"[People] only act–
the power of incentives–
when it gets so bad
that it starts
making them look foolish
or threatening legal liability.

That's Munger's rule."

– Charlie Munger in "The Psychology of Human Misjudgment"

A quick aside about Charlie Munger's actual point

Charlie Munger, in case you don't know of him, was Warren Buffet's right-hand man at Berkshire Hathaway for many many years. Buffet and Munger were arguably the greatest investment team ever until Munger's death, making Buffet the world's richest person for many years. (I'm sure Munger didn't do badly either.) And Buffet credited him with being the "architect" of Berkshire Hathaway as it exists today.

You might think of someone like that as some finance nerd, detached from the real world. You'd be wrong:

Among other interests, Munger was an enthusiastic, lifelong amateur student of human psychology. The speech from which I take this quote focused on the sub-field that held his particular attention: Misjudgment.

I first became aware of Munger's essay when I heard a different version of this quote. Upon fact-checking, that exact version may not have been Munger's at all. But it still captured his point pithily. I still like it:

"Show me the incentives,
and I'll show you the outcomes."

By the way, Munger may have said this after all. He apparently gave different versions of this speech over the years. The quote may just have come from another version.

10ish years later, Munger majorly revised this speech. That new version (audio, e.g., here, for those who prefer that) contains many other nuggets and stories worth your while. That version also turned into part of his book, Poor Charlie's Almanack.

In that later version, Munger assembled 25 human tendencies he found most impactful in human misjudgment. The point was not so much to summarize or contradict formal, academic psychology but rather to assemble a list of tools that he found helpful as a practitioner.

That list (and its explanation) alone is worth all our while. It affects innovation work in major ways. My favorite, by name alone: "Twaddle Tendency." 😂

Here's Munger's full list:

Reward and Punishment Superresponse Tendency

Liking/Loving Tendency

Disliking/Hating Tendency

Doubt-Avoidance Tendency

Inconsistency-Avoidance Tendency

Curiosity Tendency

Kantian Fairness Tendency

Envy/Jealously Tendency

Reciprocation Tendency

Influence-from-Mere-Association Tendency

Simple, Pain-Avoiding Psychological Denial

Excessive Self-Regard Tendency

Overoptimism Tendency

Deprival-Superreaction Tendency

Social-Proof Tendency

Contrast-Misreaction Tendency

Stress-Influence Tendency

Availability-Misweighing Tendency

Use-It-or-Lose-It Tendency

Drug-Misinfluence Tendency

Senescence-Misinfluence Tendency

Authority-Misinfluence Tendency

Twaddle Tendency

Reason-Respecting Tendency

Lollapalooza Tendency—The Tendency to Get Extreme Consequences from Confluences of Psychology Tendencies Acting in Favor of a Particular Outcome


– Charlie Munger in "The Revised Psychology of Human Misjudgment"

The point for innovation

But back to the importance of incentives as something for innovators to understand and prioritize.

I hear (and have experienced) many ways in which innovation work can fail.

But many of them come back to lacking a Must-Do Purpose. That's also why my first foray into researching innovation governance is to learn all I can about crafting great innovation mandates. Innovation never works if your mandate is set up for doom.

And in turn, I'm curious about the characteristics that make for true must-do purposes. How might you reliably recognize them, let alone craft them?

This is where the "Munger rule" helps us out:

Incentives are a surefire way to predict outcomes.

And the must-do-ness of those incentives massively influences whether an initiative ever gets off the ground and whether it will reach its intended outcome.

Want to know what "must-do" means? Charlie Munger teaches us to look for two criteria:

  • Will (not) doing something make people look foolish?
  • Is there legal jeopardy?

Your turn

Let's keep it simple:

Have a look at your team's charter and those of all your projects/ initiatives:

  • Will important people look foolish if they don't do their darndest to help you succeed?
  • Will someone get in legal trouble if they don't help you succeed?

Yes? Fantastic, you're likely to have a must-do purpose!

No? Well, consider: How might you change your focus or (get different stakeholders, I suppose) to follow the Munger rule?

Source

Speech delivered by Charlie Munger at Harvard in 1995

Further reading and listening

Original version, as delivered at Harvard in 1995: Munger, C. (1995). The Psychology of Human Misjudgment. https://jamesclear.com/great-speeches/psychology-of-human-misjudgment-by-charlie-munger

Audio of the 1995 speech (one of many links offering it): https://www.youtube.com/watch?v=4ICaAKuAudQ

Significantly updated version of the talk, from 10 - 15 years later: Munger, C. (2005). The Revised Psychology of Human Misjudgment, by Charlie Munger. https://fs.blog/great-talks/psychology-human-misjudgment/

Munger's book in which he expanded on this and related themes: Munger, C. T. (2023). Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger. Stripe Press. http://books.google.com/books?id=XWN-zwEACAAJ&hl=&source=gbs_api