The Psychology of Human Misjudgment

The human mind is not a blank slate, nor is it a perfectly rational computer. It is a biological survival engine, evolving over millions of years to make quick decisions with incomplete information. Ref: Evolutionary Psychology^[1]

01 Incentive-Caused Bias

"Show me the incentive and I will show you the outcome." This maxim underpins the majority of human behavior. Munger argues that people do not just respond to incentives; they are almost mechanically driven by them, often subconsciously. Ref: FedEx Case Study^[2]

In the case of Federal Express, the integrity of the delivery system was compromised because hourly wages incentivized longer hours, not faster sorting. Shifting to "pay-per-shift" aligned the incentive with the goal: go home early when the job is done.

02 Doubt-Avoidance Tendency

The brain has a hardware-level resistance to uncertainty. In our ancestral environment, pausing to contemplate whether a shadow was a lion or a rock often resulted in death. Thus, we are programmed to remove doubt quickly by jumping to conclusions. Ref: Kahneman, System 1^[3]

This tendency is especially dangerous in complex modern environments where delayed judgment is often the optimal strategy. Investors who rush to conclusions frequently underperform those who embrace uncertainty and wait for more data.

03 Social Proof

Humans are social creatures who look to others for cues on how to behave. This herd instinct was adaptive in tribal settings but creates dangerous feedback loops in markets and public opinion.