Wednesday, June 20, 2007

Success Secrets - Chalie Munger and Creative Destruction

I’d like to discuss in detail one of Charlie Munger’s many insights into human thought processes as they relate to success. This is the kind of thinking that can get us ahead not only in our professional lives, but in every aspect of our lives. I am constantly amazed at how our current technology can literally deliver , in quantity, the insights of a billionaire, right to our desktop. What might have been the contents of, maybe, a single weekly magazine article, or a three minute evening news sound bite only 20 years ago, instead, is a vast treasure trove of Charlie’s wisdom, scattered all over the Net. I am finding articles and speeches by Munger every day and, as they aggregate, it is a marvel to see the totality of the man’s wisdom.

In this post, I am going to discuss Charlie’s concept of the Destruction of Ideas and one of it’s main obstacles: the Bias From Consistency.

The concept of Creative Destruction is usually attributed to economist Joseph Schumpeter, and this concept also figures highly in the thought of billionaire Charles Koch. It is crucial to disgard ideas that are inefdfective. To regularly review the internal models that you are using to guide your behavior. Consider a few of these ideas:

Nerve cells can’t regenerate
Gold reserves are the measure of a country’s wealth
Humans will die if they travel at speeds over 30 miles per hout
Your company will take care of all your retirement needs

A lot of misery would be generated by holding on to such ideas, and it is important that they be discarded.

Buffett and Munger taught the world about creative destruction of ideas as they went beyond the investment theories of Benjamin Graham, one of their idols, to other, broader methods of finding underprices assets.

I believe John Templeton highy successful investor and mutual fund magnate, after a lifetime of only being long the market, went massively short at the top of the tech bubble. Clearly his advanced years had not dimmed his ability to cratively destroy one idea in favor of another , more effective one.

And look at China. No country was more ideologically based than Maoist China. As such they were sickeningly poor and backward, deliberately imprisoning and degrading their best and their brightest. And then, when they were able to move past their strict agrarian/communist mindset, one of the world’s most amazing transformations took place, bringing in one of the greatest economic transformations in the history of the world, lifting untold millions out of poverty.

Just because of the Creative Destruction of an idea.

What kinds of embedded ideas within ourselves need to be examined?

“My house is my bank account”
“I’m a night person not a morning person”
“My belief system is unchanged since my college years”
“Sex, Drugs, and Rock ‘N Roll, man!”
"The Bee Gees are the pinnacle of music”

I think one of the most harmful ideas that needs to be changed, almost at every level is : “This situation can’t get better”. This could be short-term or long-term. Days, weeks, or a lifetime, financial or personal, health-related, education related, etc. It is a small voice found inside many of us and it is, almost always, manifestly, provably false. It is realy a manifestation of laziness or pessimism. A perverse comfort-zone , actually. Or perhaps a “discomfort zone”.

So, why do we hold ideas long past their usefulness? Munger identifies the Bias from Consistency as one of the main causes. We strive to be consistent with our past selves, especially when we strongly identify with certain ideas we have held. It takes a special kind of humility, or a strong incentive to change ideas we have loudly or consistently embraced.

A lot of our habits, ideologies, musical tastes, clothing preferences, status symbols, personal idols, etc may have been formed early in our lives, and may be sorely in need of change. But we have held on to them , and nurtured them, and it is a wrenching and sad process to say good-bye to them. But to hold on may be utterly disastrous, or at a bare minimum, consign us to far fewer opportunities than we might experience if we open our minds and challenge our beliefs.

Next: Identifying and changing ineffective ideas.

Some Munger references:

The Psychology of Human Misjudgment

An Afternoon With Charlie Munger


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