I’ve read a lot about Charlie and his work. Peter Bevelin’s book Seeking Wisdom: From Darwin to Munger is in my top ten. I’ve a signed copy of his Almanack (I figured he’d respect me for that, as I suspect it will make a good financial as well as phenomenal personal investment). His reading list has strongly influenced my own. I’ve written articles that explore his wisdom, as it relates to mental models.

Charlie Munger has had a big influence on me. But despite everything that I’ve learnt, it wasn’t until Cedric Chin emailed me the other week with a speech by him from 2003 – Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs – that I finally grokked that Charlie and I share a similar worldview around a central concept:

Charlie Munger was a complexity thinker.

_{Image: author’s own, from Poor Charlie’s Almanack: The Wit and Wisdom of Charles T Munger.}

Let’s explore:

This is a piece that I’ve been meaning to write all week. The announcement of Charlie Munger’s death yesterday (28th November 2023) committed me to writing it. I’ve pulled it together quickly, so excuse any omissions and my brevity.

A very quick introduction to complexity

Before you say “of course he was a complexity thinker”, if you don’t already, please take the time to understand what I really mean by this. Because my experience of complexity, and Complex Adaptive Systems, is that once you understand them you can’t stop seeing them and being fundamentally influenced by them.

Here’s a definition of what a Complex Adaptive System is:

A Complex Adaptive System is a system that is complex in that it is a dynamic network of interactions, but the behavior of the ensemble may not be predictable according to the behavior of the components. It is adaptive in that the individual and collective behavior mutate and self-organize corresponding to the change-initiating micro-event or collection of events. It is a “complex macroscopic collection” of relatively “similar and partially connected micro-structures” formed in order to adapt to the changing environment and increase their survivability as a macro-structure.

The study of Complex Adaptive Systems, a subset of nonlinear dynamical systems, is an interdisciplinary matter that attempts to blend insights from the natural and social sciences to develop system-level models and insights that allow for heterogeneous agents, phase transition, and emergent behavior.

Markets are Complex Adaptive Systems. So too are the businesses within them, which together operate within a larger global financial and economic system. A lot of people don’t understand how these systems work. But Charlie Munger understood. Seeing the world through this complexity lens gave him an edge, as these select quotes from his 2003 speech demonstrate. 

Munger on his multi-disciplinary education

My personal education history is interesting because its deficiencies and my peculiarities eventually created advantages. For some odd reason, I had an early and extreme multidisciplinary cast of mind. I couldn’t stand reaching for a small idea in my own discipline when there was a big idea right over the fence in somebody else’s discipline. So I just grabbed in all directions for the big ideas that would really work. Nobody taught me to do that; I was just born with that yen. I also was born with a huge craving for synthesis.

WW II caught me. I drifted into some physics, and the Air Corps sent me to Caltech where I did a little more physics as part of being made into a meteorologist. And there, at a very young age, I absorbed what I call the fundamental full attribution ethos of hard science. And that was enormously useful to me… Under this ethos, you’ve got to know all the big ideas in all the disciplines less fundamental than your own. You can never make any explanation, which can be made in a more fundamental way, in any other way than the most fundamental way. And you always take with full attribution to the most fundamental ideas that you are required to use.

I can’t help but wonder how Munger’s blooding early on in his career as a meteorologist influenced him? Weather is the essence of a Complex Adaptive System. One characteristic being that it’s impossible to predict with any real accuracy more than a few days, or week out, but it does have patterns and cycles. Remind you of economics and business, much?

Munger realised the benefit of multi-disciplinary thinking from an early age, and that the study of complexity requires it because everything is interconnected in some way.

Want to understand this more? Look at the work of the Sante Fe Institute, an organsiation dedicated to the multidisciplinary study of the fundamental principles of Complex Adaptive Systems, including physical, computational, biological, and social systems. In paying his final respects to Charlie, prolific investor, reasearcher, writer and Chairman Emeritus of the Board at the Sante Fe Institute, Michael Mauboussin says he was heavily influenced by him.

Munger on “Man With A Hammer Syndrome”

A special version of this “man with a hammer syndrome” is terrible, not only in economics but  practically everywhere else, including business. It’s really terrible in business. You’ve got a  complex system and it spews out a lot of wonderful numbers that enable you to measure some factors. But there are other factors that are terribly important, [yet] there’s no precise numbering  you can put to these factors. You know they’re important, but you don’t have the numbers.  Well practically everybody (1) overweighs the stuff that can be numbered, because it yields to  the statistical techniques they’re taught in academia, and (2) doesn’t mix in the hard-to-measure  stuff that may be more important. That is a mistake I’ve tried all my life to avoid, and I have no  regrets for having done that.

In complex systems, “not everything that can be counted counts and not everything that counts can be counted” (attributed to Albert Einstein). Pure reductionsim and precision doesn’t work (see below). Wisdom lies in navigating the nuance between data and intuition (read more about how Charlie did this).

Munger on Physics Envy

Economics could avoid a lot of [the] trouble that comes from physics envy. I  want economics to pick up the basic ethos of hard science, the full attribution habit, but not the craving for an unattainable precision that comes from physics envy. The sort of precise reliable formula… is not going to happen, by and large, in economics. Economics involves too complex a system. And the craving for that physics-style precision does little but get you in terrible trouble, like the poor fool from McKinsey.

Once you try to put a lot of false precision into a complex system like economics, the errors can compound to the point where they’re worse than those of the  McKinsey partner when he was incompetently advising the Washington Post. So, economics should emulate physics’ basic ethos, but its search for precision in physics–like formulas is almost always wrong in economics.

Charlie, and Warren, don’t have a lot of love for McKinsey or any other consultants, who are masters of making complex problems complicated, either because they don’t understand complexity themselves or because it makes it simpler for their client to understand (and retain their services for longer).

Munger on solving complex problems (and non-linearity)

Obviously I [use] a simple search engine in my mind to go through checklist-style, and I was using some rough algorithms that work pretty well in a great many complex systems, and those algorithms run something like this: Extreme success  is likely to be caused by some combination of the following factors:

A) Extreme maximization or minimization of one or two variables.

B) Adding success factors so that a bigger combination drives success, often in non-linear fashion, as one is reminded by the concept of breakpoint and the concept of critical mass in physics. Often results are not linear. You get a little bit more mass, and you get a lollapalooza result. And of course I’ve been searching for lollapalooza results all my life, so I’m very interested in models that explain their occurrence.  

C) An extreme of good performance over many factors.  

D) Catching and riding some sort of big wave.

Simple rules work well in complex systems, with the right expertise to use them well (which start with understanding that you are operating within a system in the first place).

Non-linearity (exponentiality) is a function of complex systems. Morgan Housel reminds us that Long tails drive everything. Outsize returns stem, in part, from Berkshire Hathaway running such a concentrated portfolio.

Munger on there being Too Little Synthesis in Economics

One of the interesting things that I want to mention is that Max Planck, the great Nobel laureate who found Planck’s Constant, tried once to do economics. He gave it up. Now why did Max Planck, one of  the smartest people who ever lived, give up economics? The answer is, he said, “It’s too hard.  The best solution you can get is messy and uncertain.” It didn’t satisfy Planck’s craving for order, and so he gave it up. And if Max Planck early on realized he was never going to get perfect order, I will confidently predict that all of the rest of you are going to have exactly the same result.

Complex systems are inherently messy and uncertain. They exist on the edge of chaos, a transition space between order and disorder that exists within a wide variety of systems (including businesses). This transition zone is a region of bounded instability that engenders a constant dynamic interplay between order and disorder. I’ve written more about this here.

Munger on seeing and learning from other systems, in apparently un-related disciplines

If you want to go through life like a one legged man in an ass-kicking contest, why be my guest. But if you want to succeed, like a strong man with two legs, you have  to pick up these tricks, including doing economics while knowing psychology.  

In this vein, I next want to mention a strange Latin American case of a dysfunctional economy that got fixed. In this little subdivision of Latin America, a culture had arisen wherein everybody stole everything. They embezzled from the company, they stole everything that was loose in the community. And of course, the economy came practically to a halt. And this thing got fixed.  Now where did I read about this case? I’ll give you a hint. It wasn’t in the annals of economics. I found this case in the annals of psychology. Clever people went down and used a bunch of psychological tricks. And they fixed it.

Well, I think there’s no excuse if you’re an economist, when there are wonderful cases like that  of the dysfunctional economy becoming fixed, and these simple tricks that solve so many  problems, and you don’t know how to do the fixes and understand the problems. Why be so ignorant about psychology that you don’t even know psychology’s tricks that will fix your own dysfunctional economic systems?

Munger on (non-predictable) Second and Higher Order Effects

Too little attention in economics to second order and even higher order effects. This defect is quite understandable, because the consequences have consequences, and the consequences of the consequences have consequences, and so on. It gets very complicated. When I was a meteorologist I found this stuff very irritating. And economics makes meteorology look like a tea party.

Usually, I don’t use formal projections. I don’t let people do them for me because I don’t like  throwing up on the desk (laughter), but I see them made in a very foolish way all the time, and many people believe in them, no matter how foolish they are. It’s an effective sales technique in  America to put a foolish projection on a desk.

And if you’re an investment banker, it’s an art form. I don’t read their projections either. Once  Warren and I bought a company and the seller had a big study done by an investment banker, it  was about this thick. We just turned it over as if it were a diseased carcass. He said, “We paid  $2 million for that.” I said, “We don’t use them. Never look at them.”

Central bank inflation forecasts anyone? 

“Conclusion”

Well, it’s time to repeat the big lesson in this little talk. What I’ve urged is the use of a bigger multidisciplinary bag of tricks, mastered to fluency, to help economics and everything else. And I also urged that people not be discouraged by irremovable complexity and paradox. It just adds more fun to the problems. My inspiration again is Keynes: Better roughly right than precisely  wrong.

And so I end by repeating what I said once before on a similar occasion. If you skillfully follow the multidisciplinary path, you will never wish to come back. It would be like cutting off your hands. 

The internet will be replete with Charlie Munger quotes for the foreseeable future, and beyond. Hopefully this article adds a bit more flavour to who he was and how he thought. Rest In Peace, Charlie, and thank you.

Academic Economics: Strengths and Faults After Considering Interdisciplinary Needs – Transcript

---