Munger on Success, Economists, and Why the Feds Got Lehman Right

In a wide-ranging interview, Charles Munger — Warren Buffett’s longtime partner at Berkshire Hathaway — tells the Stanford Lawyer why he and Buffett have been so successful, why economists so often fail, and why he thinks the federal government was right to let Lehman Brothers fail.

“Warren and I have skills that could easily be taught to other people,” Munger told Joseph A. Grundfest, the Stanford professor conducting the interview, in the publication’s spring issue. “One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.” (A tip of the cap to The Ideas Report for highlighting the interview.)

Munger says that many of today’s CEOs suffer from “an extreme optimism based on an inflated self-appraisal”, and get carried away into folly. “They haven’t studied the past models of disaster enough and they’re not risk-averse enough,” Munger says. “One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people’s net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises.”

Like Buffett, Munger is straightforward, witty, and insightful — and he pulls few punches. A couple other highlights from the interview:

On the government letting Lehman Brothers fail: “I don’t think that was a mistake. You can’t save everybody. That would have created unlimited revulsion in the body politic. I probably would have let Lehman go, too. … We needed a total correction to a system that was evil and stupid. You can’t have a rule that no matter how awful you are, you’re always going to be saved. You have to allow some failure. We don’t need all our bright engineers going into derivative trading and hedge funds and so on. We need some revulsion.”

On the problem with economists: “I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting. … They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we’re learning is that when you don’t understand these consequences, you don’t have an adequately skilled profession. You have big gaps in what you need. You have a profession that’s like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg. … If you totally divorce economics from psychology, you’ve gone a long way toward divorcing it from reality.”

On whether the financial world will shift back to more traditional models: “The culture of Goldman Sachs as a partnership was morally superior and better for the surrounding civilization than the culture that came after it went public. … A lot of [changing back to more traditional models] is going to be forced, so we’ll go some in that direction. However, there are powerful forces intrinsic to the system that resist reform. But I have lived in my own life with responsible investment banking. When I was young, First Boston Company was an honorable and constructive firm and very much served the surrounding civilization. Investment banking at the height of this last folly was a disgrace to the surrounding civilization.”

On perspective: “If you’re used to growing 3 to 4 percent per year and you go to no growth at all for 10 years, which is roughly what happened in Japan, then, as human tragedies go, that’s not major. That’s not the rise of Hitler. It’s painful, but it’s quite endurable.”

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