Becoming a Better Investor: Kantian Fairness Tendency

In the book Poor Charlie’s Almanack, legendary investor and Vice Chairman of Berkshire Hathaway, Charlie Munger, highlights 25 psychological tendencies that influence how we think and make decisions… tendencies that can impact our lives and the way we invest. Understanding these biases can help us understand ourselves better. And, it can help us avoid common mistakes and make more informed investment decisions.

This week, we’re looking at tendency number seven, the Kantian Fairness Tendency, and how it impacts our investment decisions.

What is it?

German philosopher Immanuel Kant is well known for his core concept of the “categorical imperative,” which states that moral actions can be universalised - a golden rule of sorts that requires humans to follow certain patterns that, if followed by all, would make the surrounding human system/society work best for everyone.

He believed we should follow rules that are universally right, and that morality should be based on principles, not outcomes or emotions. What matters is doing the right thing, even if it’s hard.

How does this tendency play out in the world of investing?

Humans have a desire for fairness and reciprocity in human actions. We tend to give and expect fair treatment. It is something innate — but it’s reinforced when we experience it ourselves.

Munger, however, felt differently. In a talk titled Academic Economics — Strengths and Weaknesses, after Considering Interdisciplinary Needs, he stated:“It is not always recognised that, to function best, morality should sometimes appear unfair, like most worldly outcomes. The craving for perfect fairness causes a lot of terrible problems in system function. Some systems should be made deliberately unfair to individuals because they’ll be fairer on average for all of us.”

Yes, fairness builds trust, which is vital in financial markets. When companies act with integrity, they build long-term relationships with their investors and customers. However, Munger feels that our sense of fairness can sometimes cloud how we perceive value. If an investment doesn’t seem fair—maybe the terms feel lopsided or the founder takes a big payout early—we might skip it, even if it has strong potential.

Many of us expect the market and companies to behave “fairly,” rewarding good behavior and punishing the bad. But markets may not always work that way: they are volatile and affected by multiple internal and external factors.

To prevent this sense of fairness from clouding judgement as an investor, Charlie Munger suggests that we embrace rationality and focus on the facts. We should allow the fundamentals of a business/sector and objective data guide our decisions, not personal feelings about what we deem fair. When we make this disconnect, then we can stay composed as investors and avoid knee-jerk reactions when we think something is “unfair,” focusing on long-term results.

In a nutshell: fairness is a great guiding principle for personal conduct and corporate governance, but it’s not always a reliable predictor of market outcomes. So set aside those emotional reactions and focus on the facts.

https://fs.blog/great-talks/psychology-human-misjudgment/

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