Ant psychology and investors :: Business Line

Stock market investments need out-of-the-box thinking rather than programmed responses.

Charles Thomas Munger. The name has an instant resonance. And with a blink, you recall another name - Warren Buffet. Both these names are inseparable. Buffett has himself referred to both of them as “Siamese twins, practically.”

And Charles Munger is often addressed as the legendary investor’s alter ego.

So, while Buffett remains the face of Berkshire Hathaway, Munger has no lesser claim to credit for the fortunes of the company.

The multi-disciplinarian 

Both men have as many striking differences as similarities. One may typecast Buffett as purely an investor and philanthropist. And rightly so, for the man devotes his time almost exclusively to his business.

Munger, on the other hand, is a generalist for whom investment is only one of a broad range of interests. In many ways, his personality has traces of his own hero — Benjamin Franklin, who along with being a great scientist and inventor, was also a leading author, statesman and philanthropist, and played four instruments.

On similar lines, Munger hops around science, architecture, psychology and philanthropy with as much passion and curiosity as he does with business and investments.

Thinking errors

Munger very aptly follows this multi-disciplinary approach in all kind of situations.

He draws influences from fields as diverse as physics and psychology to his investment process. For long, he had been interested in standard thinking errors.

Without diving much into academic psychology textbooks, he developed his own system of psychology more or less in the self-help style of Ben Franklin.

In a series of articles that will follow, we will pick up insights from a speech that Munger gave on ‘24 Standard Causes of Human Misjudgment’. But before we start discussing these thinking errors, let us tell you why these lessons have very powerful implications for investors.

Ant behaviour

We may take great pride in our evolutionary superiority over other creatures. But we also often behave like ants.

Munger has pointed out some very intriguing observations about the behaviour of these social insects.

Each ant, like each human, is composed of a living physical structure plus behavioural algorithms in its nerve cells.

Mostly, the ant merely responds to stimuli with a few simple responses programmed into its nervous system by its genes.

For instance, one type of ant, when it smells a pheromone given off by a dead ant’s body in the hive, immediately responds by co-operating with other ants in carrying the dead body out of the hive.

Harvard’s great E.O. Wilson performed one of the best psychology experiments ever. He painted dead-ant pheromone on a live ant.

Quite naturally, the other ants dragged this useful live ant out of the hive. This, despite the poor creature kicking and protesting throughout the entire process. Such is the brain of the ant.

Of course, our brain is far more complex and advanced. Ants don’t design and fly airplanes. But under complex circumstances, don’t we also find ourselves behaving counterproductively like ants?

And aren’t stock markets a perfect playground for this kind of behaviour? We’ll discuss this and a lot more in the forthcoming articles.

(This article is sourced from Equitymaster.com, India’s leading independent equity research initiative.)

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