Most of economics can be summarized in four words: "People Respond to incentives." The document discusses several examples that demonstrate how incentives can lead to unintended and sometimes harmful consequences. It discusses how industries like tobacco, fast food, pharmaceuticals, and investment banking have exploited incentives to push products and services that are not always in the best interests of consumers. It emphasizes the importance of being aware of incentive structures and their potential to cause bias. Financial independence is presented as a way to avoid being unduly influenced by other parties' incentives.

1. The
Psychology
of Human
Misjudgment-
VI

2. Bias # 9
Incentives &
Incentive-
caused bias

3. “People
Respond to
incentives.”
The rest is
commentary
Most of economics can be summarized in four words: “People Respond to
incentives.” The rest is commentary- Steven Landsburg

4. Example 1
Freakonomics

5. Read the book (and its sequel Superfreakonomics), watch the movie.
YouTube - Freakonomics - Official Trailer [HD]
http://www.youtube.com/watch?v=56k1xVAq290
These two guys have done some wonderful work on “incentives.”
Subscribe to their old blog:
Opinion - Freakonomics Blog - NYTimes.com
http://freakonomics.blogs.nytimes.com/
And the New one:
http://www.freakonomics.com

6. Example 2
Demand Curve

7. Price and Demand are inversely related.
Provide two exceptions where to increase
demand, you should increase price.
1. Price associated with quality
2. Bribe the customer’s agent to push the product - invoking one the most
post powerful psychological tendencies - the superpower of incentives

8. Boiler Room Scene demonstrating incentive
superpower

9. Boiler Room Scene demonstrating incentive
superpower

10. Boiler Room Scene demonstrating incentive
superpower

11. Boiler Room Scene demonstrating incentive
superpower

12. Are there
“functional
equivalents” of
boiler room
operations?
cocaine, mutual fund units, penny stocks in boiler rooms, medical drugs,
time shares, insurance - ANY product with a fat commission behind it. No
matter how toxic, it WILL get pushed.
Micro-lending in Andhra Pradesh.

13. Yes!
“Any time you
create large
differences in
commissions where
the guy gets X% for
selling A, which is
some mundane
thing, and 10 times
X for selling B,
which is something
toxic, you know
what’s going to
happen.”

14. You’ll get lots of
B despite its
toxicity.
Moreover it will
get rationalized.
Man is not a
rational animal,
rather man is a
rationalizing
animal

15. I-C Bias is so pervasive it occurs in all professions.
Lawyers make clients litigate more than its necessary.

16. Doctors prescribing unsuitable medication because its in their own self
interest.

17. Read this blog post I did in 2007:
Fundoo Professor: Incentive-caused Bias in the Medical Profession
http://fundooprofessor.blogspot.com/2007/11/incentive-caused-bias-in-
medical.html
Read original article from:
http://www.nytimes.com/2007/11/25/magazine/25memoir-t.html?

18. Auditors would overlook accounting irregularities and so on…
Client: How much is 1+1?
Auditor: How much do you want it to be?

19. Example 3
Credit Rating
Agencies

20. Read this:
Market Shock: AAA Rating May Be Junk - New York Times
http://select.nytimes.com/2007/07/20/business/20norris.html?_r=1

21. Read this:
http://www92.homepage.villanova.edu/shawn.howton/Fin%202227/
articles/subprimemess.pdf

22. The process of converting something toxic to something pure…
This is the alchemy of finance.

23. Read this:
Op-Ed Columnist - All Fall Down - NYTimes.com
http://www.nytimes.com/2008/11/26/opinion/26friedman.html

24. “Whose bread i eat, his
song i sing”
“Fear professional advice especially when it is good for the advisor.”
“Double check, disbelieve, or replace much of what you’re told, to the
degree that seems appropriate after objective thought”

25. Michael
Aronstein
I love this quote...
“Of the many advances in the long history of commerce, the advent of sausage stands
out as one of the greatest...

26. “The idea of taking something which, in pure form, would be repellent to potential customers, and by thorough grinding, mixing, reshaping
and adulterating, creating an entirely new entity that could be marketed free from the taint of its original ingredients, marked a milestone in
the annals of business thought. Sausage making is the prototype for an entire class of merchandising technique that has become particularly
common in modern finance. The financial marketer who uses commingling as an approach is responding to the same general conditions that
drive the sausage stuffer: an abundance of lower grade ingredients along with hungry and credulous public.” – Michael Aronstein
Be Wary of Financial Innovation…
The guys who do it keep on re-inventing the wheel and hoodwink you into believing that what they are doing “this time, its different.”
Galbraith once wrote: “All financial innovation involves, in one form or another, the creation of debt secured in greater or lesser adequacy by
real assets … All crises have involved debt that, in one fashion or another, has become dangerously out of scale in relation to the underlying
means of payment.”
He was right as you’ll discover when you read “The Great Crash 1929”

27. Munger advices you to never ask the barber if you need a haircut.

28. Example 4
Tobacco

29. Scene from “Thank you for smoking”
YouTube - Thank You For Smoking Movie (1/9)
http://www.youtube.com/watch?v=4HC3xwlfcFM
This is a great movie which highlights a man who is a lobbyist for the
tobacco industry, does a brilliant job, and faces no cognitive dissonance
because he is doing it “for the money.”
However everything changes in the last scene...

30. Scene from “Thank you for smoking”
YouTube - Thank you for smoking part 4/9
http://www.youtube.com/watch?v=Ft9kOLfd0Vs&feature=related
See from 6:55 onwards

31. Scene from “Thank you for smoking”
Experiencing Cognitive dissonance
http://www.youtube.com/watch?v=3Quv3ZYf72Q&feature=related
See from 5:42 onwards
And
http://www.youtube.com/watch?v=h9n-UdMhBNQ&feature=related
When you take up a job, you will have the same problem. All professions have this problem of
incentive-caused bias, when you fool yourself into believing that what’s good for you is also
good for your client. And so, you will find yourself selling overpriced and unsuitable insurance,
addiction, unsuitable products (e.g. tech mutual funds on the top of a tech boom to widows
and orphans) just for the money...
I-C Bias is very pervasive. What’s the solution?
According to Munger, the solution is financial independence.

32. “Whose bread i eat, his
song i sing”
“Any time you create large differences in commissions where the guy gets X
% for selling A, which is some mundane thing, and 10 times X for selling B,
which is something toxic, you know what’s going to happen.”
“Fear professional advice especially when it is good for the advisor.”
“Double check, disbelieve, or replace much of what you’re told, to the
degree that seems appropriate after objective thought”

33. Example 5
Peddling Leverage
in USA - taking 2nd
mortgages for
consumption

34. rather go
to bed
supperless
than rise
in debt -
Ben
franklin
This is the story of a founding father of one of the greatest nations - USA,
and the subsequent behavior of its citizens and its businesses.
This is the story of debt, and how it got pushed like a drug because there
was “money in it”
All you MUST read the following books by Franklin.
Poor Richard’s Almanak
The Way to Wealth

35. Frankin gave some very valuable advice to his citizens…
look what they did and look how they were pushed into this by the
“extremes of capitalism”

36. "But what madness must it be to run in debt for these superfluities? We are offered by
the terms of this sale, six months' credit; and that, perhaps, has induced some of us to
attend it, because we cannot spare the ready money, and hope now to be fine without
it. But, ah! think what you do when, I you run I in debt you give to another power over
your liberty. If you cannot pay at the time, you will be ashamed to see your creditor; you
will be in fear when you speak to him; you will make poor, pitiful, sneaking excuses,
and, by degrees, come to lose your veracity, and sink into base, downright lying; for
The second vice is lying, the first is running in debt, as Poor Richard says.”
The love of debt, like any addiction, WILL result in breakdown of morality.

37. its hard
for an
empty sack
to stand
upright -
ben
franklin

39. I love this one…

40. Example 6
Peddling Leverage
in USA - Credit card
debt

41. http://www.youtube.com/watch?v=ysyFqkHXusc
Addiction to debt - promoted by Mastercard.
Take a good idea (credit cards), then take it to the extreme (as capitalism
does), and then see what happens. It results in DISASTER every time.

42. Watch this documentary:
http://topdocumentaryfilms.com/maxed-out/
How are the credit card companies any different than Shakespeare’s Shylock in “The Merchant of Venice?” Also
see:
Super size Me
http://freedocumentaries.org/film.php?id=98
And think about the cognitive dissonance faced by managers of McDonalds if they see this film...

43. Maxed Out | Watch Free Documentary Online
http://topdocumentaryfilms.com/maxed-out/

44. “Whose bread i eat, his
song i sing”

45. since The
borrower is a
slave to the
lender and the
debtor to the
creditor, disdain
the chain,
preserve your
freedom; and
maintain your
independency. -
benjamin
franklin
Who says slavery has gone?
Its here - alive and kicking. All those people who will work all their lives for
their credit card companies? Who are these people? If they are not slaves
then what are they?

46. silk and
satins,
scarlets
and
velvets,
put out the
kitchen
fire- ben
franklin

47. Maxed Out | Watch Free Documentary Online
http://topdocumentaryfilms.com/maxed-out/

48. Maxed Out | Watch Free Documentary Online
http://topdocumentaryfilms.com/maxed-out/
Role of financial independence- Makes you see things as they really are.
Its very tough for someone who is not financially independent to escape from the clutches of incentive-
cased bias…

49. Its difficult to
get a man to
understand
something,
when his
salary depends
upon his not
understanding
it - Upton
sinclair

50. “Whose bread i eat, his
song i sing”
“Fear professional advice especially when it is good for the advisor.”
“Double check, disbelieve, or replace much of what you’re told, to the
degree that seems appropriate after objective thought”

51. Example 7
diet and the Fast
Food and Pharma
Industries

52. Me two years ago
http://en.wikipedia.org/wiki/Super_Size_Me

53. Fat, Sick, and Nearly Dead
http://www.youtube.com/watch?v=x9SGWcZwk7c

54. Forks over knives
http://www.youtube.com/watch?v=O7ijukNzlUg

55. Food Matters
http://www.youtube.com/watch?v=r4DOQ6Xhqss

56. Promptly resolve cognitive dissonance...

62. “Whose
bread i eat,
his song i
sing”

63. Example 8
Investment Banking

64. Investment banker making a pitch to clients.

65. Why potential buyers even look at projections prepared by sellers baffles me. Charlie and I
never give them a glance, but instead keep in mind the story of the man with an ailing horse.
Visiting the vet, he said: "Can you help me? Sometimes my horse walks just fine and
sometimes he limps." The vet's reply was pointed: "No problem – when he's walking just fine,
sell him." ... At Berkshire, we have all the difficulties in perceiving the future that other
acquisition-minded companies do. Like they also, we face the inherent problem that the
seller of a business practically always knows far more about it than the buyer and also picks
the time of sale – a time when the business is likely to be walking "just fine." – WB

66. “This fishing tackle
manufacturer I knew
had all these flashy
green and purple
lures. I asked, ‘Do fish
take these?
“Charlie?’ he said, ‘I
don’t sell these lures
to fish.’” — Munger

67. Game-able systems
leading to
unintended
consequences
(Peltzman effect)

68. Take a look at this commercial. It has all the attributes of an effective
commercial. See for yourself:
YouTube - Awesome "Buckle Up" PSA Commercial
http://www.youtube.com/watch?v=m6ZKVdKTWww

69. The PSA commercial on previous slide was persuasive, but was it right?
Take a look at this:
YouTube - Sam Peltzman on the Peltzman Effect
http://www.youtube.com/watch?v=7IB2xRfRHOA
Peltzman effect - Wikipedia, the free encyclopedia
http://en.wikipedia.org/wiki/Peltzman_effect
The Peltzman effect is a contributing factor in the explanation of Smeed's Law, an empirical observation that traffic fatality rates in many countries are correlated with the number of
vehicle registrations per capita, and differing safety standards do not appear to be significant.
Peletzman effect is a mental model which tells you to not ignore the second or third order effects like the designer of the incentive scheme which rewarded
students a $1 for catching a rat on campus after all other efforts to get rid of the rats failed. Well, pretty soon, the students were breeding rats…
People not only respond to incentives, sometimes one’s well-intentioned decisions result in perverse outcomes. We call that “perverse incentives.” Read more
about this from:
http://en.wikipedia.org/wiki/Perverse_incentive

70. are there
“functional
equivalents” of the
peltzman effect?

71. Example 9
Price Controls

72. Oh Yeah?

73. Jim Rogers
“You can either
control the
price, or the
supply, but not
BOTH!”
See “Will Indian
Steel Disappear?”
Black Markets
License raj
Ration shops
http://www.blonnet.com/2004/08/31/stories/2004083100111100.htm
If you fix price too low, supply will vanish!
If you fix the supply (e.g. license raj) and then try to impose price controls
also, you will see a black market emerge.
Low price of diesel vs petrol
Smugglers and black marketeers vs. Arbitrageurs

74. Cocaine Incorporated - The New York Times

75. http://www.thehindubusinessline.com/opinion/columns/aarati-krishnan/
article3935602.ece?homepage=true

76. Example 10
Credit default
swaps

77. Pitched as an “insurance product”
What happens when CDS are bought by hedge funds with no insurable
interest?
i.e. who have nothing to lose from the demise of the corporation, are not
“insurance” in the true sense of the word.

78. Leaking bad news to
media
Planting false stories
Pressurizing bankers
to recall their loans
etc..

79. Example 9:
Carol loomis on
“The risk that won’t
go away”

80. The risk that won’t go
away
The risk that STILL
wont go away
Law of conservation
of risk
http://money.cnn.com/2008/09/25/magazines/fortune/
loomis_swamp.fortune/index.htm
http://money.cnn.com/2009/06/22/news/economy/
derivatives_regulation_risks.fortune/index.htm
http://fundooprofessor.blogspot.com/2005/09/carol-loomis-risk-and-
law-of.html

81. Example 11
Wall Street Casino

82. Buffett’s column: How to tame the casino society
Perverse incentives out of low brokerage costs.

83. How does
HE deal
with
incentives?

84. Example 12
Scott Fetzer

85. What’s Causing This???

86. “In setting compensation,
we like to hold out the
promise of large carrots,
but make sure their
delivery is tied directly
to results in the area
that a manager controls.
When capital invested in
an operation is
significant, we also both
charge managers a high
rate for incremental
capital they employ and
credit them at an equally
high rate for capital they
release.
“The product of this money's-not-free approach is definitely visible at Scott
Fetzer. If Ralph can employ incremental funds at good returns, it pays him
to do so: His bonus increases when earnings on additional capital exceed a
meaningful hurdle charge. “But our bonus calculation is symmetrical: If
incremental investment yields sub-standard returns, the shortfall is costly
to Ralph as well as to Berkshire. The consequence of this two- way
arrangement is that it pays Ralph - and pays him well - to send to Omaha
any cash he can't advantageously use in his business.”

87. Example 13
GEICO

88. “The bonuses received by
dozens of top executives,
starting with Tony, are based
upon only two key variables:
(1) growth in voluntary auto
policies and (2) underwriting
profitability on “seasoned”
auto business (meaning
policies that have been on the
books for more than one
year).”

89. Example 14
H.H. Brown

90. “A distinguishing
characteristic of H. H.
Brown is one of the most
unusual compensation
systems I’ve encountered -
but one that warms my
heart: A number of key
managers are paid an
annual salary of $7,800,
to which is added a
designated percentage of
the profits of the company
after these are reduced by
a charge for capital
employed. These managers
therefore truly stand in
the shoes of owners.”
“In contrast, most managers talk the talk but don't walk the walk, choosing
instead to employ compensation systems that are long on carrots but short
on sticks (and that almost invariably treat equity capital as if it were cost-
free). The arrangement at Brown, in any case, has served both the company
and its managers exceptionally well, which should be no surprise: Managers
eager to bet heavily on their abilities usually have plenty of ability to bet
on.”

91. Example 15
Ending the deficit

93. “If you were to
persuade,
appeal to
interest not
reason” - Ben
franklin

94. Bias # 10
Pavlovian
Association

95. This is the famous dog of pavlov who learnt to salivate at the sound of a
bell.
The human equivalent of the pavlovian dog is there in all of us.

96. Invert,
Always
Invert
:-)

97. pattern seeking is pavlovian misassociation

98. Looking for trends when there aren’t any
Associating Trend with Destiny
Will this stock keep going up? vs. Has this stock been going up?
Mind looks for patterns in things that are random.

99. Michael Shermer: Pattern Seeking Video
http://www.ted.com/talks/
michael_shermer_on_believing_strange_things.html

100. Pavlovian Association

101. Pavlovian Association

103. Restaurants stopped serving
tandoori items and sale of
tandoors plunged...

104. High price
associated
with high
quality
e.g.
Nakshatra
diamonds
made by De
Beers

105. Advertisers demonstrate the power of
positive associations by constantly
connecting their products with the things
we like.
Advertisers demonstrate the power of positive associations by constantly connecting
their products with the things we like.
Girl Models next to Car Models
Lending positive traits of beauty and desirability
You won’t see Coke advertised alongside some account of the death of a child. Instead,
Coke ads picture life as happier than reality.

106. “Throwing the baby out with the bathwater”
“If Satyam Computers is a fraud, then all IT companies are frauds, so I am
going to dump them all.” - Mr. Market
Under what circumstances, Mr. Market would be wrong?

107. Painting
Everythin
g with the
same
brush
“Painting everything with the same brush”
A drop in price of steel is bad news for ALL steel companies, so I am going
to dump them all.” - Mr. Market.
Under what circumstances, Mr. Market would be wrong?

108. “Our inferential machinery, that we use in daily life, is not made for a complicated environment in
which a statement changes markedly when its wording is slightly modified. Consider that in a
primitive environment there is no consequential difference between “most killers are wild animals”
and “most wild animals are killers.” The error here is almost inconsequential.
“Our statistical intuitions have not evolved for a habitat in which these subtleties can make a big
difference.”

109. between 1983 and 1993, when butter
production was up 1%, the S&P 500 was up 2%
the next year. Conversely, if butter
production was down 10%, S&P 500 DECLINED
BY 20%.
Co-relation and causation

110. Insensitivity
to Base Rates
(Probability
unconditioned
on featured
evidence)
Base rate is the probability unconditioned on featural evidence, frequently also
known as prior probabilities. For example, if it were the case that 1% of the
public are "medical professionals" and 99% of the public are not "medical
professionals," then the base rates in this case are 1% and 99%, respectively.

111. “In all free-enterprise attitudes there is a strong tendency to believe that
the more money, either as income or assets, of which an individual is
possessed, the deeper and more compelling his economic and social
perception, the more astute and penetrating his mental processes. In a
world where for many the acquisition of money is difficult... the possession
of it in large amount seems a miracle. Accordingly, possession must be
associated with some special genius.”- Galbraith

112. Mis-associating good outcomes with skill (stock market swindle, massively
outperforming fund etc.)
Mis-associating bad outcomes with bad process
Under-appreciation of role of luck

113. Role of Luck

114. Summer of 2000

118. Simone Tata,
Chairperson of
Trent &
Stepmother of
Ratan Tata,
Chairman of the
Tata Group
http://
en.wikipedia.org/
wiki/Simone_Tata

119. 2002
1.In 2002, a class-project report on a company called Trent landed on my table and when I opened it my eyes
popped out again!
2.Lakme, a highly valued cosmetics company had, some time back, sold off its brands to Unilever. Lakme was
controlled by the Tata’s one of India’s largest business groups.
3.The lady who was running the company, in her own wisdom decided to not distribute the money to the company’s
stockholders. Instead, she announced a foray into retail business of running departmental stores - TRENT -
WESTSIDE
4.That market hated that decision - NEXT SLIDE

121. Trent’s Stock Price Chart
1.Over the next few years, as retail boom took off, so did the stock - what we
bought for Rs 68 was now quoting at Rs 800.
2.When someone asks me when will I buy a retail stock, my favorite answer is
“when its free!”
3.Value investing does have a tendency to spoil you!
4.The key lesson here is that while we may try to be catalysts in unlocking value, to
succeed here is not a precondition - there may be OTHER catalysts in place will will
give you a very nice exit.

122. “Chance
favors
the
prepared
mind.” -
Louis
Pasteur

123. http://en.wikipedia.org/wiki/Serendipity
You find something when you’re not looking for it.
do not ignore the importance of accidental discoveries - events, meetings, chance
happenings - keep an open mind to all possibilities.

124. I love what Taleb has
to say about
inventions, how
almost all of the
discoveries that have
had tremendous
impact on our
culture were
accidents in the
sense that they were
discovered while
searching for
something else.
Arlene Goldbard, Blogger
“Because of hindsight bias, he says, histories of economic life and scientific discoveries are written
with straightforward story lines: someone set out to do something and succeeded, it’s all about
intention and design. But in truth, “most of what people were looking for, they did not find. Most
of what they found they were not looking for. Penicillin was just some mold inhibiting the growth
of another lab culture; lasers at first had no application but were thought to be useful as a form of
radar; the Internet was conceived as a military network; and despite massive National Cancer
Institute-funded cancer research, the most potent treatment—chemotherapy—was discovered as a
side-effect of mustard gas in warfare (people who were exposed to it had very low white blood cell
counts). Look at today’s biggest medical moneymakers: Viagra was devised to treat heart disease
and high blood pressure.”

125. Chains of habit
are too light to
be felt ...
... until they are
too heavy to be
broken -
Warren Buffett
Don’t take the same route to office, don’t listen to same type of music, don’t read papers from front
page, don’t order from a menu from starters to desserts, expose yourself to different cultures - you
don’t know what you idea might stumble upon…
and when u get that flash of inspiration - your idea - JOT it down - some of the best business plans were made
on napkins
Allow one thing to lead to another (serendipity)
Be connected- Linkedin, Facebook, etc…

126. “Go where
events flow
fastest.
Surround
yourself with a
churning mass
of people and
things
happening.”

127. “But why is she in
the right places at
the right times?
Because she has
made the effort to
be in many places
at many times. Fate
has given her a
lucky break, but
she has earned it.
She has positioned
herself for it.”
Drop what you’re doing when you get an interesting opportunity, call etc - DONT IGNORE IT!

128. “It is a fundamental assumption
of the Work Ethic that people
ought to have goals and should
struggle toward them in a
straight line. We are counseled
to fix our eyes on our goals,
looking neither to the right nor
to the left, refusing to be
distracted.
Max Gunther
This is supposed to be the sure route to success. But here is a puzzling fact. It turns out
that lucky men and women, on the whole are not straight-line strugglers. They not only
permit themselves to be distracted, they invite distraction. Their lives are not straight lines
but zigzags.”

129. Herb Simon
"I have encountered many
branches in the maze of
life's path, where I have
followed now the left
fork, now the right. . . .In
describing my life as
maze-like, I do not mean
that I have a large
number of deliberate,
wrenching decisions to go
off in one direction or
another.
On the contrary, I have made very few. Obvious responses to opportunities and
circumstances, rather than studied decisions, have put me on the particular roads I have
followed."

130. “The lucky... are
aware that life is
always going to be
a turbulent sea of
opportunities
drifting randomly
past in all
directions.”
“If you put blinders on yourself so that you can see only straight ahead, you will miss nearly
everything. This is what the unlucky typically do. They stick to preplanned life routes even
when they are going nowhere or are actually plodding downhill to disaster.”- Max Gunther

131. Search strategy - I do not ignore serendipity
The Rabbit Runs
Faster than the Fox
because the Fox is
only running for his
dinner while the
rabbit is running for
his life.
Ideas can come from screens, company management interaction, reading “news” - ignore
macroeconomic, focus on company specific - management interviews or make up ur own
news by looking at fundamental, slow but long-term changes happening to companies.
ideas come from reading books from multiple disciplines, even Aesop fables.
Rise in the price of a raw material leads to the idea of looking at the company which supplies
the raw material

132. Bias # 11
REASON
RESPECTING
TENDENCY

133. “Excuse me. I have
five pages. May I
use the Xerox
machine?”
Compliance Rate:
64%
Reason Respecting Tendency
The word “because” is one of the most powerful words in English.

134. “Excuse me, I have five
pages. May I use the
Xerox machine because
I am in a rush?”
Compliance Rate: 94%

135. “Excuse me. I have five
pages. May I use the
Xerox machine because
I have to make some
copies?”
Compliance Rate:93%
Implication for us:
Because people want reasons which explain why something happened, there are people who
materialize to offer reasons even when there isn’t any.

136. Bias # 12
PAIN REDUCING
PSYCHOLOGICAL
DENIAL

137. I call this the “Dam Fools” Model - Pain Reducing Psychological Denial. This from Jared Diamond:
“The last reason that I shall mention for irrational failure to try to solve a perceived problem is psychological denial. This is a technical term with a
precisely defined meaning in individual psychology, and it has been taken over into the pop culture. If something that you perceive arouses an
unbearably painful emotion, you may subconsciously suppress or deny your perception in order to avoid the unbearable pain, even though the
practical results of ignoring your perception may prove ultimately disastrous. The emotions most often responsible are terror, anxiety, and sadness.
Typical examples include refusing to think about the likelihood that your husband, wife, child, or best friend may be dying, because the thought is
so painfully sad, or else blocking out a terrifying experience. For example, consider a narrow deep river valley below a high dam, such that if the
dam burst, the resulting flood of water would drown people for a long distance downstream. When attitude pollsters ask people downstream of the
dam how concerned they are about the dam's bursting, it's not surprising that fear of a dam burst is lowest far downstream, and increases among
residents increasingly close to the dam. Surprisingly, though, when one gets within a few miles of the dam, where fear of the dam's breaking is
highest, as you then get closer to the dam the concern falls off to zero! That is, the people living immediately under the dam who are certain to be
drowned in a dam burst profess unconcern. That is because of psychological denial: the only way of preserving one's sanity while living immediately
under the high dam is to deny the finite possibility that it could burst.”
There is much denial in the world of business. Witness what’s happening in the banking sector right now.

140. A Cocoon of Unreality

141. Refusal to look at stock
market pages when
facing massive losses
vs. doing frequent
marking to market of
portfolios during bull
runs

142. “I think its in the
nature of things
for some
businesses to die.
Its also in the
nature of things
that in some cases,
you shouldn’t
fight it...
“There’s no logical answer in some cases except to wring the money out
and go elsewhere. And that’s very tough for managements to do. In fact,
they almost never face up to that. It’s very rare.” — Munger.

145. Perverse incentives:
Restructured assets - Denial
Evergreening
Throwing good money after bad.

146. “I don't want you to think we have any
way of learning or behaving so you won't
make mistakes. I'm just saying that you
can learn to make fewer mistakes than
other people - and how to fix mistakes
faster when you do make them...

147. “But there's no way you can live an
adequate life without making many
mistakes.

148. In fact, one trick in life is to get so you
can handle mistakes. Failure to handle
psychological denial is a common way
for people to go broke...

149. “You've made an enormous commitment to
something.The more the effort and money
you’ve poured in, the more the whole
consistency principle makes you think: "Now
it has to work, If I put in just a little more,
then it'll work.“ [Contrast- boiling frog]

150. And deprival super-reaction syndrome also comes
in:You're going to lose the whole thing if you don't
put in a little more. People go broke that way -
because they can't stop and rethink and say: "I
can afford to write this one off and live to fight
again. I don’t have to pursue this thing as an
obsession - in a way that will break me...

151. Part of what you must learn is to handle
mistakes and new facts that change the
odds. Life, in part, is like a poker game,
wherein you have to learn to quit sometime
when holding a much-loved hand.”

152. Thank You