Mind Tricks That Cost You Money

Good Evening! 👋

Dear Friends,

In honor of our newsletter last week, which focused on Warren Buffett for Wealth Wednesday, I will discuss one of my favorite speeches ever made. The funny part? It is not about investing; it is actually a psychology speech by one of the most famous investors ever.

In this newsletter, I will give you my five favorite lessons!

Charlie Munger didn’t just study investing. He studied people.

And more specifically, how people mess up.

The first time I read The Psychology of Human Misjudgment, it felt like someone turned the lights on. It wasn’t full of stock tips or clever formulas. It was full of mental models for spotting the traps our brains fall into — the same traps that wreck portfolios and keep people stuck in the same bad habits for decades.

Munger believed that if you can understand how your brain leads you astray, you can protect yourself from bad decisions. And as an investor, that’s half the battle.

Over the years, I’ve gone back to that speech more times than I can count. Some ideas took a while to sink in. Others hit me immediately.

But these five have stuck with me. They’ve changed the way I think about investing — and honestly, the way I think about life.

1. Incentive Bias

Charlie once said, “Never, ever think about something else when you should be thinking about the power of incentives.”

That one hit me hard.

Incentives shape behavior more than logic ever will. People don’t do what makes the most sense. They do what they’re rewarded to do.

I started seeing this everywhere in the investing world.

Analysts often give optimistic forecasts because they want to maintain access to management. Executives push short-term earnings because their bonuses depend on it. Fund managers talk up a position because they’re already in deep.

And once you understand this, the world looks different.

Now, when I read a glowing write-up or watch a hype video, I always ask one thing first: what’s their incentive? Are they selling, talking their book, or truly adding value?

That one filter alone has helped me avoid more bad decisions than almost anything else.

2. Social Proof Tendency

We’re wired to follow the crowd.

Munger called it one of the most powerful forces in human behavior. When we don’t know what to do, we look around and copy what others are doing. It’s comfortable. It feels safe.

But in investing, that instinct can be dangerous.

I’ve seen it happen in both directions. In bull markets, everyone piles into the same momentum stocks. In downturns, people sell good companies just because everyone else is.

I’ve made this mistake too. Early on, I chased trends simply because they were trending. I didn’t fully understand the business, but I saw everyone talking about it online and didn’t want to miss out.

Now, when something feels too crowded or too consensus, I slow down. I ask myself if I’m thinking independently or just getting swept up.

Munger reminded me that following the herd might protect your ego in the short term, but it rarely builds wealth in the long run.

3. Commitment and Consistency Bias

Once we take a position, we want to stay consistent with it — even when the facts change.

Munger warned about this one because it makes smart people defend dumb decisions just to avoid feeling wrong.

I’ve felt this firsthand.

There were times I bought a stock, did the write-up, maybe even told friends about it. Then the numbers changed. The outlook shifted. But instead of re-evaluating with a clear head, I found myself trying to justify holding it. I didn’t want to admit I might have been early or just flat-out wrong.

Now, I try to build a habit of checking my ego at the door.

I keep notes on why I bought something in the first place, and I revisit those notes when new information shows up. If the original reason is no longer true, I let it go.

Investing isn’t about being consistent with your past opinions. It’s about being consistent with reality.

4. Authority Bias

We naturally trust people who sound like experts.

That can be helpful in some areas of life, but in investing, it can get you burned.

Munger pointed out that people tend to defer to authority, even when that authority is unqualified or flat-out wrong. And once I started looking for it, I saw it everywhere.

Hedge fund managers go on CNBC and talk confidently about a stock they’re down 40 percent on. Analysts throw around target prices like they’re facts. Even social media is full of “experts” with no track record, just a loud voice.

I used to take some of those opinions at face value. But now, I take a different approach.

I listen, then verify. I ask, what’s their angle? What are they basing this on? Do I understand it well enough to agree or disagree?

Munger taught me to respect thoughtful analysis, but not to blindly trust it. The best investors learn to weigh evidence, not personalities.

5. Deprival Superreaction Tendency

People hate losing more than they like winning.

That emotional reaction to loss is hardwired into us, and Munger called it one of the most damaging tendencies in decision-making.

I’ve felt it. You probably have too.

It’s that gut punch when a stock drops 20 percent and your instinct is to sell just to make the pain stop. Or the refusal to cut a loser because selling would make the loss feel real.

Early in my investing journey, I held on to a few bad positions way too long because I didn’t want to admit the money was gone. It wasn’t logic that kept me in. It was emotion.

Once I understood how this tendency works, I started treating losses as part of the process. Not as failures, but as tuition. The goal isn’t to avoid every loss. The goal is to keep emotions from turning small losses into big ones.

Munger helped me see that reacting to pain can be far more costly than the pain itself. The investors who win are the ones who stay rational when it hurts.

Conclusion

Charlie Munger didn’t just teach us how to invest. He taught us how to think.

He understood that the biggest threat to our portfolio isn’t the market — it’s our own mind. Biases, shortcuts, emotions, overconfidence. These are the real risks.

The five lessons I just shared have changed the way I approach investing. I spend more time questioning assumptions. I’m slower to follow the crowd. I try to stay humble, especially when I feel most confident.

Munger once said the best thing a human being can do is help another human being know more. That’s what he did for me — and I hope some of what I’ve learned from him helps you too.

If you can manage your behavior better than the next person, you don’t have to be a genius. You just have to stay in the game, think clearly, and avoid the big mistakes.

That’s how Charlie played the game. And that’s why he won.

See you on Sunday!

Cheers,

Matt Allen

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