Winston Feng of Stanford University on the Cognitive Biases…

The damage usually begins well before a spreadsheet is opened. It begins the moment an investor decides what to believe and leaves the question of whether it holds up for later, or for never. That was Charlie Munger’s case in his 1995 address at Harvard Law School, revised afterwards and published as “The Psychology of Human Misjudgment”, and no better inventory of investor error has appeared since.

The longer version names twenty-five tendencies that bend judgement in predictable directions, and Munger’s position was that naming them is the only defence that holds. Winston Feng, an investor and Stanford University researcher whose CV runs through Goldman Sachs, Point72 Asset Management and Holocene Advisors to his present work at Skyline IM, anchors his own risk process in the same material, and has argued that pulling models from several disciplines beats any single specialist lens.

What Munger compressed into one lecture, behavioural finance has spent four decades establishing with data and peer review. Markets are priced by people, and people lean on mental shortcuts that paid off on the savanna and are expensive in a liquid market. Neither a CFA charter nor a Bloomberg terminal switches them off. What follows are the tendencies that most damage returns, and the countermeasures that survive real pressure.

Incentives Come First, and Everything Else Runs Downstream

Incentive-caused bias sits at the head of Munger’s list, and he meant it to. “Never, ever, think about something else when you should be thinking about the power of incentives,” he told the room, and every earnings season delivers a fresh illustration.

Sell-side research is paid on trading volume. Fund managers are paid on assets under management, an arrangement that rewards gathering capital rather than compounding it. Executives are paid on figures they are in a position to shape, and a figure that can be shaped generally is.

None of this requires bad faith. It requires only that people respond sensibly to the rewards in front of them, which they do almost without exception. The working defence is to meet every recommendation, forecast and adjusted earnings number with one opening question: who gets paid if you believe this?

Many treat that question as the cheapest filter an allocator has, and it strips out a large share of bad inputs before they get near a model.

Doubt Avoidance and the Hurry Into a Position

Uncertainty is uncomfortable, and people shut it down as fast as they can. Munger’s term was doubt-avoidance tendency, the pull towards any conclusion at all over an unresolved question. On a desk it presents as an analyst who settles on a view twenty minutes into the research and then spends three weeks assembling evidence for it.

The next tendency makes it worse. Once a position exists on the books, inconsistency-avoidance makes walking away feel costly. Munger observed that beliefs behave like habits, and that people defend them with the stubbornness they bring to any routine. State the thesis in public and revising it becomes harder still.

For that reason, some insist on a written version of the opposing case, drafted before any capital is deployed. A list of the things that would disprove the thesis, set down in advance, is hard to dismiss later, because the analyst had nothing to defend yet.

Social Proof, Envy and the Trade Everyone Is Already In

Social proof is the habit of reading other people’s behaviour for direction, and it is strongest in the conditions where it does most harm: uncertainty, time pressure and a room full of credible-looking people. The crowded trades of market history were built by clever people watching other clever people and drawing the obvious conclusion.

Envy supplies the fuel. Munger thought envy among the most underrated forces in human behaviour, and it drives the closing act of every bubble, the phase in which valuation drops out of the argument and a neighbour’s new money takes its place. An investor who can watch somebody else collect a return they passed on and feel almost nothing holds an edge no model can supply. That temperament is far rarer than analytical talent, and telling a repeatable process from luck depends on it.

Loss, Contrast and a Reference Point That Lies

Deprival-superreaction tendency is Munger’s label for what behavioural economists call loss aversion, the finding that a loss stings roughly twice as much as an equivalent gain pleases. The sequence is familiar to most investors. They cling to losers so the loss never has to be booked, sell winners early to secure the good feeling, and gradually strip out the holdings that were working.

The scale of it has been measured. Terrance Odean’s 1998 paper in the Journal of Finance, drawn from 10,000 discount-brokerage accounts between 1987 and 1993, found investors realised 14.8% of their paper gains against only 9.8% of their paper losses. The reflex has not softened since: in an August 2026 snapshot of direct-equity accounts, 22% of Gen Z accounts had never placed a sell order.

Contrast-misreaction piles on by tying every judgement to whatever sits beside it. A stock 60% off its high looks cheap only next to that high, and no business ever undertook to return to one. The fix is procedural. Value the asset on its cash flows, its balance sheet and an unsentimental reading of its competitive position, and keep the purchase price and the old peak out of the arithmetic entirely. What an investor paid is of no interest to the market.

Certainty About the Forecast, and About the World

Munger kept excessive self-regard and overoptimism apart, and he had good reason. The first means thinking too highly of your own judgement. The second means expecting the world to fall in with it. Together they produce an investor who trusts the forecast and also trusts that nothing outside it will occur, which is how positions end up too large.

Sizing is where the bias shows up in the numbers, and where the most durable risk control sits. An investor who genuinely accepts that the edge is thin and the forecast fragile will size to match and will survive being wrong. One who does not will sooner or later hold something both wrong and oversized, at which point the arithmetic of recovery takes over. After a 50% drawdown it takes a 100% gain to break even, a fact worth revisiting before every capital allocation decision.

When Four Biases Point the Same Way

Munger held back his most important idea until the end of the talk. The lollapalooza effect, as he named it, describes several tendencies acting in the same direction at the same time, and it explains why manias and panics travel far further than any one bias could carry them. A late-stage bubble combines social proof, envy, authority-misinfluence and reason-respecting, all aimed one way. Any one of them can be managed. Four at once will sweep along people who should know better.

This is why many who follow Munger trust a written checklist over instinct. These tendencies hijack intuition, so relying on intuition to catch the hijacking makes little sense. A checklist consulted before the decision, not after it, operates from outside the compromised judgement. Munger organised his around inversion, the practice of asking how a position could fail and then avoiding those routes on purpose.

From Framework to Working Process

A list of biases, read once, changes very little. Outcomes change when the list becomes a process, which is why the framework is better described as a risk discipline than a philosophy.

In practice that means pre-mortems that map failure modes before capital moves, sizing rules that assume the analysis is weaker than it feels, and a standing requirement that somebody on the team makes the honest opposing case before a position is approved. The steps are simple. They are also uncomfortable, and most firms let them lapse once returns look healthy.

Investors who compound for decades seldom hold better information than their peers. More often they hold a system that keeps functioning while they are frightened, envious or certain. Munger’s contribution was to name the specific ways a capable mind goes wrong, which handed capable people something concrete to design around.

About Winston Feng

Winston Feng is an investor and researcher focused on global technology and growth equities. He graduated from Cornell University as a National Scholar and began his career in Goldman Sachs’ investment banking division, working across Hong Kong and New York on capital raising and strategic advisory mandates for governments, state-owned entities and multinational corporations. He later refined his investment approach at Point72 Asset Management and Holocene Advisors, and now works at Skyline IM.

His work has also included advising economic think tanks on Asian financial systems and advocating for broader ESG adoption among private companies in the region. Outside his career across global markets, he supports Robin Hood and the American Cancer Society, and spends his free time playing tennis, surfing, golfing and reading classic literature.

Frequently Asked Questions

What is the lollapalooza effect?

It is Charlie Munger’s term for several cognitive tendencies acting in the same direction at the same time. A late-stage bubble, for instance, can combine social proof, envy, authority-misinfluence and reason-respecting, all pointing one way. Any single bias can be managed in isolation; four operating together will carry along people who should know better, which is why manias and panics overshoot so far.

Why does loss aversion cost investors money?

Because a loss hurts about twice as much as an equal gain pleases, investors hold losers so the loss never has to be booked and sell winners early to lock in the good feeling. Odean’s 1998 study of 10,000 brokerage accounts measured it directly: 14.8 per cent of paper gains were realised against only 9.8 per cent of paper losses, steadily stripping portfolios of the holdings that were working.

How does Winston Feng turn the framework into a process?

Through pre-mortems that identify failure modes before capital is deployed, sizing rules that assume the analysis is weaker than it feels, and a standing rule that someone on the team argues the honest opposing case before a position is approved. Munger organised his own version around inversion, asking how a position could fail and then deliberately steering clear of those routes.