The Psychology of Money 183mental habit that has served him well. “Personally, I’ve gotten so that I
now use a kind of two-track analysis,” he said in a 1994 speech reprinted
inOutstanding Investor Digest.“First, what are the factors that really
govern the interests involved, rationally considered. And second, what
are the subconscious inf luences where the brain at a subconscious level is
automatically doing these things—which by and large are useful, but
which often misfunction.”^10
BEHAVIORAL FINANCE
In many ways, Charlie Munger is a genuine pioneer. He was thinking
about, and talking about, the psychological aspects of market behavior
long before other investment professionals gave it serious attention. But
that is beginning to change. Behavioral f inance is now an accepted area
of study in the economics department at major universities, including
the work done by Richard Thaler at the University of Chicago.
Observing that people often make foolish mistakes and illogical as-
sumptions when dealing with their own f inancial affairs, academics, in-
cluding Thaler, began to dig deeper into psychological concepts to explain
the irrationalities in people’s thinking. It is a relatively new f ield of study,
but what we are learning is fascinating, as well as eminently useful to
smart investors.
Overconfidence
Several psychological studies have pointed out that errors in judgment
occur because people in general are overconf ident. Ask a large sample
of people how many believe their skills at driving a car are above av-
erage, and an overwhelming majority will say they are excellent driv-
ers. Another example: When asked, doctors believe they can diagnose
I came to the psychology of misjudgment almost against my
will; I rejected it until I realized my attitude was costing me a
lot of money.^9
CHARLIEMUNGER, 1995