The instinct for fairness

What is it? This tendency refers to our inclination to be treated fairly and the problems that not being treated fairly can cause. When people expect fair behaviour but do not get it, that gives rise to hostility.

The tendency comes from Immanuel Kant, a German philosopher of the 1700s. Munger says, "Kant was famous for his "categorical imperative," a sort of "golden rule" that required humans to follow those behaviour patterns that, if followed by all others, would make the surrounding human system work best for everybody. And it is not too much to say that modern acculturated man displays, and expects from others, a lot of fairness as thus defined by Kant."

Found in: Expectations of fairness

In Life: The Kantian behaviour can be found in even mundane acts, says Munger. "In a small community having a one-way bridge or tunnel for autos, it is the norm in the United States to see a lot of reciprocal courtesy, despite the absence of signs or signals. And many freeway drivers, including myself, will often let other drivers come in front of them, in lane changes or the like, because that is the courtesy they desire when roles are reversed. Moreover, there is, in modern human culture, a lot of courteous lining up by strangers so that all are served on a "first-come-first-served" basis."

In investing: Kantian tendency comes into play in investing when companies act against minority shareholders. A number of foreign MNCs operating in India have indulged in practices not in the interests of minority shareholders. Some of the methods include: paying a higher royalty to foreign parent company as HUL did, even in the face of falling volume growth or merging of an unlisted subsidiary at high valuations (Akzo Nobel) or transfer of profitable division to the parent company at lower valuations (Siemens) or transfer of core business to an unlisted subsidiary of the parent (Maruti).

This behaviour becomes a problem for investors when companies decide to take such actions with disregard towards minority shareholders. Such companies should better be avoided.

You just read about one of the misjudgements people generally make while investing. Read 25 ways to (Not) make mistakes to get an account of Charlie Munger's twenty-five typical misjudgements, along with our commentary on how they fit into Indian businesses and Indian investments.