The Lollapalooza effect: decision-making in the real world (2024)

Famed investor Charlie Munger died last In November just a couple of months shy of his hundredth birthday. Vice chairman of megacorp Berkshire Hathaway, he had a long track record of success. His long-term perspective and investment acumen meant he cashed out with assets of over $2 billion.

Munger wasn’t just an investor. He was a student of the human condition, devoting much of his time to considering how and why people do what they do. He was also fearless, eschewing the comfort of dogma and reasoning upwards from first principles. This is harder than it first seems. He spent much of his day reading, combining disciplines like psychology, economics, and history to form his own framework to making better decisions.

Why would a money man have such a relentless focus on decision-making? Well, as anyone who has tried to invest their own money will tell you, investing decisions are hard. Many clever people have been humbled in the attempt to beat the market, falling prey to overconfidence (“I have a medical degree, I think I can pick a few companies to invest in!”), social proof (“I keep hearing about Tesla going up and up from my mates, it might be worth a few quid”) to anchoring (“It was at £120 a share last year so £80 is a bargain”).

And whilst there is an entire field of study (behavioural finance) devoted to the frailties of human financial decision making, Munger’s multidisciplinary approach and relentless curiosity meant he was able to connect the dots in a way that academics cannot and will not do.

A crude analogy: academia is about mapping the rules of the game, business is about winning the game.

An academic is incentivised to add yet another (oh so similar) cognitive bias to the landfill of social psychology research. Academics are measured on their citation& publication count – not holistic cross-disciplinary explanations of human behaviour.

By comparison investors are incentivised to make the right decision to return a profit over an appropriate timeframe. Their measure of success is whether their investment is worth more after a month, year or decade. There is no room to hide.

The Lollapalooza effect

The Lollapalooza effect is an example of the theoretical versus the applied. Munger coined the term to refer to a situation where multiple biases, tendencies, or mental models act in concert to produce an extreme outcome. Typically, cognitive biases are studied in isolation in order to separate cause and effect, and unpick the drivers of decision making. But individual biases fail to capture the complexity of real world decision-making as people are influenced by a range of influences simultaneously. Different biases can work together, amplifying each other’s impact.

Here’s Munger describing his thinking at the 2017 Daily Journal Annual Meeting:

“Well, I coined that term the “Lollapalooza effect” because when I realized I didn’t know any psychology and that was a mistake on my part, I bought the three main text books for introductory psychology and I read through them. And of course being Charlie Munger, I decided that the psychologists were doing it all wrong and I could do it better. And one of the ideas that I came up with which wasn’t in any of the books was that the Lollapalooza effects came when 3 or 4 of the tendencies were operating at once in the same situation. I could see that it wasn’t linear, you’ve got Lollapalooza effects. But the psychology people couldn’t do experiments that were 4 or 5 things happening at once because it got too complicated for them and they couldn’t publish. So they were ignoring the most important thing…”

When you look at social phenomena you see Lollapalooza effects everywhere. A good example is stock market bubbles. When confirmation bias (the tendency to search for, interpret, favour, and recall information in a way that confirms one’s preexisting beliefs) intersects with social proof (the reliance on others’ actions to guide behaviour) and optimism bias (the market keeps rising) the result can be a significantly distorted decision-making process. Unsustainable valuations are the result.

Auctions are another good example: we’ve all seen prices going much higher than they would be in a non-competitive setting. Here we have the social proof of observing others bidding combining with the scarcity whipped up by an auctioneer, on top of a commitment to follow through on your initial bid.

Implications for researchers

First an epistemological one. Often the greatest insights come in the gaps between disciplines. The cross-pollination of ideas is always powerful.

Second, and more practically, stepping back and thinking clearly about cause and effect. We shouldsee the system.The world is full of people reducing problems to simple, linear solutions. As Rory Sutherland put it:

“Organisations often make solutions based on a model of reality, rather than the complexity of lived experience… It is easier to reduce everything into atwo body problemwhich you can solve with a simplistic model..”

Unfortunately this leads to false precision and solutions too brittle to bloom in the wild. Complex adaptive systems involvefeedback loops, many of which we are unaware of or are too difficult to model.

Third? We can all be a little more humble. The world is complex. Human behaviour is so driven by context that it is frustratingly hard to predict. That’s OK! Just keep an open mind.

In the words of Munger “It’s good to learn from your mistakes. It’s better to learn from other people’s…”