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Lessons from Charlie Munger-XVII - Views on News from Equitymaster
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  • Mar 7, 2013

    Lessons from Charlie Munger-XVII

    In the previous article, we discussed how the ageing process could weaken your thinking capacity and ways that could help you to retain your mental prowess in old age. Today we shall discuss a psychological tendency that is very dominant in all spheres of our lives and often misleads investors into making poor decisions.

    Authority-misinfluence tendency

    In his bestselling psychology book Influence, renowned author Robert Cialdini tells an interesting and funny story. A man complaining of earache goes to visit the doctor. The doctor diagnoses an ear infection and prescribes ear drops for him. On the prescription, he writes, "Place drops in R ear." Given that doctors are usually in a rush, he abbreviated "Right" with R.

    What do you think the trained nurse must have done? She followed the instructions obediently and interpreted it as 'rear' instead of 'right ear'. Very dutifully, the nurse asked the patient to turn over and placed the prescribed number of drops in the patient's anus. Yes, what you just read is true!

    Now, you don't have to be a trained medical practitioner to realise that an ear infection is unlikely to be cured by placing the drops in your rear. It is interesting to note here that neither the nurse nor the patient doubted the sanity of the prescription. Why? Simply because it came from an authority!

    Errors owing to the misinfluence of authority are found across all spheres of human life. In some cases, the results tend to be very tragic. A classic case that shows the powerful influence of an authority figure is the Holocaust. What else do you think could have motivated Nazis to ruthlessly slaughter millions of innocent Jews?

    Charlie Munger recalls an incidence from World War II wherein a new pilot was very eager to please the general. Sitting besides the general in the copilot's seat, he misinterpreted a minor shift in the general's position as a direction to do something absolutely foolish. Without a moment's doubt, he did it and this resulted in a plane crash.

    Why is man innately wired to follow authority? What causes man to submissively bow down to authority even if it may seem wrong and unreasonable?

    The answer probably lies in the way we have evolved over the ages. All our ancestors lived in dominance hierarchies. Dominance hierarchy is a social living group with a ranking system based on power. Owing to competition over limited resources and mating opportunities, relative relationships are developed between members of the same gender. This results in the creation of a social order. The social order undergoes changes only when a dominant animal is overpowered by a subordinate one.

    Human societies have followed a similar path. History has been largely shaped by few men at the helm, while the majority of humanity has simply followed orders. This explains why following authority is a very automatic tendency of man.

    Following authority is not a flaw in itself. In several cases, it is quite crucial. For instance, think about the fate of a military operation where each member refuses to take orders without questioning. On the other hand, follow-the-leader tendency can be very dangerous at times as the examples above suggest.

    In our next article of this series, we will analyse how the authority-misinfluence tendency could be causing you to make investment mistakes in the stock markets. We will also discuss ways that could help investors minimise the ill-effects of this tendency.

    Lessons from Charlie Munger Article Series - Previous article | Next | All Articles
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      Ankit Shah (Research Analyst) is the editor for Equitymaster Insider and Vivek Kaul's Inner Circle. A journalism graduate turned Research Analyst, Ankit joined Equitymaster when he was just 23 years old, right after getting his MBA from NMIMS, Mumbai. Having been an avid reader of Equitymaster's research through his college years, Ankit knew he would fit right in!

    In his seven years with Equitymsater, Ankit rose quickly, leaving his mark on almost everything from: Travelling thousands of miles to find the next small cap stock, as part of the Hidden Treasure team... Designing Equitymaster's Secrets, an online value investing course based on the company's 20-year journey... Bringing global investing ideas to Indian readers through Vivek Kaul's Inner Circle... Right to launching his brand-new service, Equitymaster Insider.

    Ankit is a firm believer in Charlie Munger's multidisciplinary approach on juggling between various disciplines...He is not just a research analyst, but also a voracious reader and an avid traveler...Born and brought up in Mumbai, he now prefers to keep away from the noisy megapolis as much as possible. In any given month, you could find him exploring the ancient ruins of South America, the beaches of South East Asia, or the organic cafes of Pondicherry.



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    Aug 24, 2017 12:43 PM