Planck knowledge and chauffeur knowledge

I’m at Stanford Director’s College. In a talk about what went wrong with Enron, Charlie Munger (vice-chairman of Warren Buffet’s Berkshire Hathaway) told a thought-provoking joke about Max Planck.

After winning the Nobel prize, Max Planck went around Germany giving talks. His chauffeur heard the talk so many times that he had it by heart, and so one time, he asked Max Planck if he could give the address. Planck agreed, they changed places, and the lecture came off famously. But then came the Q&A, with the very first question being one that the chauffeur had no hope of answering. The chauffeur replied: "I'm surprised to hear such an elementary question on high energy physics here in Munich. It's so simple, I'll let my chauffeur answer it."

(Munger actually referred to this not as a joke but an “apocryphal story.” How nice if it were true!)

The point of the story was that there are two types of knowledge, the kind of rote knowledge that the chauffeur had, and the deep knowledge that Planck had. (What Munger didn’t say: the chauffeur had some Planck knowledge of his own, being clever enough to turn that question around! But it’s a great punch line — and a great concept.)

Munger went on to point out that what went wrong in oversight of Enron was a lot of chauffeur knowledge, great ability to give a presentation, but no deep knowledge. For example, the SEC’s approval of Enron and Arthur Anderson’s desire to “mark to market” (mark up, that is, not mark down) their energy contracts, was the product of pure ignorance. (Here, to my delight, he quoted Samuel Johnson, who, when asked why he mis-defined a word in his dictionary, replied, “Ignorance, Madam. Pure ignorance.”)

When asked how to find out if someone has Planck knowledge during an interview process, he noted: ” I’m afraid I’m going to have to say that the only way to tell is if you have it yourself.”

The subject of his talk was the lack of trust in business, and the the danger of self interest. He began the talk with another Samuel Johnson line: “It is difficult for reason to overcome interest.’ (And Ben Franklin: “If you would persuade, appeal to interest, not to reason.”) This in the context of the way that stock options, in his opinion, make it difficult for outside directors to truly be independent. How nice to meet someone Johnson-literate! We traded Johnson stories and appreciation afterwards.

Another great line: a great company “operates in a seamless web of deserved trust.” Something to aspire to.