Rationality and Objectivity Will Work
Charlie Munger argues that rationality and objectivity are essential for success in investing and life, and stresses the importance of learning from both mistakes of commission and omission. He also emphasizes the duty of successful individuals to act as exemplars of ethical behavior.
THE IDEA
Rationality and Objectivity Will Work
Munger argues for rationality and objectivity, including procedures that require people to consider an opposing position. He criticizes the legal profession for moving away from those disciplines.
Learning from Mistakes
Munger emphasizes the need to remember both mistakes of omission (opportunities missed) and mistakes of commission (bad investments). He references Chris Davis's 'temple of shame' for bad stocks and suggests a 'temple of shame squared' for great missed opportunities. By acknowledging both types of errors, one becomes a better investor.
Being an Exemplar
Munger believes that people who rise high in organizations have a duty to be exemplars, not taking every last penny. He contrasts this with the behavior of many in modern finance, where even those aware of wrongdoing consider it normal. He and Buffett aim to be exemplars, but notes there are few imitators.
When to use it
Investing: Use a 'temple of shame' checklist to review both bad investments and missed opportunities.
Legal practice: Apply forced objectivity to weigh evidence fairly, avoiding bias.
Business leadership: Model ethical behavior and avoid taking every last penny from the company.
Personal development: Regularly reflect on decisions to learn from both types of mistakes.
FROM THEORY TO EVERYDAY LIFE
In practice
Missing K-Mart and Freddie Mac
Munger mentions not investing in K-Mart's bankruptcy (a mistake of omission) and buying only 4% of Freddie Mac while missing Fannie Mae entirely. He calls this a cognitive mistake, showing that even rational minds can miss opportunities.
Temple of Shame Squared
Chris Davis keeps a wall of stock certificates of his worst investments (temple of shame). Munger suggests adding a 'temple of shame squared' for great opportunities that were almost acted on but missed due to lack of rationality.
A MOMENT TO REFLECT
Put it to work.
What mistakes of omission have you made in your career or investments? How can you systematically learn from them?
In what areas of your life can you act as an exemplar, setting a standard for ethical behavior?
How does the concept of forced objectivity apply to your decision-making processes?
CONTINUE THE CONVERSATION
Source texts
- The Art of Being Rational Charlie Munger