Human psychology and the economy

Human psychology and the economy

Have you ever read up on human psychology? Charlie Munger – the longtime business partner of Warren Buffet has – and he applies the lessons he learns to his business.

His idea is that if you don’t understand the way people think you can never be a successful businessperson.

Here is an excerpt:

Under-recognition of the power of what psychologists call ‘reinforcement’

and economists call ‘incentives.’

Well you can say, “Everybody knows that.” Well I think I’ve been in the top 5% of my age cohort all my life in understanding the power of incentives, and all my life I’ve underestimated it. And never a year passes but I get some surprise that pushes my limit a little farther.

One of my favorite cases about the power of incentives is the Federal Express case. The heart and soul of the integrity of the system is that all the packages have to be shifted rapidly in one central location each night. And the system has no integrity if the whole shift can’t be done fast. And Federal Express had one hell of a time getting the thing to work. And they tried moral suasion, they tried everything in the world, and finally somebody got the happy thought that they were paying the night shift by the hour, and that maybe if they paid them by the shift, the system would work better. And lo and behold, that solution worked.

You can read his whole speech here. As you go through it, try and see who the lessons can help you grow your business and make smarted investments.

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