Becoming A Better Investor: Reason-Respecting Tendency

Legendary investor and former Berkshire Hathaway vice chairman Charlie Munger often highlighted the powerful role human psychology plays in our decision-making—particularly in investing. In his famous talk, “The Psychology of Human Misjudgment,” he outlined 25 key psychological tendencies that commonly lead to errors in judgment. According to Munger, by becoming aware of these cognitive biases, investors can better avoid pitfalls and make more rational, informed decisions

This week, we explore the twenty-fourth tendency, the Reason-Respecting Tendency, and how it impacts investment decisions.

What is it?

The Reason-Respecting Tendency describes our inclination to be influenced by reasoning, even when the reasoning is flawed or weak. Essentially, we are more likely to comply with requests or accept ideas if a reason — any reason — is provided, even if it’s not strong or valid.  Humans like reason and having it laid out in front of them, because it makes things easier to comprehend.

How does it play out in the world of investing?

In the world of investing, understanding this tendency can make the difference between sound decision-making and costly mistakes.

Munger’s theory is that we naturally respond more favourably when given a reason, no matter the quality of that reason. He cited a famous experiment where people were more likely to let someone cut in line at a photocopy machine simply because the person gave a reason for it, even if that reason was as meaningless as “I need to make copies.” It turns out when other people offer justifications, we offer less resistance.

When we apply this tendency to the world of investing, it means we may accept investment theses simply because they come with an explanation, even if that explanation has little substance. So it’s not the strength of reason/argument that persuades us, it’s the mere presence of one.

This tendency can make us lazy investors who may be easily manipulated by charismatic founders and financial influencers: a shallow story that sounds persuasive can nudge us to make a poor investment.

So how do we protect ourselves against this tendency?

• Inversion: Look at it from the opposite POV. Instead of taking blind advice and looking at what we’ll gain from the investment, ask — “what could possibly go wrong,” and work backwards. We may find that the “reasoning” given to us isn’t rooted in data.
• Ask follow up questions: Don’t take any and every reason given to you at face value. Do your own research, run the numbers, see if the explanation given to you has substance. Whether it’s an analyst pitching a company or a media narrative driving market momentum, always pause and ask: “Is this a real reason, or just a story that sounds like one?”
• Seek out a contrarian opinion: It pays to question the reasons put forth by other people. Similar to inversion, actively seeking out an opposing view can help make a smarter investment decision. Deliberately talk to someone who disagrees with the investment idea and hear their reasoning. This may bring to light facts that can expose a “persuasive” reason that isn’t really valid.

Guarding against the Reason-Respecting Tendency means that we need to pause and question the logic behind the reasons given to us. It’s not enough to simply hear a reason — we must evaluate whether it actually holds up.