Poor Charlie's Almanack

The model

Charles Munger was a lawyer from Omaha who practised in Los Angeles, became an investor, and from the late 1970s served as vice chairman of Berkshire Hathaway alongside Warren Buffett. Buffett credited him with changing Berkshire’s approach, from buying mediocre businesses cheaply to buying good businesses at fair prices. Munger rarely wrote. Poor Charlie’s Almanack, compiled by his friend Peter Kaufman and first published in 2005, gathers his talks, a biographical portrait and a collection of his remarks. The title nods to Benjamin Franklin’s Poor Richard’s Almanack, and Franklin, whom Munger admired, appears throughout. A new edition published by Stripe Press in 2023 brought the book to a much wider audience. Munger died in November 2023, a month before his hundredth birthday.

Munger’s model of good thinking has four main parts.

A latticework of models. Munger argued that a person who knows only one discipline will distort every problem to fit it, like the man with a hammer to whom every problem looks like a nail. Wisdom comes from holding the big ideas of many fields, among them compound interest from mathematics, incentives from economics, natural selection from biology, redundancy from engineering and the psychology of misjudgment, and from arranging them in a latticework so that each problem can be examined through several lenses. He thought a hundred or so models would carry a person most of the way.

Invert. Munger often quoted the mathematician Carl Jacobi’s advice: invert, always invert. Many problems are easier to solve backwards. Instead of asking how to succeed, ask what would guarantee failure and avoid it. Instead of asking how to help a company, ask what would ruin it.

Avoid stupidity. Munger repeatedly said that much of his and Buffett’s success came from trying to be consistently not stupid rather than very intelligent. In a world where most people make avoidable errors, avoiding them is a large advantage.

The circle of competence. Know the limits of what you understand, and stay inside them. The size of the circle matters less than knowing where its edges are.

Seeing with it

The book’s best-known chapter is a talk Munger gave at Harvard in 1995, revised in 2005, titled “The Psychology of Human Misjudgment”. In it he lists about twenty-five psychological tendencies that cause people to misjudge situations. They include the power of incentives, which he thought almost everyone underestimates; the tendency to dislike and distort what conflicts with prior beliefs; the tendency to be influenced by social proof, by authority and by reciprocation; the overweighting of vivid and recent evidence; the pain of losses; and the tendency to stay consistent with past commitments. His most important point came at the end. The worst errors happen when several tendencies act together, in what he called the lollapalooza effect, as in cult conversions or financial manias.

Munger illustrated these ideas with business examples. His favourite example was a delivery company whose night shift, paid by the hour, never finished on time. When the company began paying by the shift and letting people go home once the work was done, the problem disappeared. His point was that most behaviour that looks irrational makes sense once incentives are understood.

The model also explains his investing style. Inside the circle of competence, with the latticework applied and stupidity avoided, opportunities that are clearly attractive appear rarely. When they do, Munger believed in betting heavily. The rest of the time, he believed in sitting still.

Where the model stops

Munger’s list of tendencies is practical rather than scientific. He drew on psychology books, especially Robert Cialdini’s Influence, and on his own observation, and he acknowledged that his categories overlapped. Academic psychologists have tested many of the underlying effects more precisely, and some, such as particular forms of social priming, have not held up, while incentives, social proof and loss aversion have.

The model is also easier to describe than to follow. Building a latticework of a hundred models takes a lifetime of reading, and Munger’s results depended on extraordinary patience, temperament and long partnership with Buffett. Readers who adopt the vocabulary of mental models without the depth risk a new kind of hammer: a list of fashionable concepts applied mechanically.

Since it was published

The Stripe Press edition of 2023 renewed interest in the book. The idea of mental models has spread widely among founders and investors, helped by writers such as Shane Parrish. After Munger’s death, Berkshire Hathaway’s annual letter and meetings paid tribute to his role, and Buffett described him as the architect of the modern company.

Questions it lets you ask

What would guarantee failure here, and are we doing any of it? Which disciplines would look at this problem differently, and what would each see? What are the incentives of everyone involved, including us? Is this inside our circle of competence, and how do we know? Which psychological tendencies might be acting on us at the same time? And is the opportunity clearly attractive, or are we just restless?