📖Charlie Munger

Fermat-Pascal System

🌳 Advanced★★★★☆

Probability thinking — weighing likelihood against payoff — is the foundation of rational decision-making.

💬

The Fermat/Pascal system is dramatically consonant with the way the world works.

— Munger's Speech，1994

🏠 Everyday Analogy

Just as a casino owner doesn't focus on individual wins or losses but calculates long-term probabilistic advantages, investing should also emulate a shrewd casino operator—not being misled by short-term fluctuations but making decisions based on probability and expected value. For every investment, the mathematical formula 'win rate × profit − loss rate × loss' must be clearly calculated.

📖 Core Interpretation

A decision-making system based on probability and expected value, using mathematical thinking to address uncertainty.
💎 Key Insight：Munger uses the Fermat/Pascal framework: multiply probability by magnitude for every possible outcome. A 90% chance of making $10 is worth less than a 20% chance of making $100. Most people overweight certainty and underweight expected value. In investing, this means sometimes taking uncertain bets with massive asymmetric payoffs — and always avoiding bets where the downside is catastrophic regardless of probability.

AI Deep Analysis

Get personalized insights and practical guidance through AI conversation

❓ Why It Matters

Business decisions are fundamentally about making choices under uncertainty, with probabilistic thinking being the optimal tool.

🎯 How to Practice

Evaluate the probability and payoff of each possible outcome, calculate the expected value, and make the choice that maximizes expected value.

🎙️ Master's Voice

Those who keep learning, will keep rising in life.
Munger sees learning as the key to continued success. Those who stop learning stop growing, regardless of past achievements.

⚔️ Practical Guide

✅ Decision Checklist

  • Am I still learning?
  • Is my learning rate high?
  • Am I rising or stagnating?

📋 Action Steps

  1. Never stop learning
  2. Increase learning rate
  3. Apply new knowledge

🚨 Warning Signs

  • Learning has stopped
  • Relying on past knowledge
  • Resistance to new ideas

⚠️ Common Pitfalls

✕Probabilities are difficult to estimate precisely.
✕Black swan events may fall outside the scope of models.

📚 Case Studies

1
Fermat-Pascal Betting System Insight (1994)
Munger discussed the ‘Fermat-Pascal system’ as the math behind rational betting, emphasizing expected value and edge in investment decisions.
✨ Outcome：Applied probability-weighted thinking to concentrate capital in high-odds situations.
2
Tech Bubble Avoidance via Probability (2000)
Using Fermat-Pascal style probability reasoning, Munger and Buffett declined most dot-com investments lacking clear odds or durable economics.
✨ Outcome：Missed the crash; Berkshire’s capital base was preserved while many tech-speculators lost heavily.

See how masters handle real scenarios?

30 real investment dilemmas answered by legendary investors

Explore Scenarios →