Could the Oracle of Omaha have made a mistake?
All people are subject to
that influence the way we see and interpret information. These biases
tend to be deeply rooted in our experiences, and are usually very helpful in
making effective decisions. As researchers we have found that often top
executives are particularly subject to such cognitive biases. Very
powerful CEOs are especially vulnerable as their judgment has served them well
through the years.
The issue in the Lubrizol situation is probably
not that Warren
Buffet intentionally white-washed the insider trading situation to his
shareholders – it is more likely that he has been viewing the situation through
the lens of his experiences – which tells him that David Sokol would not engage
in such behavior.
Several specific biases could be at work. As David Sokol
is a lot like Warren Buffett – also born and raised in Omaha, wealthy,
successful, and generally conservative with Midwestern values – he may be
subject to a type of similarity or projection bias in which Mr. Buffett
projects his own extremely strong personal values onto David Sokol.
Buffett may also be subject to a halo effect bias in which Mr. Sokol’s business
values and success in other areas are falsely believed to extend into his
personal values. In each of these situations, a CEO is probably not aware
of how their experience is blinding them, or leading them to selectively
perceive certain information as more important than other information.
The truth is that
at this point we really do not know what really happened with these Lubrizol
shares. A federal investigation and lawsuits from shareholders will sort
out the facts. The simple point is this – sometimes we see what we expect
to see, or what we want to see, at times projecting our own values onto those we
trust. Warren Buffett has made a career out of poring over data but
ultimately trusting his instincts. It may be that the shroud of his
experience – clouded by key cognitive biases – has finally led him astray.Mike Mannor blogs at mikemannor.wordpress.com on issues of creativity, innovation, and strategy with a focus on highlighting
people and organizations that inspire in their efforts to make a positive impact
in the world.