Becoming A Better Investor: The Authority-Misinfluence Tendency

Legendary investor and former Berkshire Hathaway Vice Chairman Charlie Munger is known for his valuable advice when it comes to financial planning and investing. In his famous speech “The Psychology of Human Misjudgment,” Munger laid out 25 psychological biases or “tendencies” that distort our thinking and influence our behaviour. He believed that by understanding the effects of these tendencies,  we could avoid making bad investment decisions.

This week, we’re looking at the twenty-second tendency, the Authority-Misinfluence Tendency: how it works, how it impacts us, and how to avoid it.

What is it?

Munger says that humans have a tendency to “follow the leader,” even when the leader may lead us to disastrous consequences.  (No pun intended!) This stems from the fact that we have been living in dominance hierarchies since time immemorial. He says, “…human society is formally organised into dominance hierarchies, with their culture augmenting the natural follow-the-leader tendency of man.”

Munger says that human reactions are often automatic, and our instinct to follow authority is no exception. But this tendency can lead to serious consequences, especially when the leader is wrong or their ideas are misunderstood. And this misjudgment is what drives the Authority-Misinfluence Tendency.

How does it play out in the world of investing?

Munger illustrates how blindly following an authority figure can lead to complete disaster, giving the examples of Nazi Germany, where Adolf Hitler led believing Catholics and Lutherans to commit genocide.

He also highlights how completely submitting to authority figures can lead to confused instructions. In an example cited by Cialdini, a physician wrote an instruction for a nurse treating a patient with an earache: “Two drops, twice a day, ‘r. ear.’” Misinterpreting the abbreviation, the nurse asked the patient to lie on his stomach and proceeded to administer the drops in their anus, mistaking “r. ear” (right ear) for “rear.”

This kind of blind faith and misinterpretation can have negative impacts when it comes to investing. The Authority-Misinfluence Tendency shows up in many ways: taking stock tips from celebrity investors without doing due diligence, trusting fund managers based solely on past performance, or following charismatic CEOs without questioning fundamentals.

Investors may fall into the trap of believing that if someone is in a position of power or has a large following, they must know what they’re doing.

So how do we safeguard against this tendency?

• Be skeptical: Charisma may sway us, but we need to remain skeptical and a little detached. Just because someone sounds compelling or convincing doesn’t mean they are right. Leave room for interpretation.
• Double check the data: Words can inspire and trigger emotions, but data does the real talking. Don't rely on headlines or sound bites. Instead, dig into the financials of a company, look at the fundamentals, understand the business model, assess the risk and then make an investment decision.
• Seek our other sources: This is something Munger talks about often, the need to diversify our sources of information and seek out differing opinions. It’s important to assess a company from all angles — and even from the POV of people who challenge our assumptions — before making an investment.

At the end of the day, Munger believes we need to question authority and not worship it. So it is wise to seek out the advice of experts, while leaving enough room for independent thinking.