Charlie Munger, psychology, incentives, and police

Reference Charlie Munger speech as published on Farnam Street Blog.

A couple of the points he makes here are directly applicable to the situation in our country with the disfunctional relationship between populations and police.

The first point is about how human psychology is enormously important and is a driver of economics.  This is true also for policing.

6) Extreme and Counterproductive Psychological Ignorance

All right, I’m down to the sixth main defect, and this is a subdivision of the lack of adequate multidisciplinarity: Extreme and counterproductive psychological ignorance in economics. Here I want to give you a very simple problem. I specialize in simple problems. You own a small casino in Las Vegas. It has fifty standard slot machines. Identical in appearance, they’re identical in function. They have exactly the same payout ratios. The things that cause the payouts are exactly the same. They occur in the same percentages. But there’s one machine in this group of slot machines that, no matter where you put it among the fifty, in fairly short order, when you go to the machines at the end of the day, there will be 25% more winnings from this one machine than from any other machine. Now surely I’m not going to have a failure here. What is different about that heavy winning machine? (Silence) Can anybody do it?

Male: More people play it.

Charles Munger: No, no, I want to know why more people play it. What’s different about that machine is people have used modern electronics to give a higher ratio of near misses. That machine is going bar, bar, lemon. Bar, bar, grapefruit, way more often than normal machines, and that will cause heavier play. How do you get an answer like that? Easy. Obviously, there’s a psychological cause: That machine is doing something to trigger some basic psychological response.

If you know the psychological factors, if you’ve got them on a checklist in your head, you just run down the factors, and, boom!, you get to one that must explain this occurrence. There isn’t any other way to do it effectively. These answers are not going to come to people who don’t learn these mental tricks. If you want to go through life like a one-legged man in an ass-kicking contest, why be my guest. But if you want to succeed, like a strong man with two legs, you have to pick up these tricks, including doing economics while knowing psychology.

In this vein, I next want to mention a strange Latin American case of a dysfunctional economy that got fixed. In this little subdivision of Latin America, a culture had arisen wherein everybody stole everything. They embezzled from the company, they stole everything that was loose in the community. And of course, the economy came practically to a halt. And this thing got fixed. Now where did I read about this case? I’ll give you a hint. It wasn’t in the annals of economics. I found this case in the annals of psychology. Clever people went down and used a bunch of psychological tricks. And they fixed it.

Well, I think there’s no excuse if you’re an economist, when there are wonderful cases like that of the dysfunctional economy becoming fixed, and these simple tricks that solve so many problems, and you don’t know how to do the fixes and understand the problems. Why be so ignorant about psychology that you don’t even know psychology’s tricks that will fix your own dysfunctional economic systems?

Here I want to give you an extreme injunction. This is even tougher than the fundamental organizing ethos of hard science. This has been attributed to Samuel Johnson. He said in substance that if an academic maintains in place an ignorance that can be easily removed with a little work, the conduct of the academic amounts to treachery. That was his word, “treachery.” You can see why I love this stuff. He says you have a duty if you’re an academic to be as little of a klutz as you can possibly be, and therefore you have got to keep grinding out of your system as much removable ignorance as you can remove.

There are bunches of psychology based books that are considered to be full of tricks or manipulation, but really they are just facts about the way humans behave.  Books that have titles like, “get anyone to do anything” or “make everyone like you.”  Policing should be set up to take maximum advantage of these tendencies and behaviors.  Interactions should be about de-escalation of emotions, and minimization of ego and all associated defensive emotions.

He also makes the case for how incentives will direct behavior:

9) Not Enough Attention to Virtue and Vice Effects

Okay, my ninth objection: Not enough attention to virtue and vice effects in economics. It has been plain to me since early life that there are enormous virtue effects in economics, and also enormous vice effects. But economists get very uncomfortable when you talk about virtue and vice. It doesn’t lend itself to a lot of columns of numbers. But I would argue that there are big virtue effects in economics. I would say that the spreading of double-entry bookkeeping by the Monk, Fra Luca de Pacioli, was a big virtue effect in economics. It made business more controllable, and it made it more honest. Then the cash register. The cash register did more for human morality than the congregational church. It was a really powerful phenomenon to make an economic system work better, just as, in reverse, a system that can be easily defrauded ruins a civilization. A system that’s very hard to defraud, like a cash register, helps the economic performance of a civilization by reducing vice, but very few people within economics talk about it in those terms.


I’ll go further: I say economic systems work better when there’s an extreme reliability ethos. And the traditional way to get a reliability ethos, at least in past generations in America, was through religion. The religions instilled guilt. We have a charming Irish Catholic priest in our neighborhood and he loves to say, “Those old Jews may have invented guilt, but we perfected it.” (Laughter). And this guilt, derived from religion, has been a huge driver of a reliability ethos, which has been very helpful to economic outcomes for man.

Pay for directors and judges

Many bad effects from vice are clear. You’ve got the crazy booms and crooked promotions – all you have to do is read the paper over the last six months. There’s enough vice to make us all choke. And, by the way, everybody’s angry about unfair compensation at the top of American corporations, and people should be. We now face various crazy nostrums invented by lawyers which won’t give us a fix for unfair compensation, yet a good partial solution is obvious: If directors were significant shareholders who got a pay of zero, you’d be amazed what would happen to unfair compensation of corporate executives as we dampened effects from reciprocity tendency.

A roughly similar equivalent of this no-pay system has been tried in a strange place. In England the lower criminal courts which can send you to prison for a year or fine you substantially, are staffed by lay magistrates. You’ve got three judges sitting up there, and they all get a pay of zero. Their expenses are reimbursed, but not too liberally. And they work about 40 half-days a year, as volunteers. It’s worked beautifully for about 700 years. Able and honest people compete to become magistrates, to perform the duty and get the significance, but no pay.

This is the system Benjamin Franklin, near the end of his life, wanted for U.S. government. He didn’t want the high executives of government to be paid, but to be like himself or the entirely unpaid, well-off ministers and rulers of the Mormon Church. And when I see what’s happened in California, I’m not sure he wasn’t right. At any rate, no one now drifts in Franklin’s direction. For one thing, professors – and most of them need money – get appointed directors.

The incentives here need to be both for police and citizens.


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