The Charlie Munger Guide To Lollapalooza Effects

Charlie Munger says that lollapalooza effects “can make you rich or they can kill you.”

Jan 13, 2022

In our post about The Psychology of Human Misjudgment, you learned about the 20+ psychological tendencies that cause investors to make suboptimal decisions. Now it’s time that we establish a common understanding of lollapalooza effects.

In the coming weeks, I am going to start sharing more about my unique way of analyzing stocks. To get the most from that content, you need to know everything worth knowing about lollapalooza effects.

What is a lollapalooza effect?

A lollapalooza effect is an extreme outcome. That’s it.

Charlie Munger coined the term after studying the three main psychology textbooks. He noticed that the famous psychological experiments—like Stanley Milgram’s experiment about authority bias—failed to consider the other biases at play.

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 in their own profession. —Charlie Munger

This combination of psychological forces, Munger believed, was the “most important thing.” However, a lollapalooza effect does not always arise from only psychological forces.

What causes lollapalooza effects?

The combination of multiple factors that are all moving in the same direction is what creates the potential for a lollapalooza effect.

Lollapalooza effects occur when there are multiple forces or factors moving in the same direction. The key is that when forces combine, they don’t just add up; each force builds off of and strengthens the other, creating an explosive effect with huge results. —Charlie Munger

I’m trying to get lollapalooza effects by combining. It is perfectly obvious. This is the way you win big in the world—by getting two or three forces working together in the same direction. —Charlie Munger

It is often like critical mass in physics

You get lollapalooza effects when two, three or four forces are all operating in the same direction. And, frequently, you don’t get simple addition. It is often like critical mass in physics where you get a nuclear explosion if you get to a certain point of mass—and you don’t get anything much worth seeing if you don’t reach the mass. —Charlie Munger

Charlie Munger’s examples of Lollapalooza Effects

Over the years, Charlie Munger has given many real-world examples of lollapalooza effects. Here are a few that will help you understand the power of this one big idea.

1. The Popularity of Coca-Cola

In designing our new beverage, we are mindful of combinatorial effects. Why should we hold back?…Once we realize that we get extra-powerful effects—what I call lollapalooza effects—from combining a bunch of things to work in the same direction, we are not going to stop with food value. We are going to have food value plus a stimulant: caffeine. It is obvious. Both plainly work. So there is no reason not to combine them. We want double the effect.

2. Tuberculosis Treatment

Really big effects—lollapalooza effects—will often come only from large combinations of factors. For instance, tuberculosis was tamed—at least for a long time—only by routine, combined use (in each case) of three different drugs. —Charlie Munger

3. Airplane Flight

Other lollapalooza effects, like the flight of an airplane, follow a similar pattern. —Charlie Munger

4. The Moonies Brainwashing College Students

In his 1997 lecture at the Stanford Law School, “An Elementary Lesson on Wordly Wisdom Revisited,” Munger noted that the ability to “break people’s minds” can be the result of a lollapalooza effect.

How do you take a normal kid who is just a little miserable, take him off for a weekend in the country and turn him into a brainwashed zombie who, for the rest of his life, sells flowers on the street corner?… It is obvious. It is a total lollapalooza. The Moonies achieve it by combining psychological tendencies to act in the same direction. There are about 20 standard tricks that can be used to trigger lousy cognition of that type. And the Moonies have figured out how to play four, five, six, seven, or eight of them at the same time... They use social proof. They use stress. And the “conversion” process works to create a “snap” in a sadly high fraction of cases. —Charlie Munger

Cathie Wood’s rapid rise is a lollapalooza effect.

I am recording a podcast about Cathie Woods this weekend. It includes the models (or forces) that helped create the lollapalooza effect that is Cathie Wood.

If you don’t already, follow the podcast on Apple or Spotify. It’s 100% free.