Selected Passages from Poor Charlie's Almanack
26 min read

Selected Passages from Poor Charlie's Almanack

There is an old twopart rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously.

Charlie Munger was born 100 years ago, on January 1, 1924 in Omaha, Nebraska. He studied meteorology at Cal Tech, earned a J.D. from Harvard, and served as the Vice Chairman of Berkshire Hathaway and Warren Buffet's right-hand man.

He is known for his wit and pragmatism, often expressed during Berkshire's annual shareholders meeting. This book, originally published in 2005 by Peter Kaufman, is a compilation of talks Charlie has given over the years, sprinkled with commentary and footnotes.

Despite never receiving formal training, Charlie was a master of human psychology. Each talk examines why people do things and is delivered in the practical, no-bullshit style that Charlie is so well known for.

The last talk in the book, titled "The Psychology of Human Misjudgment", includes a checklist of the major psychological tendencies that Charlies has collected and catalogued in his career. I've listed the twenty-five tendencies below, along with a description of them in my own words and some choice quotes from the chapter.

Reward- and punishment-superresponse tendency
Most people underestimate the power of incentives and disincentives in changing human behavior and thinking. This especially applies to sales organizations, which often rely on incentives that can be badly warped if not closely monitored.

We should also heed the general lesson implicit in the injunction of Ben Franklin in Poor Richard’s Almanack: “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.
Widespread incentive-caused bias requires that one should often distrust or take with a grain of salt the advice of one’s professional adviser, even if he is an engineer. The general antidotes here are: 1) Especially fear professional advice when it is especially good for the adviser, 2) learn and use the basic elements of your adviser’s trade as you deal with your adviser, and 3) double-check, disbelieve, or replace much of what you’re told, to the degree that seems appropriate after objective thought.
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 employee’s point of view, incentive-caused bias quite naturally causes opposing abuse from the employer: the sweatshop, 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 psychology-induced 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.
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 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.

Liking/loving tendency
People favor products and services that are associated with objects of their affection. Similarly, people tend to like and love those who like and love them. If someone you admire does something, you are more likely to admire that behavior.

One very practical consequence of liking/loving tendency is that it acts as a conditioning device that makes the liker or lover tend to 1) ignore the faults of, and comply with the wishes of, the object of his affection; 2) 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 3) distort other facts to facilitate love.
For instance, it is obviously desirable to attract a lot of lovable, admirable people into the teaching profession.

Disliking/hating tendency
People disfavor products and services that are associated with things they dislike.

Disliking/hating tendency also acts as a conditioning device that makes the disliker/hater tend to 1) ignore virtues in the object of dislike; 2) dislike people, products, and actions merely associated with the object of his dislike; and 3) distort other facts to facilitate hatred.

Doubt-avoidance tendency
People prefer to come to a conclusion than deal with uncertainty, even if the conclusion is incorrect.

Thus, the natural state of most men is in some form of religion. And this is what we observe.

Inconsistency-avoidance tendency
People are reluctant to change, even when shown new evidence that contradicts their prior beliefs.

The great rule that helps here is again from Franklin’s Poor Richard’s Almanack: “An ounce of prevention is worth a pound of cure.” What Franklin is here indicating, in part, is that inconsistency-avoidance tendency makes it much easier to prevent a habit than to change it.
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.
As Lord Keynes 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.
One corollary 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.
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-trusted Franklin would be inconsistent with the appraisal implicit in lending Franklin the book.

Curiosity tendency
Curiosity helps t0 reduce bad consequences resulting from other psychological tendencies.

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.

Kantian fairness tendency
Modern society favors reciprocal courtesy.

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.

Envy/jealousy tendency
People want what others have, but it is often taboo to discuss this.

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.

Reciprocation tendency
People reciprocate both favors and disfavors.

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 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.
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 caused 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 1-in-6 statistic, Cialdini changed his procedure. His practitioners next wandered around the campus asking strangers to devote a big chunk of time every week for two years to the supervision of juvenile delinquents. This ridiculous request got him a 100 percent 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.

Influence-from-mere-association tendency
People associate the qualities of a thing based on its association to other similar things. For example, an expensive item will be perceived as high-quality.

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.
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.
To avoid being misled by the mere association of some fact with past success, use this memory clue. Think of Napoleon473 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, or 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.

Simple, pain-avoiding psychological denial
People prefer denial to bad news that will cause them pain.

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.

Excessive self-regard tendency
People like others who remind them of themselves. They also tend to believe that their own ideas are better than they are.

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.
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.
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.
According to Tolstoy, the worst criminals don’t appraise themselves as all that bad. They come to believe either that 1) they didn’t commit their crimes or 2) considering the pressures and disadvantages of their lives, it is understandable and forgivable that they behaved as they did and became what they became. (this is also referenced in [[How to Win Friends and Influence People]])
On the personal level, a man should try to face the two simple facts: 1) 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 2) 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 1) a fair, meritocratic, demanding culture, plus personnel handling methods that build up morale; and 2) severance of the worst offenders.

Overoptimism tendency
People avoid thinking about pain, and will fail to imagine scenarios where things do not work out for them.

About three centuries before the birth of Christ, [[Demosthenes]], the most famous Greek orator, said, “What a man wishes, that also will he believe.”
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.

Deprival-superreaction tendency
People are irrationally upset when something is taken away from them, whether it be status, money, or power, even if it is relatively small.

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.
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’s483long fight against bureaucratic ills at General Electric. Few business leaders have ever conducted wiser campaigns.
Deprival-superreaction 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-superreaction tendency causes much of this labor resistance, often in cases where it would be in labor’s interest to make a different decision.
Deprival-superreaction 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-superreaction 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-superreaction 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.

Social-proof tendency
People will follow the examples of others, in both action and inaction.

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,487 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.
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 both bad and good behavior are made contagious by social-proof tendency, it is highly important that human societies 1) stop any bad behavior before it spreads and 2) foster and display all good behavior.
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.

Contrast-misreaction tendency
People compare things on relative terms, which can impact value judgements. For example, listing a very high price for an item and then heavily discounting it to make the cost seem reasonable.

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.

Stress-influence tendency
Stress can magnify the effects of other psychological tendencies and cause changes in behavior that can only be reversed during additional high stress periods.

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 1) he could classify dogs so as to predict how easily a particular dog would break down, 2) the dogs hardest to break down were also the hardest to return to their pre-breakdown state, 3) any dog could be broken down, and 4) he couldn’t reverse a breakdown except by reimposing stress.
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.

Availability-misweighing tendency
People tend to overemphasize experiences and evidence that are particularly memorable. Vivid examples can be used to persuade someone to reach a certain conclusion.

The main antidote to miscues from availability-misweighing tendency often involve procedures, including the use of checklists, which are almost always helpful.
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.
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.

Use-it-or-lose-it tendency
Skills must be practiced or they deteriorate.

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 1) will be lost more slowly and 2) 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.

Drug-misinfluence tendency
Drugs are bad.

Senescence-misinfluence tendency
Some people maintain the ability to continue learning late into life.

Authority-misinfluence tendency
People tend to follow orders from authority, even when it goes against their better judgement.

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, r. ear.” The nurse then directed the patient to turn over and put the eardrops in his anus.

Twaddle tendency
People have a natural tendency to say what they think, even when they don't know what they are talking about.

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.
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.”

Reason-respecting tendency
People are more likely to follow instructions when the reasons for them are given.

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.
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.”
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.

Lollapalooza tendency
Psychological effects are much stronger when two or more tendencies are layered.

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

Below are some of my favorite quotes from the other ten talks in the book.

So let's briefly review what kinds of models and techniques constitute this basic knowledge that everybody has to have before they proceed to being really good at a narrow art like stock picking.

First, there's mathematics. Obviously, you've got to be able to handle numbers and quantities-basic arithmetic. And the great useful model, after compound interest, is the elementary math of permutations and combinations. That was taught in my day in the sophomore year in high school. I suppose by now, in great private schools, it's probably down to the eighth grade or so. It's very simple algebra. And it was all worked out in the course of about one year in correspondence between [Blaise] Pascal and [Pierre de] Fermat. They worked it out casually in a series of letters. It's not that hard to learn. What is hard is to get so you use it routinely almost every day of your life. The Fermat/Pascal system is dramatically consonant with the way the world works. And it's a fundamental truth. So you simply have to have the technique.

Many educational institutions-although not nearly enough have realized this. At Harvard Business School, the great quantitative thing that bonds the first-year class together is what they call decision tree theory. All they do is take high school algebra and apply it to real-life problems. And the students love it. They're amazed to find that high school algebra works in life.

In all cases, the people who sell the machinery-and, by and large, even the internal bureaucrats urging you to buy the equipment-show you projections with the amount you'll save at current prices with the new technology. However, they don't do the second step of the analysis, which is to determine how much is going to stay home and how much is just going to flow through to the customer. I've never seen a single projection incorporating that second step in my life. And I see them all the time. Rather, they always read, "This capital outlay will save you so much money that it will pay for itself in three years."

So you keep buying things that will pay for themselves in three years. And after 20 years of doing it, somehow you've earned a return of only about 4 percent per annum. That's the textile business. And it isn't that the machines weren't better. It's just that the savings didn't go to you. The cost reductions came through, all right. But the benefit of the cost reductions didn't go to the guy who bought the equipment.

It's such a simple idea. It's so basic. And yet it's so often forgotten.

And, by the way, I have a name for people who went to the extreme efficient-market theory, which is "bonkers." It was an intellectually consistent theory that enabled them to do pretty mathematics, so I understand its seductiveness to people with large mathematical gifts.

It just had a difficulty in that the fundamental assumption did not tie properly to reality. Again, to the man with a hammer, every problem looks like a nail. If you're good at manipulating higher mathematics in a consistent way, why not make an assumption that enables you to use your tool?

When Warren lectures at business schools, he says, "I could improve your ultimate financial welfare by giving you a ticket with only 20 slots in it so that you had 20 punches, representing all the investments that you got to make in a lifetime. And once you'd punched through the card, you couldn't make any more investments at all." He says, "Under those rules, you'd really think carefully about what you did, and you'd be forced to load up on what you'd really thought about. So you'd do so much better."

This simple idea may appear too obvious to be useful, but there is an old twopart rule that often works wonders in business, science, and elsewhere: 1) Take a simple, basic idea and 2) take it very seriously.

    1. You must both rank and use disciplines in order of fundamentalness.
    2. 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.
    3. 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.
    4. But when the step 3 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.

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.

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 yen.
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 WWII caught me, I drifted into some physics, and the Air Corps 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.

Another thing that helped economics is that, from the beginning, it attracted the best brains in soft science. Its denizens 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 creditable outcomes like the three Cabinet appointments of economics PhD George Shultz 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, Immanuel Kant, then the greatest intellectual in Germany, simply announced that there was nobody in Germany to equal Adam Smith. Well, Voltaire, being an even pithier 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.

The situation of people like Laffer reminds me of a rustic legislatorand 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 schoolchildren to make the computations.

Well, you can say that this is too ridiculous, and it can't be fair to liken economics professors like Laffer to a rustic legislator like this. I say I'm under-criticizing 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 McKinsey partner when he was incompetently advising The Washington Post. So economics should emulate physics' basic ethos, but its search for precision in physics-like formulas is almost always wrong 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 de 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.

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.

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 Salomon 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 counsel 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 idea that I found important is that maximizing nonegality 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 nonegalitarian 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.

I frequently tell the apocryphal story about how Max Planck, 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 Planck, 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?" Planck 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 quickwittedness of the protagonist. In this world, I think we have two kinds of knowledge. One is Planck 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 timbre 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 Planck knowledge and away from the people who have the chauffeur knowledge. And there are huge forces working against you.

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 counseled by the great algebraist Jacobi: "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 haired over.”