Below are excerpts (Part 2 of 4) from Thirty Years: Reflections on the Ten Attributes of Great Investors by Michael Mauboussin, which contains lots of insightful commentary on how behavioral psychology can greatly impact one’s likelihood of investment success.

Creativity 

“I believe…that diverse input combined with rigor can lead to insight. This is all very consistent with what Charlie Munger, the vice chairman of Berkshire Hathaway, calls the ‘mental models’ approach.”

“Charlie Munger said that he really liked Albert Einstein’s point that ‘success comes from curiosity, concentration, perseverance and self-criticism. And by self-criticism, he meant the ability to change his mind so that he destroyed his own best-loved ideas.’ Reading is an activity that tends to foster all of those qualities.”

“Great investors generally practice a few habits with regard to their reading. First, they allocate time to it. Warren Buffett has suggested that he dedicates 80 percent of his working day to reading. Note that if you are spending time reading, you are not doing something else. There are trade-offs. But many successful people are willing to make reading a high priority. Second, good readers tend to take on material across a wide spectrum of disciplines. Don’t just read in business or finance. Expand the scope into new domains or fields. Follow your curiosity. It is hard to know when an idea from an apparently disparate field may come in handy. Finally, make a point of reading material you do not necessarily agree with. Find a thoughtful person who holds a view different than yours, and then read his or her case carefully. This contributes to being actively open-minded. Research shows that successful people read a lot and do so more for education than for entertainment. Reading is their primary means to continue their education. This habit is particularly important for investors, who must synthesize a huge number of inputs into actionable ideas.”

“Investing entails ongoing learning, so motivation to learn and stay involved is essential. Reading is probably the best indication of this motivation.”

Psychology

“Comparing is a critical element of investing. Investors compare all day: stocks versus bonds, active versus passive, value versus growth, stock A versus stock B, and now versus later. Humans are quick to compare but not very good at it…

One of the basic challenges in comparing well is a concept that psychologists call ‘coherent arbitrariness,’ which says that we struggle to understand the absolute value of a good but are effective at understanding the relative value. You may not know the proper value of a pharmaceutical company, but you can rank them in order of your preference. Unless you solely engage in arbitrage, absolute values ultimately matter. 

Humans tend to think by analogy, which can create some cognitive trouble. One issue is that a single analogy, or even a handful of analogies, may fail to reflect a full reference class of relevant cases. For example, rather than asking whether this turnaround is similar to a prior turnaround, it is useful to ask for the base rate of success for all turnarounds. Psychologists have shown that properly integrating the outcomes from an appropriate reference class improves the quality of forecasts. Another challenge with using analogies is that we see similarities when we focus on similarities and see differences when we focus on differences. The emphasis of the comparison colors the outcome…what you are looking for dictates what you see.”

“To learn from history, you need to understand causality. We commonly limit our comparisons to attributes and hence miss essential insights. Great investors compare well without falling for the common traps.”