Could the Oracle of Omaha have made a mistake?
All people are subject to biases 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. Mr. 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.