Charlie Munger, Warren Buffett’s long-time partner, once gave a legendary talk called The Psychology of Human Misjudgment. His central point?
It’s not lack of intelligence that ruins decisions. It’s the predictable ways our minds misfire.

1. Incentives Rule the Game

Munger said, “Never, ever think about something else when you should be thinking about incentives.” He told the story of FedEx: workers were slow when paid by the hour. Switch to “by shift” pay and suddenly the packages flew out faster. Nothing magical — just incentives aligned with outcomes.

My take: Most businesses don’t have “bad people.” They have bad incentive structures that produce bad behavior. Alignment means checking if the system is rigged to get exactly what you don’t want.

2. Denial is Expensive

When reality feels too painful, we look away. Munger gave the stark example of parents who cannot accept a child’s death. In business, this shows up as leaders who keep propping up a failing strategy, bleeding money and time rather than face the discomfort of saying: this isn’t working.

My take: Misalignment often hides under denial. Leaders will tolerate toxic employees, broken systems, or outdated products because facing it feels worse in the moment. But denial always costs more later.

3. The Lollapalooza Effect

Individually, biases are dangerous. Together, they’re deadly. Social proof, reciprocation, and commitment can all hit at once. That’s why Tupperware parties, auctions, and yes, industry fads, pull in so much irrational behavior.

My take: In organizations, Lollapaloozas show up when “everyone else is doing it” thinking collides with weak questioning. Leaders follow trends, copy competitors, or double down on pet projects — and the whole system pays. Alignment is about catching when multiple forces are stacking up and pushing you toward a cliff.

4. The Hammer Problem

Munger warned against the “man with a hammer” syndrome: when your only tool is a hammer, every problem looks like a nail.

My take: I see this in leaders who cling to one framework, one KPI, or one success story. The context has shifted but their playbook hasn’t. Alignment work forces you to widen your toolkit so you’re not trying to ‘hammer’ every problem into submission.

Yesterday I said leaders don’t fail because of bad strategy — they fail because of unmanaged emotions. Today I’ll take it further: Leaders don’t fail because of external enemies. They fail because of internal blind spots, amplified by misjudgments. Emotions unchecked create blind spots. Blind spots unchecked become misjudgments. Misjudgments repeated collapse strategy.

Alignment is about defending against those blind spots. It keeps you from making the avoidable mistakes that drain energy, money, and trust.

Fearless Leadership: What To Do About It

Munger diagnosed the problem. But what’s the cure?

Dr. Loretta Malandro, in Fearless Leadership, argues that transformation requires confronting behavioral blind spots head-on:

• The Need to Be Right
  Leaders cling to being right instead of solving the real problem. This feeds Munger’s denial bias and compounds misalignment over time.
• Victim Mentality and Playing Small
  Blame shifts outward, accountability evaporates, and energy drains. When leaders don’t take ownership, neither do their teams.
• Silo Mentality
  Departments protect turf instead of the enterprise. Social proof bias reinforces this — “our group is right, theirs is wrong.”
• Avoiding Straight Talk
  Leaders sugarcoat, delay, or dodge hard conversations. That opens the door for incentives and misjudgments to spread unchecked.

Malandro’s answer? 100% Accountability – as a practice – raising behavioral standards, talking straight, confronting denial, honoring commitments, and standing for each other’s success.

My take:

• Munger shows us the psychology of failure.
• Malandro shows us the discipline of fearless leadership.
• Alignment bridges both: awareness + accountability + behavior.

Because until leaders are willing to change their own behavior — not just restructure or rebrand — misjudgments will keep sabotaging the best strategies.

Want to dive into the full speech? Here’s the PDF: Charlie Munger – The Psychology of Human Misjudgment

Strategic Reflection Prompt

1. Which bias is most alive in your leadership today — misaligned incentives, denial, social proof, or hammer-thinking?
2. And which fearless shift is required — dropping the need to be right, cutting denial, breaking silos, or talking straight?

About Giselle

Giselle Hudson is a writer, possibility thinker, speaker, Strategic Alignment Facilitator™, and MCODE Legacy Coach. She helps solo professionals, non and for profit organizations identify where focus and learning need to occur to stay aligned and achieve real results — all beginning with The One Question Every Business Must Answer™.