Does psychology refer to the soul, the psyche, or the mind ?

"Our comforting conviction that the world makes sense rests on a secure foundation: our almost unlimited ability to ignore our ignorance."

—Daniel Kahneman

Psychology is a discipline that aims to analyze the mental and behavioral processes of human beings and their interactions with the physical and social environment.

The word psychology comes from the Greek psycho or psykhé, which means soul, psyche or mental activity, and from logy, which means study'or treatise'. Therefore, psychology means study or treatise on the psyche.

A cognitive bias is a systematic misinterpretation of available information that influences the way we process thoughts, make judgments, and make decisions. The concept of cognitive bias was introduced by Israeli psychologists Daniel Kahneman and Amos Tversky in 1972.

"The confidence people have in their beliefs is not a measure of the quality of evidence but of the coherence of the story, the mind has managed to construct."

—Daniel Kahneman

The brain represents only 2-3% of our body weight, yet it uses approximately 20% of our energy. It is a rather expensive organ that constantly seeks to save energy by avoiding a high cognitive load. It is precisely because of this factor that many neuroscientists say that he is a cognitive bum.

This behavior of the brain directly affects our daily decision-making, which is not done in as rational a way as we like to believe, but rather, in many cases, relies on heuristics, procedures that help us when solving a problem. They are mental shortcuts, intuitive judgments that are based on partial knowledge, experience or assumptions that allow us to be more agile and that, therefore, can be useful when making a decision. However, these heuristics can lead us to incorrect judgments. It is then when these biases occur, cognitive errors that can make us act in an irrational way. Psychologists Daniel Kahneman, Paul Slovic, and Amos Tversky introduced the concept of psychological bias in the early 1970s. They published their findings in their 1982 book, Judgment Under Uncertainty.

"Nothing in life is as important as you think it is, while you are thinking about it."

—Daniel Kahneman

During the 19th century, human decision-making was held to be essentially rational, with a hyper-maximizing human being making near- perfect cost-benefit assessments for every decision. However, beginning in 1971 Tversky and Kahneman published scientific papers arguing that most important human decisions are based on a limited number of heuristic principles and not on a formal analysis of the problem, thus contradicting the rational model of decision-making in force at that time.

The proposed new approach gave rise to a flood of new research in psychology and also extended to other fields of research such as economics, law, sociology, medicine or political science. All this research was key to the psychologist Daniel Kahneman receiving the Nobel Prize in economics in 2002.The enormous impact on our behavior and the youth of these discoveries that have given rise to the emerging field of knowledge known as Behavioral Economics, which is in its infancy, make this section the most important in the book.

It will not help us to know the rest of the models, how things work if we fall into biases, and make irrational decisions. 

The path started by Kahneman and Tversky towards the search for rationality has just begun, and we don’t know where it will take us. At the moment, in the first decades of study, it has meant a revolution, no longer in psychology, but in economics and decision making, recognized worldwide when in 2002, Daniel Kahneman becomes the first non- economist to receive the Nobel of Economics. Kahneman is a psychologist.

Knowing that we are not rational, that we are biologically wired to not be, changes everything.

From this moment, the economics, unable to explain the real decisions of citizens and economic cycles, is forced to rely on psychology, which in turn relies on evolutionary biology and neuroscience to give birth to an emerging research field that has turned science upside down. 

Charlie Munger, as always, already knew the importance of these biases, which he exposes in the magnum opus speech Psychology of Human Misjudgment at Harvard Law School circa Jun 1995 and expanded in the monumental Poor Charlie’s Almanack.

We include the full text of the book, since the publisher has kindly given us permission to do so, which we greatly appreciate. The only inclusion that has been made from the original text is to include a quote from a relevant person in the beginning of each model, that helps to remember the main idea of each model. Poor Charlie's Almanack is without any doubt one of the most valuable books that exist, and therefore its purchase is practically a must for anyone who wants to improve their life.