Our brain is a connection machine. This is quite practical: if we eat an unknown fruit and feel sick afterward, we avoid it in the future, labeling the plant poisonous or at least unpalatable.
Our brain creates an illusion of connection with different events which can impact our decision-making. This is good till we use association with careful nature but as we start using it intuitively then it can create a problem for us.
Munger also warns that some of the most important miscalculations occur when you associate someone with their past success without examining to see if it was luck. This will influence our decision.
Investment – Similarly, if someone has invested in a company that was traded on a 25x of P/E and he has incurred losses then he will associate 25x P/E with a higher valuation and never invest in a company having a P/E of 25x.
This is good till one point in time, but he should take this as a learning and study well before investing. Not making the rule of thumb that 25x P/E is always a higher valuation. Many times, P/E can be misleading (I am not going into detail about the misconception of P/E over here). We should learn from our mistakes/experiences but never should make a pattern to use it for the rest of our life for all events which seem similar to our brain.
This entire series will be reviewed with various examples from books which are “Thinking, Fast and Slow” and “The Art of Thinking Clearly“.