Munger on Corporate Finance and Psychology

From this conversation with Charlie Munger at Harvard-Westlake preparatory school:

"Corporate finance is beneath contempt. Believing just by buying volatile stocks you make an extra 7 percentage points per annum, I mean those people still believe in the tooth fairy and yet it is taught..."

During the same conversation, Munger also said:

"this is the real world as [it] exists. You have these extremely dumb things being done by these smart people. But a lot of them are under big institutional pressure..."

He goes on to say that many of the dumb things come out of those who reside in academia. Then he added the following:

"I had a friend who had a child in the economics department at Chicago, very free market orthodox economics,and [the child] didn't believe the markets were quite as perfect as they thought at the University of Chicago and he had to hide his views."

According to Munger, his friend's child had little to no chance at that "really great university unless he pretended to believe twaddle."

This he attributes to "terrible cognition" more than anything:

"Upton Sinclair said it best of all. He said, 'It is very hard to get a man to believe non-X when his way of making a living requires him to believe X.' On a subconscious level, your brain plays tricks on you and...it's very hard to deal with since it's not conscious malevolence that's causing the bad cognition -- it's the subconscious reality of the human mind.

We have psychology departments with distinguished professors, surely they can teach our young to avoid – the psychology term for this is 'self-serving bias.' Surely the psychology department is teaching our children to avoid this. Well, it's not so. The psychology department is full of people who collect psychology experiments the way a boy collects butterflies. They just like listing them and knowing the other people who collect the butterflies and so forth. Very little synthesis is done from one experiment to another, and if you ask them to synthesize - where you use the findings of psychology against the risks of reality, and through synthesis create a powerful machine that will get the right answer in a complex mess - the psychology professors are not going to help you. In fact, you'd be sort of dropped out of a psychology department if you purported to know a lot of non-psychology and integrate it beautifully with psychology."

It's not that Munger doesn't think the best thinkers in psychology haven't figured out some very useful stuff. It's that they too often don't propagate their ideas in a "functional way".

"The psychology professors who invented and discovered a lot that is very important, they are not really helping the wider civilization all that much. We're better of having them than not having them [but] in terms of what is the best that can be in academia, it has failed us horribly. With hard science and engineering excepted - [and] I think the cognition of medicine tends to be quite good in the best places and biology also tends to be good - but boy, you get into the rest of the social sciences and you have to be very wary because there is an asininity trying to clobber you up behind every rock."

As always, Charlie Munger provides his views in a less than subtle but uniquely insightful way.

Adam

Charlie Munger at Harvard-Westlake 2010

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