Charlie Munger is an American investor and philanthropist. He works with Warren Buffet and is an extremely successful investor. I will discuss about two interesting concepts of Charlie Munger- Lollapalooza Effect and Chauffeur Knowledge.
Lollapalooza effect is when multiple biases, tendencies or mental models acting at the same time in the same direction.
“The stupefying losses in mortgage-related securities came in large part because of flawed, history-based models used by salesman, rating agencies and investors.”
-Warren Buffet
Good example of this is subprime mortgage crisis. There were banks offering loans to individuals whose repaying capacity was doubtful, there were greedy real estate agents who were keen to make money, there were individuals were ready to take loan which they could not offer, there was housing boom, there were banks who created complex derivatives out of these loans and sold them to investors across world and then there were rating agencies who rated these junk bonds as AAA. Idea was to make maximum money in housing boom. The Lollapalooza Effect brought down global economy.
Charlie Munger differentiates between real knowledge and what he calls as “chauffeur knowledge”. Chauffeur knowledge is a superficial knowledge of subject beyond one’s area of competence. He loves to quote the following story.
I frequently tell the apocryphal story about how Max Planck, after he won the Nobel Prize, went around Germany giving the same standard lecture on the new quantum mechanics.
Over time, his chauffeur memorized the lecture and said, “Would you mind, Professor Planck, because it’s so boring to stay in our routine, if I gave the lecture in Munich and you just sat in front wearing my chauffeur’s hat?” Planck said, “Why not?” And the chauffeur got up and gave this long lecture on quantum mechanics. After which a physics professor stood up and asked a perfectly ghastly question. The speaker said, “Well I’m surprised that in an advanced city like Munich I get such an elementary question. I’m going to ask my chauffeur to reply.”
-Charlie Munger
To avoid getting into chauffeur knowledge one should stick to one’s circle of competence and avoid getting into area which are beyond area of competence. A person with true knowledge will stick to his area of competence and will acknowledge ignorance if it is beyond his area of competence.
Rolf Dobelli is a Swiss businessman and author. He has written a book called “The Art of Thinking Clearly”. He talks about chauffeur knowledge in his book.
Be on the lookout for chauffeur knowledge. Do not confuse the company spokesperson, the ringmaster, the newscaster, the schmoozer, the verbiage vendor, or the cliché generator with those who possess true knowledge. How do you recognize the difference? There is a clear indicator: True experts recognize the limits of what they know and what they do not know. If they find themselves outside their circle of competence, they keep quiet or simply say, “I don’t know.” This they utter unapologetically, even with a certain pride. From chauffeurs, we hear every line except this.
-Rolf Dobelli
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