If you know Berkshire Hathaway
Today, we'll start at the top with tendency No. 1: reward and punishment superresponse.
The carrot and the stick, on steroids
Incentives play a very important role in our lives. From our upbringing as children to our work lives as adults, various incentives dictate how we behave. The power of incentives is so great that if not properly addressed, it can and will produce less-than-desirable behavior.
Munger uses the example of the Xerox
What does this have to do with investing?
Of the many ways this lesson can relate to stocks, I keep coming back to how incentives apply to a company's management. When management's compensation structure is flawed, expect unproductive behavior to follow.
You needn't look far down the Dow Jones Industrial Average (INDEX: ^DJI) to find examples. Bank of America
And what have we learned?
I can sum up my greatest takeaway from this tendency with a quote from the book: "Never, ever, think about something else when you should be thinking about the power of incentives." In other words: Be careful what you ask for. You just might get it.