Excessive Self-Regard Tendency
The near-universal tendency to rate oneself, one's choices, and one's possessions more favorably than objective evidence warrants —what psychologists call the 'Lake Wobegon Effect,' where everyone believes themselves to be above average.
Concept Analysis
Definition & Origins
Excessive Self-Regard Tendency describes the near-universal human tendency to evaluate oneself, one's decisions, and one's possessions more favorably than objective evidence supports. Munger identified this as a fundamental force in human psychology, rooted in evolutionary advantage: those who believed in themselves were more likely to act decisively and survive. The tendency encompasses the "Lake Wobegon Effect" (everyone believes themselves to be above average), the Endowment Effect (people value objects more highly because they own them), and the systematic overrating of one's own past decisions.
The evolutionary logic is straightforward: individuals who systematically doubted their own abilities would have been less likely to compete for mates, resources, or social status, and would have been reproductively disadvantaged relative to more self-confident competitors. Natural selection therefore favored the self-regard machinery. The problem is that the same machinery that produced useful decisiveness in ancestral environments produces systematic error in modern investment and management contexts, where accurate self-assessment is more valuable than confident self-promotion.
Munger drew on Darwin's personal protocol as the practical model for counteracting this tendency: Darwin deliberately wrote down any observation that contradicted his existing theories, knowing from experience that his mind would discard such observations within minutes if he didn't record them. The act of writing forced an encounter with disconfirming evidence that the Excessive Self-Regard Tendency would otherwise have suppressed.
Core Ideas
Self-evaluation is systematically inflated. The human mind does not assess itself objectively. Across virtually every domain — driving ability, investment skill, managerial competence — people rate themselves above the median, a mathematical impossibility. Research in organizational psychology shows that the self-assessment inflation is largest in domains where objective feedback is slow or ambiguous — precisely the domains where investment and business judgment operate.
The Endowment Effect magnifies self-regard through ownership. Once an object, idea, or investment is owned, the mind attributes it additional value simply because it is "mine." The stock worth buying at $50 seems more clearly worth holding at $40 than it would seem worth buying at $40 — because ownership has updated the self-concept to include this stock. The endowment effect creates an asymmetry between buying and selling thresholds that is entirely a product of possession, not of rational valuation.
Self-serving attribution prevents learning. Investment successes are attributed to skill; failures are attributed to bad luck or external factors. This attribution bias prevents honest assessment of which decisions were genuinely skillful versus which were simply lucky. In a rising market, almost any investment strategy appears skillful; the Excessive Self-Regard Tendency causes investors to credit their own analysis for returns that the market environment would have produced regardless.
Hiring bias compounds over time. Managers rate employees they hired more highly than employees they inherited, because negative evaluation of a hire implies negative evaluation of the hiring decision — and therefore of the manager's own judgment. This bias produces distorted performance assessments that systematically favor the manager's own choices, and it compounds: a team of managers who have hired primarily their own recruits builds a culture of mutual self-regard that excludes honest evaluation.
Domain Transferability of Self-Regard. Munger specifically warned about the tendency of successful professionals to transfer their self-assessed expertise from their home domain to adjacent ones. A successful surgeon becomes confident in their investment judgment; a successful entrepreneur becomes confident in their political analysis; a successful investor becomes confident in their scientific assessments. The self-regard that was warranted in the domain of proven expertise transfers — without justification — to domains where it has not been tested.
Practical Application
For investors, Excessive Self-Regard produces three costly behaviors: overtrading (incurring transaction costs and tax consequences based on overestimated stock-picking ability), over-concentrated positions (holding more in a single name than the evidence supports), and post-rationalization of errors (attributing mistakes to unforeseeable events rather than analytical failures, preventing genuine improvement).
Munger's antidote was not diversification but the discipline of asking "What would it take for me to be wrong?" before any concentration decision. He also recommended seeking trusted advisors who are not subject to the same self-regard bias — people who will provide honest critical assessment rather than validation.
The Darwin Protocol, applied to investment: keep a physical record of every investment thesis at the time of investment, including explicit predictions that would falsify the thesis. Review these records annually. The discipline of comparing predictions to outcomes, without the ability to revise the prediction retroactively, produces genuinely honest performance assessment and prevents the self-serving attribution that otherwise allows every failure to become someone else's fault.
Common Misconceptions
Misconception 1: Confidence correlates with competence. Research consistently shows that the most confident individuals are often the least competent in complex domains (the Dunning-Kruger effect). In investing, the manager who speaks with absolute certainty is frequently the one who has not considered how they might be wrong. The most experienced investors are typically the most qualified in expressing conditional confidence.
Misconception 2: Past success proves skill. A string of successful investments may reflect luck rather than skill, especially in bull markets. Excessive Self-Regard causes investors to treat lucky outcomes as validation of their analytical framework, leading to larger and riskier bets — exactly when the market environment that produced the luck may be reversing.
Misconception 3: Selling a losing position is an admission of failure. The ego treats selling at a loss as a blow to self-image. Rational investors treat each position as a fresh decision: "Would I buy this today at the current price?" If not, the position should be sold regardless of purchase price. The Excessive Self-Regard Tendency produces the classic "waiting to break even" bias — holding a losing position past the rational exit point because selling acknowledges a mistake.
Munger's Own Words
"The life of Darwin demonstrates how a turtle may outrun the hares, aided by extreme objectivity, which helps the objective person end up like the only player without blindfold in a game of pin-the-donkey." — Charlie Munger, Harvard School Commencement (1986)
"We all commonly observe the excessive self-regard of man. He mostly misappraises himself on the high side, like the ninety percent of Swedish drivers that judge themselves to be above average." — Charlie Munger, The Psychology of Human Misjudgment (Harvard, 1995)
"The best antidote to folly from an excess of self-regard is to force yourself to be more objective when you are thinking about yourself, your family and friends, your property, and the value of your past and future activity. This isn't easy to do well and won't work perfectly, but it will work much better than simply letting psychological nature take its normal course." — Charlie Munger, The Psychology of Human Misjudgment (Harvard, 1995)
Thought Evolution
Related Concepts
Case Companies
Engineers invented digital photography in 1975 but the company's leadership could not abandon the film business model tied to their professional identity and past success. The self-regard invested in decades of film expertise prevented honest assessment of the digital disruption until it was too late to respond effectively. The executives who had built the film franchise could not evaluate the threat to it with the objectivity that the situation required.
Nobel laureates who believed their models were infallible leveraged to the point of collapse in 1998, unable to recognize that their self-assessed expertise had blind spots in domains — correlation behavior under extreme market stress — that their models had not been tested against. The Excessive Self-Regard of the partners was amplified by their genuine expertise in a narrower domain, producing fatal overconfidence in a broader one.
Executives constructed increasingly complex financial structures partly because their past "success" convinced them they were smarter than the market, regulators, and their own board. The self-regard was institutionalized: Enron formally evaluated employees on their rated intelligence, creating an organization-wide self-regard that made honest internal criticism structurally impossible.
Buffett himself cites his continued investment in the failing New England textile business as a classic case of Excessive Self-Regard: he believed his managerial skill could turn around an economically doomed industry. The lesson he drew: no amount of managerial talent can overcome the structural economics of a commodity business with no competitive advantage.
Mentioned In
Source: Poor Charlie's Almanack, The Wit and Wisdom of Charles T. Munger