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Tagged with Ethics

Charlie Munger’s lessons about business ethics

In 12 Feb 2020, Charlie Munger chaired the Daily Journal Corporation’s Annual Shareholders Meeting (2-hour video stream, transcript).

Charlie’s remarks about business ethics have always been on point. Here are excerpts of his most recent commentary on the theme that have ressonated with me.

On avoiding businesses that make money by tricking people:

Munger: And it’s a very good thing to be doing. The world needs what we’re trying to do [at the Daily Journal Corporation]. And we’re trying to reward the right people. And really trying to serve the customers.

When it comes to customers, my ambition is to be as close to Costco as I can possibly be. I’ve never been associated with a company that works harder than Costco to make sure that customers are served well. I mean, I just love success that occurs that way. And I hate success where you deliberately trying to cheat people or sell them something that’s not good for them. Like gambling service in Las Vegas.

I do think there’s something to be said [on that]. You have the option for selling stuff that’s good for people instead of stuff that tricks them. And any rate, that’s our approach. I would choose that approach even if I made less money. In fact, I think you make more.

It reminds me of Warren Buffet’s favorite saying, he says, “You always take the high road.” he says, “It’s less crowded.” And that’s the system.

On being rewarded only after delivering value to customers:

Gerry Salzman: As we move forward, the financial results will depend upon the number of users in these various justice agencies. Yes, we do get implementation fees, but we can only take that into income when everything is delivered. And so we focus on trying to get to the point where everything is delivered. Then we can take it into income and reflected in the financial statements.

Munger: This is a very important thing that everybody in this room should understand. We have no simple way of just counting up hours and sending little invoices to the government. That’s what most consultants like to do, which is bill hours. But we don’t. We only get the right to collect money [after] the thing works. And we do that on purpose.

It reminds me of one of my favorite tales which really happened. When I was young, a lot of the earth moving was not done with bulldozers, it was done by teams of mules who were guided by contractors who ran these mule teams and their big plows.

And there was a contractor who had an enormous number of mules, and when the war came, the big builder called him and said, “I’ve got a cost plus contract with the government, I’m going to make you cost plus and I want your mules to start tomorrow morning on this big project.” Cost plus cost plus percentage of cost. And this contractor said, “Oh, no.” He says, “I can’t do that.” And he goes, “Why not?” He said, “Well”, he said, “I get business all these years because I’m so efficient.” And he said, “When I take it cost plus contract, even my mules seem to know it and they all go to hell.”

On avoiding excesses and misalignments:

Munger: I don’t like it when bad stuff comes in. I don’t like it when investment bankers talk about EBITDA, which I translate as “bullshit earnings”.

And I don’t like all this talk about J-curves and all these private sales of software companies from one venture capital to another, and markups. It looks like a daisy chain to me. So I think there’s a lot of wretched excess in it.

But it reflects an underlying sound development, which is this huge growth of software changing the technology of the world. But it’s going to have some unpleasant consequences because there’s so much wretched excess in it. I bet that almost everybody in this room has somebody in software in the family.

I’ve got two people in private equity in my family, and private equity has grown into the trillions. And, of course, it’s a very peculiar development because there’s a lot of promotion and a lot of crazy buying. It’s what I call “fee-driven buying”, much of it, where people are buying things to get the fees. I’m not used to that. I buy things because I think they’re going to work for me for the long pull, as the owner! I’m not thinking about scraping fees off along the way. So it’s a very different.

It makes me very nervous to have all this fee-driven buying. Wherever they’re successful, they just raise a fund that’s twice as big as the last one. Throw more money at more deals. And of course, with more money and more overhead, it’s an (inaudible) demand for fees.

Will the world provide wonderful results for all these people? The answer is no, it won’t. It’s gonna be a lot of tragedy.

On what wretched excess could lead to:

Munger: Finance by its nature, the temptations are too great and it goes to wretched excess. And of course, I don’t like it. I don’t think it’s good for the country.

I would argue that the wretched excess that led to the Great Depression, which led to the rise of Hitler. I think we pay a big price eventually for wretched excess and stupidity and greed and so forth. I’m all for staying in control. In other words, I’m all for behaving a lot more like Confucius.

Bonus — Charlie’s commencement address at USC Law School in 2007 is also pure gold in terms of life wisdom. After listening to it, check out this summary as well.

Richard Hamming on legal challenges computers face

The always-sharp Richard Hamming on the legal challenges delaying a broader deployment of computers to medical diagnostics:

One major trouble is, among others, the legal problem. With human doctors so long as they show “due prudence” (in the legal language), then if they make a mistake the law forgives them – they are after all only human (to err is human).

But with a machine error whom do you sue? The machine? The programmer? The experts who were used to get the rules? Those who formulated the rules in more detail? Those who organized them into some order? Or those who programmed these rules?

With a machine you can prove by detailed analysis of the program, as you cannot prove with the human doctor, that there was a mistake, a wrong diagnosis. Hence my prediction is you will find a lot of computer-assisted diagnosis made by doctors, but for a long time there will be a human doctor at the end between you and the machine.

We will slowly get personal programs which will let you know a lot more about how to diagnose yourself but there will be legal troubles with such programs. For example, I doubt you will have the authority to prescribe the needed drugs without a human doctor to sign the order.

You, perhaps, have already noted all the computer programs you buy explicitly absolve the sellers from any, and I mean any responsibility for the product they sell! Often the legal problems of new applications are the main difficulty, not the engineering!

Building on Hamming’s insights, I would speculate that much of the conversation about AI paradoxes (e.g. the trolley problem applied to self-driving cars) also stems from challenges in accountability.

We are used to treating humans as agents that can be hold accountable for the consequences of their acts (except for, say, children and elderly with decreasing mental capacity.)

If our present model of accountability is based on two premises:

  1. For all practical matters, humans have free will
  2. Humans have things to lose — we “suffer” if money, freedom, or reputation is taken from us

The question then becomes: How to translate these two premises to a world where machines are ubiquitious and ever smarter? Will we wait until they seem to have free will and things to lose?