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Charlie Munger: A Two-Step Process for Making Effective Decisions and Improving Your Thinking

A simple and lightweight approach to decision making that prevents us from being manipulated.

  1. Understand the forces at play.
  2. Understand how your subconscious might be leading you astray.

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While most of us make decisions daily, few of us have an effective framework for thinking that protects us when making decisions. We’re going to explore Munger’s two-step process for making effective decisions and reducing human misjudgment.

In A Lesson on Elementary Worldly Wisdom, Charlie Munger offers a simple two-step filter for making effective decisions:

Personally, I’ve gotten so that I now use a kind of two-track analysis. First, what are the factors that really govern the interests involved, rationally considered? And second, what are the subconscious influences where the brain at a subconscious level is automatically doing these things-which by and large are useful, but which often misfunction.

One approach is rationality-the way you’d work out a bridge problem: by evaluating the real interests, the real probabilities and so forth. And the other is to evaluate the psychological factors that cause subconscious conclusions-many of which are wrong.

Let’s take a closer look.

1. The Forces at Play

The key to the first step is knowing what you know and what you don’t know. You need to understand your circle of competence. It’s just as important to know what you don’t know as it is to know what you do know.

If you know what you don’t know, you might still have to make a decision, but your approaches for making that decision will change. For example, if you’re forced to make a decision in an area that you know is well outside your circle of competence, one tool you can use is inversion.

While there are millions of factors that go into decisions there will always be a few variables and factors that will carry the bulk of the weight. If you’re operating within your circle of competence, it should be relatively easy to figure out the relevant variables and forces at play.

I can’t tell you the relevant variables. There is no magic formula. In order to make consistently good decisions you need to develop a deep fluency in the area in which you are making decisions and you need to pull in the big ideas from multiple disciplines to make sure you’re exercising good judgment.

2. The Psychological Factors

There are many causes of human misjudgment — our mental models page lists a few. These are the subtle ways that your mind might be leading you astray at a subconscious level. Your subconscious mind is larger than your conscious mind and yet we rarely pay attention to how we might be tricking ourselves. One way to mislead yourself, for instance, is to make decisions based on a small sample size and extrapolate the results to a larger population. Another way we fool ourselves is to remain committed to something we’ve said in the past. We might rely on an authority figure or default to what everyone else is doing. You get the idea.

Usually when we have extreme success or failure there are four or five factors working in the same direction. The same goes for psychology. The more human misjudgment factors there are working against us, the more likely we are to make an ill-informed decision.