so, I confidently predict that the change in practice will improve general competency. And with that, I have nothing more to add. That brings us to the end of the chapters covered in this video. If you enjoyed this video, give me a like. Thanks for watching. See you in the next.