The following notes consists of my favorite highlights from the book.

Jacket

A man who has committed a mistake and doesn't correct it, is committing another mistake. — Confucius (Chinese thinker, 6th to 5th Century BC)

The 16th Century French essayist Michel de Montaigne said: ''Anyone who wishes to be cured of ignorance must first admit to it."

The best way to learn what, how and why things work is to learn from others. Charles Munger says, "I believe in the discipline of mastering the best that other people have ever figured out. I don't believe in just sitting down and trying to dream it all up yourself. Nobody's that smart."

Rene Descartes said: "The reading of all good books is like conversation with the finest minds of past centuries."

I advise all of you to read the annual reports of Berkshire Hathaway and Wesco Financial (Charles Munger is chairman). These reports are the best educational tools about how to think about investing and business. The lessons also show us how to behave in life.

Why spend time studying wisdom? Charles Munger gives a compelling reason: "I think it's a huge mistake not to absorb elementary worldly wisdom if you're capable of doing it because it makes you better able to serve others, it makes you better able to serve yourself and it makes life more fun... I'm passionate about wisdom. I'm passionate about accuracy and some kinds of curiosity."

Italian mathematician and philosopher Gian-Carlo Rota's said in Indiscrete Thoughts: "The advice we give others is the advice that we ourselves need."

What Influences Our Thinking?

Behavior is influenced by our state of mind
Our life is what our thoughts make it.
— Marcus Aurelius Antoninus (Roman emperor and philosopher, 121-180)

Natural selection
I have called this principle, by which each slight variation, if useful, is reserved, by the term Natural Selection.
— Charles Darwin (British naturalist, 1809-1882)

Our fears are always more numerous than our dangers.
— Lucius Annaeus Seneca (Roman philosopher, c.4 BC-65 AD)

Men's natures are alike; it is their habits that carry them far apart.
— Confucius

Warren Buffett gives us some introductory remarks on why even smart people get bad results:

It's ego. It's greed. It's envy. It's fear. It's mindless imitation of other people. I mean, there are a variety of factors that cause that horsepower of the mind to get diminished dramatically before the output turns out. And I would say if Charlie and I have any advantage it's not because we're so smart, it is because we're rational and we very seldom let extraneous factors interfere with our thoughts. We don't let other people's opinion interfere with it... we try to get fearful when others are greedy. We try to get greedy when others are fearful. We try to avoid any kind of imitation of other people's behavior. And those are the factors that cause smart people to get bad results.

Any behavior that we find rewarding, either pleasurable or less painful, are strengthened.

The connections in our brain are constantly strengthened and weakened, developing and changing. The more we are exposed to certain experiences, the more the specific connections are strengthened, and the better we learn and remember those experiences

The Psychology of Misjudgments

We see similar situations where they don't exist because a situation resembles an earlier experience. We therefore believe that the future mirrors the past and that history will repeat itself.

We automatically feel pleasure or pain when we connect a stimulus - a thing, situation or individual - with an experience we've had in the past or with values or preferences we are born with. As we've learned, we move towards stimuli we associate with pleasure and away from those we associate with pain. We most easily associate to the events whose consequences we have experienced most often and the ones we easily remember. The more vivid or dramatic an event is, the easier we remember it.

People can influence us by associating a product, service, person, investment, or a situation with something we like. Many times we buy products, enter relationships, and invest our money merely because we associate them with positive things

Whether we like someone is influenced by the events with which an individual is associated. Bad news isn't welcome. We tend to dislike people who tell us what we don't want to hear even when they didn't cause the bad news i.e., kill the messenger. This gives people an incentive to avoid giving bad news. To protect themselves, they tell the news in a way they believe we want to hear it. This tendency is called the Persian Messenger Syndrome and traces its origins back to ancient Greece. In Antigone, a messenger feared for his life since he knew the king would be unhappy with the news he brought.

Merely because you associate some stimulus with earlier pain or pleasure doesn't mean the stimulus will cause the same pain or pleasure today. Past experiences are often context dependent.

Create a negative emotion if you want to end a certain behavior. If you want someone to stop smoking, one way could be to show them what they stand to lose. Terrifying pictures may cause them to associate smoking with death.

The iron rule of nature is: you get what you reward for.
If you want ants to come, you put sugar on the floor.
— Charles Munger

After a success, we become overly optimistic risk-takers. After a failure, we become overly pessimistic and risk-averse - even in cases where success or failure was merely a result of chance. Good consequences don't necessarily mean we made a good decision, and bad consequences don't necessarily mean we made a bad decision.

Since our experiences seem longer when broken into segments, we like to have pleasurable experiences broken into segments but painful ones combined. That is why Mary puts presents in many boxes. Frequent rewards feel better. For example, it feels better to gain $50 twice than $100 once since every gain is rewarding. It feels better to lose $100 once than $50 twice since every loss is painful.
We prefer a sequence of experiences that improve over time. Losing $100 first and then gaining $50 seems more rewarding than gaining $50 and then losing $100. We want to get rid of the bad experiences first. Immediate losses are preferred over delayed ones. Just as we don't like bad experiences, we also don't like waiting for them. We like to get over them fast.

American statesman, scientist and philosopher Benjamin Franklin tells us that: ''A spoonful of honey will catch more flies than a gallon of vinegar." Praise is more effective in changing behavior than punishment. It is better to encourage what is right than to criticize what is wrong.

Set examples. Michel de Montaigne said: "It is a custom of our justice to punish some as a warning to others. For to punish them for having done wrong would, as Plato says, be stupid: what is done cannot be undone. The intention is to stop them from repeating the same mistake or to make others avoid their error. We do not improve the man we hang: we improve others by him."

Don't over-learn from your own or others bad or good experience. The same action under other conditions may cause different consequences.

Decision-makers should be held accountable for the consequences of their actions. In The Case for Modern Man, American philosopher Charles Frankel defines responsibility: ''A decision is responsible when the man or group that makes it has to answer for it to those who are directly or indirectly affected by it." Charles Munger adds, ''An example of a really responsible system is the system the Romans used when they built an arch. The guy who created the arch stood under it as the scaffolding was removed. It's like packing your own parachute."

"Things that happen to others don't happen to me."
We see ourselves as unique and special and we have optimistic views of ourselves and our family. We overestimate the degree of control we have over events and underestimate chance.
> The 18th Century English poet Edward Young said: "All men think all men are mortal but themselves." Most of us believe we are better performers, more honest and intelligent, have a better future, have a happier marriage, are less vulnerable than the average person, etc. But we can't all be better than average.
> We tend to overestimate our ability to predict the future. People tend to put a higher probability on desired events than on undesired events. For example, we are over-optimistic about the outcome of planned actions. Optimism is good but when it comes to important decisions, realism is better.

As the old saying goes: "If the only tool you have is a hammer, you approach every problem as if it were a nail." The more we know or think we know about a subject, the less willing we are to use other ideas. Instead, we tend to solve a problem in a way that agrees with our area of expertise. And the more useful a given idea is - whether or not it's appropriate to the problem at hand - the more overconfident we are about its usefulness

And a guy who's bringing reality into a pleasant party, and making people face their own limitations and errors, will have poor prospects.

Recognize your limits. How well do you know what you don't know? Don't let your ego determine what you should do.
Charles Munger says, "It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent. There must be some wisdom in the folk saying: 'It's the strong swimmers who drown."'

Consider people's actual accomplishments and past behavior over a long period of time rather than first impressions. Since people leave track records in life, an individual's paper record is often predictive of future performance and behavior.

When comparing records or performances, remember that successes draw far more attention than failures.

Nothing is easier than self-deceit. For what
each man wishes, that he also believes to be true.
— Demosthenes (Greek statesman, 384-322 BC)

In his famous 1974 commencement address at Caltech, American physicist Richard Feynman warned against self-deception: "The first principle is that you must not fool yourself- and you are the easiest person to fool."

Austrian philosopher Ludwig Wittgenstein said in Culture and Value: "Nothing is so difficult as not deceiving oneself." We have to see the world as it is. Not for what it was or for what we want it to be. Refusing to look at unpleasant facts doesn't make them disappear. Bad news that is true is better than good news that is wrong.

The more time, money, effort or pain we invest, the more we feel the need to continue, and the more highly we value something - whether or not it is right. We don't want to waste our efforts. This way we protect our reputation and avoid the pain of accepting a loss. If people challenge our decisions, we become even more committed we are right

This is the sunk cost fallacy.

How do people seduce us financially, politically or sexually? They make us first agree to a small request, so small that no one would refuse. This way they create a commitment. Then they make a second and larger request (the one they wanted all along). We are then more likely to comply. This "foot-in-the-door technique" is based on the principle that if people ask us to make a small commitment, we are more likely to agree to a larger request because we want to appear consistent

How do we get people to take inner responsibility for their actions? Make it voluntary. We take responsibility for our behavior in cases when we are internally motivated by satisfaction or interest, when we feel in control, and when we are free from incentives or outside pressure.

A decision must be active. Lucius Annaeus Seneca said: "There is nothing wrong with changing a plan when the situation has changed." Irish writer Jonathan Swift said: ''A man should never be ashamed to own that he has been in the wrong, which is but saying, in other words, that he is wiser today than he was yesterday." J.M. Keynes said: "When somebody persuades me that I am wrong, I change my mind. What do you do?" Sometimes things don't go the way we believe they will. The solution is to face it and act.

Charles Munger says: "We've done a lot of that - scrambled out of wrong decisions. I would argue that that's a big part of having a reasonable record in life. You can't avoid wrong decisions. But if you recognize them promptly and do something about them, you can frequently turn the lemon into lemonade."

When you are asked to perform a future action but are uncertain, ask yourself: Would I do this if I had to do it tomorrow?

Warren Buffett says, "The most important thing to do when you find yourself in a hole is to stop digging." Merely because you've spent money or time on some project or investment doesn't mean you must continue to spend it in the future. Time, effort, and money spent are gone. Decisions should be based on where you want to be. Not where you've been. Base decisions on the present situation and future consequences.

"Facts do not cease to exist because they are ignored," said British novelist Aldous Huxley. If we only look to confirm our beliefs, we will never discover if we're wrong. Be self-critical and unlearn your best-loved ideas. Search for evidence that disconfirms ideas and assumptions. Consider alternative outcomes, viewpoints, and answers. Have someone tell you when your thinking is wrong.

Warren Buffett says, "Charlie and I believe that when you find information that contradicts your existing beliefs, you've got a special obligation to look at it - and quickly."

We dislike losing the things we have more than we appreciate gaining the things we don't have.

How do we create demand? Create competition. Make people perceive there is a huge competition for the item and limit the number of people that can participate in the bidding. If others want what's scarce, we want it even more. When we can't get something, we lower our opinion of it. When we can get something that others don't want, we don't want it either.

This is why many companies offer money-back guarantees on their products. Once we have taken possession of some item, we are not likely to return it.

Buffett: A very important principle in investing is that you don't have to make it back the way you lost it. In fact, it's usually a mistake to try to make it back the way you lost it.

We want and value more what is scarce or unique. We want what is (or threatens to be) less available. The less available it is, the more we desire it. That's why we subscribe to newsletters containing exclusive and restricted information. And why we participate in initial public offerings and buy stocks on hot tips.

Sometimes we don't act when we know we should. We ignore Warren Buffett's Noah principle: "Predicting rain doesn't count; building arks does."‌

Deciding to do nothing is also a decision. And the cost of doing nothing could be greater than the cost of taking an action.

Once we know what to do, we should do it. The 19th Century British biologist Thomas Henry Huxley said: "Perhaps the most valuable result of all education is the ability to make yourself do the thing you have to do when it ought to be done whether you like it or not. It is the first lesson that ought to be learned and however early a person's training begins, it is probably the last lesson a person learns thoroughly."

We give more weight to the present than to the future. We seek pleasure today at a cost of what may be better in the future. We prefer an immediate reward to a delayed but maybe larger reward. We spend today what we should save for tomorrow. This means that we may pay a high price in the future for a small immediate reward. For example, we buy things we can't afford on credit cards.

Michel de Montaigne said: "I conceive that pleasures are to be avoided if greater pains be the consequence, and pains to be coveted that will terminate in greater pleasures." Consider both the short and long-term consequences of a decision. Weigh present good/bad against future good/bad. Short-term suffering may lead to long term pleasure.

Studies show that it matters whether we believe that others deserve their success. Aristotle said: "The best way to avoid envy is to deserve the success you get."

The world is not going to come to an end because tomorrow there are 200 or 250 thousand more people on the planet than there were today. That's about the number it grows every day... it is like eating about 300 calories more each day than you burn up; it has no effect on you today. You don't get up from the table and all of a sudden everybody says, "My God, you look fat compared to when you sat down!" But, if you keep doing it over time, the incremental problems are hard to attack because that one extra piece of pie doesn't really seem to make a difference. The 250,000 people tomorrow don't seem to make any difference, but the cumulative effects of them will make a huge difference over time, just like overeating will make a huge difference over time. The time to attack those problems is early.‌

The order in which something is presented matters. Sales people often try to sell the more costly item first. We are out buying a computer and some diskettes. In comparison to $1,500 computer, diskettes at $10 seem like a bargain. After we buy the big ticket items, the add-ons seem cheap in comparison.

Wise men talk because they have something to say; fools, because they have to say something.
— Plato

Mark Twain wrote:
"If you have nothing to say, say nothing."

We are easily influenced when we are told stories because we relate to stories better than to logic or fact. We love to be entertained. Information we receive directly, through our eyes or ears has more impact than information that may have more evidential value. A vivid description from a friend or family member is more believable than true evidence. Statistical data is often overlooked. Studies show that jurors are influenced by vivid descriptions. Lawyers try to present dramatic and memorable testimony.

Joseph Stalin said: ''A single death is a tragedy; a million deaths is a statistic." Information that moves us emotionally makes us pay greater attention to the event itself than to its magnitude. Statistics rarely spark our emotions. An individual face and name will.

We base what is likely to happen on what we see. Not on what we don't see. We don't see what could have happened. We see the winners because they are vocal or visible and get media coverage. We don't see the quiet losers. We see the successful forecasters. We don't see those who didn't predict well. We see the kind of risk that makes headlines. We don't see the statistical risk

Remember this when you hear of the next 'high-school drop-out turned millionaire'.

The American car manufacturer Henry Ford said: "If there is any one secret of success, it lies in the ability to get the other person's point of view and see things from his angle as well as from your own."

Follow Confucius: "What you don't want yourself, don't do to others. Reward hostility with justice, and good deeds with good deeds." Give people what you want in return from them. Ask: Assuming others are like me, how would I like to be treated if the roles were reversed?

Set the correct example. In Confucius words: "Example is better than law. For where the laws govern, the people are shameless in evading punishment. But where example governs, the people have a sense of shame and improve."

Aristotle said: "Personal beauty is a greater recommendation than any letter of introduction." Studies show that we believe that physically attractive people have a more desirable personality than average-looking or unattractive people. Experiments show that attractive criminals are seen as less aggressive and get a milder punishment than ugly criminals. But like the 6th Century Greek writer Aesop wrote, "Appearances often are deceiving."

We like people who compliment us - true or not - and make us feel special. To quote the British Prime Minister and novelist Benjamin Disraeli: "Talk to a man about himself and he will listen for hours." We also like the people who give us what we are missing in life

Don't depend on the encouragement or criticism of others. Marcus Aurelius Antoninus said: "How much time he gains who does not look to see what his neighbor says or does or thinks."

Benjamin Franklin wrote: "Love your enemies, for they tell you your faults."

If 40 million people say a foolish thing, it does not become a wise one.
Somerset Maugham (British novelist, 1874-1965)

Warren Buffett says: ''As happens in Wall Street all too often, what the wise do in the beginning, fools do in the end"

The 19th Century American poet Ralph Waldo Emerson said: "It is easy in the world to live after the world's opinion; it is easy in solitude to live after our own; but the great man is he who in the midst of the crowd keeps with perfect sweetness the independence of solitude." What is popular is not always right. If you don't like what other people are doing, don't do it.

Warren Buffett says: "We derive no comfort because important people, vocal people, or great numbers of people agree with us. Nor do we derive comfort if they don't."

Make people responsible for their actions. Remember though, when all are accountable, no one is accountable.

As Warren Buffett says, "Techniques shrouded in mystery clearly have value to the purveyor of investment advice. After all, what witch doctor has ever achieved fame and fortune by simply advising 'Take two aspirins'?"

Evaluate the truth of a statement on the basis of its underlying facts, without regard to the authority's personal qualities or social status.
Anyone can call themselves an expert. Separate between real and false experts.

"Why was he so stupid? How could he have done that? It was obvious it would happen. " The 19th Century Russian writer Fyodor Dostoevsky said: "Everything seems stupid when it fails." In hindsight, everything seems obvious. But we should look at earlier decisions in the context of their own time. Perhaps the actions made sense at the time. We don't know what uncertainties, conditions, or situational factors faced the decision-maker. Good decision-making can lead to bad outcomes and vice versa. If we believe that we predicted the past better than we did, we may also believe that we can predict the future better than we can. The Romanian dramatist Eugene Ionesco said: "You can only predict things after they've happened."

Hindsight bias.

Charles Munger adds: "You can't really know anything if you just remember isolated facts and try and bang 'em back. If the facts don't hang together on a latticework of theory, you don't have them in a usable form."

People can't be persuaded by what they don't understand. We underestimate the importance of giving people a reason. It is often easier to get people to change with a well-explained reason backed by solid evidence. Tell them so they understand why a specific action is needed, what the expected objective is, and why you think the action is right.

Studies show that in order to understand some information we must first accept it as true. The 17th Century philosopher Benedictus de Spinoza argued that understanding and believing are simply two different words for the same mental process. We first believe all information we understand and only afterwards and with effort do we evaluate, and if necessary, un-believe it

I have often said that the sole cause of man's unhappiness is that he does not know how to sit quietly in his room.
— Blaise Pascal

The 19th Century American writer Henry David Thoreau said: "It is not enough to be busy; so are the ants. The question is: What are we busy about?" Don't confuse activity with results. There is no reason to do a good job with something you shouldn't do in the first place.

What do you want to accomplish? As Warren Buffett says, "There's no use running if you're on the wrong road."

Why do we always need to give an answer? Isn't it better to say, "I don't know?" Greek philosopher Socrates said that awareness of ignorance is the beginning of wisdom.

You can't change the cards life has dealt you, but you can determine the way you'll play them.
— Ty Boyd (American motivational speaker)

If a problem can be solved, there is no need to worry. The thing to do is to correct it. If a situation can't be solved, we shouldn't worry about that either. We can't do anything about it. Mark Twain says: "I've suffered a great many catastrophes in my life. Most of them never happened." Sometimes keeping ourselves busy with something else may cause us to stop worrying.‌

One of the things that influenced me greatly was studying physics... If I were running the world, people who are qualified to do physics would not be allowed to elect out of taking it. I think that even people who aren't [expecting to] go near physics and engineering [in their planned profession] learn a thinking system in physics that is not learned so well anywhere else. Physics was a total eye-opener.
The tradition of always looking for the answer in the most fundamental way available - that is a great tradition and it saves a lot of time in this world. And, of course, the problems are hard enough that you have to learn to have what some people call assiduity. Well, I've always liked that word - because to me it means that you sit down on your ass until you've done it.

I believe that it was Charlie Munger who said that. At least, it reads very much in his tone.

Benjamin Franklin said: "He that would live in peace and at ease, must not speak all he knows, nor judge all he sees."

The 1st Century philosopher Epictetus said: "Happiness and freedom begin with a clear understanding of one principle: Some things are within our control, and some things are not. It is only after you have faced up to this fundamental rule and learned to distinguish between what you can and can't control that inner tranquility and outer effectiveness become possible."

This is one of the most fundamental principles of Stoicism.

Follow these three pieces of advice from Charles Munger:

I don't want you to think we have any way of learning or behaving so you won't make a lot of mistakes. I'm just saying that you can learn to make fewer mistakes than other people - and how to fix your mistakes foster when you do make them. But there's no way that you can live an adequate life without [making] many mistakes. In fact, one trick in life is to get so you can handle mistakes. Failure to handle psychological denial is a common way for people to go broke: You've made an enormous commitment to something. You've poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, "Now it has to work. If I put in just a little more, then it'll work."

Sunk cost fallacy again.

People may change their behavior merely because they are being observed.

In one experiment psychologists found that people who lost a $10 theater ticket on the way to the theatre were reluctant to buy a second ticket. Those who instead lost a $10 bill on the way to buy a $10 theatre ticket saw the loss of the money and the purchase of the ticket as unrelated, so they would buy the ticket. But, in both cases, the loss was the same.

We should view our assets in terms of their entirety. A dollar is a dollar independent of where it comes from. What counts is what we put in or take out of our pocket.

Remember Chinese philosopher Lao-Tsu (604-531 BC): "He who knows men is clever; He who knows himself has insight; He who conquers men has force; He who conquers himself is truly strong."

The Physics and Mathematics of Misjudgments

Modern History Professor Richard Evans wrote in In Defence of History: "Time and again, history has proved a very bad predictor of future events. This is because history never repeats itself; nothing in human society... ever happens twice under exactly the same conditions or in exactly the same way."
Sometimes we can guess that certain things are bound to happen, but we can't predict when they will happen.

If a business measures performance by the amount of steel produced, they will get a lot of steel produced. But the amount of produced kilo steel is only one part of the equation. It's better to ask: What is the equation that achieves what we want to accomplish? What factors cause what we want to achieve? Under what circumstances? What causes business value? Do we have the factors needed? What must be changed in the equation to achieve what we want? Have we thought through what other effects our actions may have?

Be mindful of what you optimize for.

Take away the cause, and the effect ceases.
— Miguel De Cervantes (from Don Quixote)

We tend to assume that when two things happen together, that one causes the other. That a change in one variable is strongly correlated or followed by a change in another doesn't automatically mean that one causes the other. Some third factor may cause them both. Assume we detect a high correlation between money and happiness. But that doesn't tell us if money causes happiness, if happiness causes money, or if some third factor causes them both.‌

There is nothing more deceptive than an obvious fact.
— Sherlock Holmes (Arthur Conan Doyle, The Boscombe Valley Mystery)

Even if perfection in assessing risks is unattainable, insurers can underwrite sensibly. After all, you need not know a man's precise age to know that he is old enough to vote nor know his exact weight to recognize his need to diet.

The chance of gain is by every man more or less overvalued, and the chance of loss is by most men undervalued
— Adam Smith (Scottish philosopher and economist, 1723-1790)

He that builds before he counts the cost, acts foolishly;
And he that counts before he builds, finds he did not count wisely.
— Benjamin Franklin

If you do venture investments, follow the advice of Warren Buffett:

You may consciously purchase a risky investment - one that indeed has a significant possibility of causing loss or injury - if you believe that your gain, weighted for probabilities, considerably exceeds your loss, comparably weighted, and if you can commit to a number of similar, but unrelated opportunities. Most venture capitalists employ this strategy. Should you choose to pursue this course, you should adopt the outlook of the casino that owns a roulette wheel, which will want to see lots of action because it is favored by probabilities, but will refuse to accept a single, huge bet.

Four out of five doctors recommend the drug.
> This statement doesn't tell us anything if we don't know how many doctors were observed. Maybe it was just 1O; an observation that can't be extrapolated to include all doctors. A small sample size has no predictive value

We have Lord Keynes' attitude, which Warren quotes all the time: "We'd rather be roughly right than precisely wrong." In other words, if something is terribly important, we'll guess at it rather than just make our judgment based on what happens to be easily countable.

No victor believes in chance.
— Friedrich Wilhelm Nietzsche

Spanish-American philosopher George Santayana once said: "Those who cannot remember the past are condemned to repeat it."

A poor widow living alone in the country kept a faithful hen. Each morning the hen laid a big, brown egg for the woman's breakfast. One day the widow thought to herself: "Now if I were to double my hen's allowance of barley, she would lay me two eggs a day instead of one." So she started feeding her biddy a double measure of grain, and soon the hen began to grow fat and sleek and lazy. It wasn't long before she stopped laying altogether.

Every action has consequences. Both intended and unintended. No matter how carefully we plan, we can't anticipate everything

By solving one problem, we generate another one and sometimes create an even worse one.

One way to reduce unintended consequences is to stop focusing on isolated factors and instead consider how our actions affect the whole system.

When thinking through consequences, consider what other people are likely to do. Since our interests may conflict with others, the final outcome of our decision often depends on what others will do. What other people do may depend on what they think we will do, their available choices, interests, and how they are thinking- including their misjudgments. As we have learned, humans don't always act rationally.

Let's say TransCorp has 10 projects from 10 divisions to choose from. They only have time and money to invest in one project. Which one are they most likely to pick? Of course, the one that looks most attractive. But all division managers have an incentive to make their own project the most attractive one. The risk is therefore that TransCorp chooses the project with the most optimistic forecast and therefore more likely to disappoint.

Fidelity's former manager Peter Lynch said in One Up on Wall Street: "There are 60,000 economists in the U.S., many of them employed full-time trying to forecast recessions and interest rates, and if they could do it successfully twice in a row, they'd all be millionaires by now... As far as I know, most of them are still gainfully employed, which ought to tell us something."

Warren Buffett says that we tend to put too much comfort in computer models and the precision they project: "We believe the precision they project is a chimera. In fact, such models can lull decision-makers into a false sense of security and thereby increase their chances of making a really huge mistake."

Warren Buffett says: "It is not necessary to do extraordinary things to get extraordinary results." A few products or a few customers produce most of the profit or a few in the sales staff produce most of the sales. In many business activities a few things can produce much of the value. Ask: How do we allocate our time, work, attention and money? Can we identify the few things that really matter?

What do we want to accomplish? It's hard to achieve a result if we don't understand what causes the result to happen. In order to solve problems or achieve goals, we must first understand what causes the result we want to accomplish. Start with examining what factors make up the system and how they connect. Then, define the key factors that determine outcome.

A bird in the hand is worth two in the bush.
— Aesop

We identify the wrong cause because it seems the obvious one based on a single observed effect. As Bertrand Russell says: "Obviousness is always the enemy to correctness."

When someone remarked to the French writer Voltaire, "Life is hard," he retorted, "Compared to what?"
We tend to ignore alternatives, and therefore we fail to make appropriate comparisons

There was a sign hanging in the physicist Albert Einstein's office at Princeton that said: "Not everything that counts can be counted, and not everything that can be counted counts."

Time is the key to compound interest. Over short periods, compounding produces a little extra return. Over long periods, it has an enormous effect

Money paid in the future is worth less than money paid today. A dollar received today is worth more than a dollar received tomorrow. If we have a dollar today, we can invest it and earn interest making that dollar worth more than a dollar in the future. This means that money has a price and that price is interest.

But as Richard Feynman said in his Caltech Lectures on Physics: "There are good guesses and there are bad guesses. The theory of probability is a system for making better guesses."

We can either estimate the probability based on its relative frequency (proportion of times the event happened in similar situations in the past) or we can make an educated guess using past experiences or whatever important and relevant information and evidence that is available

Remember the advice of Benjamin Franklin: "He that waits upon fortune, is never sure of a dinner."

As Marcus Tullius Cicero said: "For who can shoot all day without striking the target occasionally." Often we don't notice the incorrect predictions, only the rare moments when something happens

Past performance is no guarantee of future results.

Guidelines to Better Thinking

Albert Einstein said: "If you can't explain it simply, you don't understand it well enough." Get to the point. Ask: What do I want to say? One reason for miscommunication can be that the words mean one thing to you and something else to the person you're talking to.

Warren Buffett says it best: One friend of mine said that in hiring they look for three things: intelligence, energy, and character. If they don't have the last one, the first two will kill you because, it's true, if you are going to hire somebody that doesn't have character, you had really better hope they are dumb and lazy, because, if they are smart and energetic, they'll get you in all kinds of trouble.

It's amazing how people even today use a computer to do something you can do with a pencil and paper in less time.
— Richard Feynman (from No Ordinary Genius)

Be problem-oriented. Not method-oriented. Use whatever works. Why? Because the result is what matters, not the method we use to arrive at it. Look for good enough solutions appropriate to the problem at hand. Not perfection and beauty.

Make fewer and better decisions. Why? Because it forces us to think more on each decision and thereby reduces our chance of mistakes.

Warren Buffett gives another compelling reason: Charlie and I decided long ago that in an investment lifetime, it's just too hard to make hundreds of smart decisions. That judgment became ever more compelling as Berkshire's capital mushroomed and the universe of investments that could significantly affect our result shrank dramatically. Therefore, we adopted a strategy that required our being smart - and not too smart at that - only a very few times.

Those who attain to any excellence commonly spend life in some single pursuit, for excellence is not often gained upon easier terms.
— Samuel Johnson

It is impossible for our brain to think too many things at the same time and expect to do well. Shifting our mental attention between tasks costs time and comprehension, especially when we switch between more complicated and unfamiliar tasks.
Actions and decisions are simpler when we focus on one thing at the time. Publilius Syrus said: "To do two things at once is to do neither." If we only have one thing to focus on, we tend to do it well and build knowledge.

The formulation of a problem is often more essential than its solution, which may be merely a matter of mathematical or experimental skill.
— Albert Einstein

Sometimes it is harder to understand a problem than to solve it. Asking the important questions may help. Start with basic questions like: What does it mean? What is the simplest example? What is the number one question? How can I tell if the answer is right? Can I come up with an example that makes it clear what the problem is?
But it is not enough to ask the right questions. We must look at the right place and ask the right person. We can't rely too much on assumptions since we can't be sure that someone else's assumptions are the same as ours, unless we ask them to explain.

It's not that I'm so smart; it's just that I stay with problems longer.
— Albert Einstein

Meaningful goals need to be backed by reasons as a way of testing that we set the right goal. Goals should be:
Clearly defined. Don't say: "I want to have a better life." Be concrete. For example: "I want a new Volvo."
Focused on results.
Realistic and logical - what can and can't be achieved? Low goals may produce low performance and unrealistic goals may cause people to cheat. Lucius Annaeus Seneca said we should: "Never work either for useless goals, or impossible ones."
Measurable.
Tailored to our individual needs.
Subject to change. Ask: Given our current objective, what is the best course of action to take?

The key thing in economics, whenever someone makes an assertion to you, is to always ask, "And then what?" Actually, it's not such a bad idea to ask it about everything. But you should always ask, "And then what?"
— Warren Buffett

Engage in self-criticism. Question your assumptions. Explain the opposite of your beliefs. Ask: Assume I'm wrong, how will I know? Why may an opposite theory be correct? Assuming my answer is correct, what would cause me to change my mind? Then, look for that evidence.
Often we don't see our weaknesses and thus are not motivated to improve. Therefore, encourage the right people to give objective feedback that will help us improve.
Look back and measure how you are doing against your original expectations. Find your mistakes early and correct them quickly before they cause harm. The next tool forces us to be objective. Charles Munger says on backward thinking:

> The mental habit of thinking backward forces objectivity - because one of the ways you think a thing through backward is you take your initial assumption and say, "Let's try and disprove it."

That is not what most people do with their initial assumption. They try and confirm it. It's an automatic tendency in psychology- often called "first-conclusion bias". But it's only a tendency. You can train yourself away from the tendency to a substantial degree. You just constantly take your own assumptions and try and disprove them.

Honesty is the first chapter of the book of wisdom.
— Thomas Jefferson (American President 1743-1826)

Wealth is a blessing to those who know how to use it, a curse to those who don't.
— Publius Terentius

The superior man does not waste himself on what is distant, on what is absent. He stands in the here and now, in the real situation.
— Confucius

The brain can be developed just the same way as the muscles can be developed, if one will only take the pains to train the mind to think.

— Thomas Alva Edison (American inventor, 1847-1931)

Educated men are as superior to uneducated men as the living are to the dead.
— Aristotle

Learn, understand and use the big ideas and general principles that explain a lot about how the world works. When Charles Munger was asked what would be the best question he should ask himself, he said:

bIf you ask not about investment matters, but about your personal lives, I think the best question is, "Is there anything I can do to make my whole life and my whole mental process work better?"

And I would say that developing the habit of mastering the multiple models which underlie reality is the best thing you can do... It's just so much fun - and it works so well.

Which models are most reliable? Charles Munger answers:

The models that come from hard science and engineering are the most reliable models on this Earth. And engineering quality control - at least the guts of it that matters to you and me and people who are not professional engineers - is very much based on the elementary mathematics of Fermat and Pascal: It costs so much and you get so much less likelihood of it breaking if you spend this much ...
And, of course, the engineering idea of a backup system is a very powerful idea. The engineering idea of breakpoints- that's a very powerful model, too. The notion of a critical mass - that comes out of physics - is a very powerful model.

Sun Tzu said in The Art of War: "The general who wins a battle makes many calculations in his temple before the battle is fought."

A model is an idea that helps us better understand how the world works

Ask: What is the underlying big idea? Do I understand its application in practical life? Does it help me understand the world? How does it work? Why does it work? Under what conditions does it work? How reliable is it? What are its limitations? How does it relate to other models?

Bad terminology is the enemy of good thinking.
— Warren Buffett

Samuel Johnson said: "He is a benefactor of mankind who contracts the great rules of life into short sentences, that may be easily impressed on the memory, and so recur habitually to the mind."

Since the best way to learn something is by doing it, we must apply models routinely to different situations. Like any skill, this takes both practice and discipline.

So look around, ask questions and remember the words of inventor and engineer Charles Proteus Steinmetz: "There are no foolish questions and no man becomes a fool until he has stopped asking questions."

Keeping knowledge alive and adding knowledge over time comes with an extra benefit. "Just as iron rusts from disuse, and stagnant water putrefies, or when cold turns to ice, so our intellect wastes unless it is kept in use," wrote Leonardo da Vinci

Remember, knowing a definition or memorizing an idea is useless if we don't understand its meaning. Alfred North Whitehead said in The Aims of Education: "Education should be useful, whatever your aim in life."

Words, definitions, propositions, statements, or goals don't tell us anything. We need to understand what they mean. It is the same with knowledge. Knowledge is only valuable if it's useful and something is only useful if we understand what it means.

Words or names don't constitute knowledge. Knowing the name of something doesn't help us understand it. Since understanding implies action and accomplishment, one way of understanding is to see what happens

Danish physicist Niels Bohr said: "Never express yourself more clearly, than you are able to think." When describing something, tell it as it is and use words that people understand, and in terms of ideas with which they are familiar

Warren Buffett adds, "If somebody's reinvesting all their cash flow, they better have some very big figures coming in down the road because a financial asset has to give you back a lot more cash one day in order to justify your laying out cash for it now."

Former General Electric CEO Jack Welch said: "You can't believe how hard it is for people to be simple, how much they fear being simple. They worry that if they're simple, people will think they're simple-minded. In reality, of course, it's just the reverse. Clear tough-minded people are the most simple."

Warren Buffett agrees: "We haven't succeeded because we have some great, complicated systems or magic formulas we apply or anything of the sort. What we have is just simplicity itself." Charles Munger adds: "If something is too hard, we move on to something else. What could be more simple than that?"

Make problems easier to solve. Turn complicated problems into simpler ones. Eliminate everything except the essentials. Break down a problem into its components but look at the problem holistically. Draw a picture of the problem. Put down on a paper the key factors and their relationship. Charles Munger says: "I generally try to approach complex tasks by first disposing of the easy decisions."

William James said: "The art of being wise is the art of knowing what to overlook."

Deal with the situations in life by knowing what to avoid. Reducing mistakes by learning what areas, situations and people to avoid is often a better use of time than seeking out new ways of succeeding. Also, it is often simpler to prevent something than to solve it

Another rule comes from Benjamin Franklin: "To apply myself industriously to whatever business I take at hand, and not divert my mind from my business by any foolish project of growing suddenly rich; for industry and patience are the surest means of plenty."

Our plans miscarry because they have no aim. When a man does not know what harbor he is heading for, no wind is the right wind.
— Lucius Annaeus Seneca

Have goals that cause what we want to accomplish. Do we know what we want to achieve and why? Aristotle said: ''Are we not more likely to hit the mark if we have a target?" How can we make the right decision if we don't know what we want to achieve? Even if we don't know what we want, we often know what we don't want, meaning that our goal can be to avoid certain things.

Marcus Porcius Cato wrote: "Wise men profit more from fools than fools from wise men; for the wise men shun the mistakes of the fools, but fools do not imitate the successes of the wise."

Tell the truth. Follow Lou Vincenti's rule (former Chairman of Wesco): "If you tell the truth you don't have to remember your lies.