Is Berkshire Hathaway Really a Psychology Experiment?

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8 Responses

  1. Guy Spier says:

    “It is simple to hear and understand the principles they teach, but it goes against human nature to apply them”. This is true, but that is not to say that there is not a small, but growing group in the United States and around the world who have every intent to copy these principles.

    And that group includes: Ken Shubin Stein, not to mention Mohnish Pabrai, John Mihaljevic and various others.

  2. Matt says:

    Very interesting, Ken. I’d be interested to know if you think that learning about and understanding these biases helps people avoid them, or if the ability to avoid them is to some significant degree independent of knowing about them (even tacitly, perhaps.) I can imagine that, for some people, knowing of the biases might make them _more_ likely to fall prey to them, because knowing about them makes them _think_ they are avoiding them, even though they are not, but I don’t know of any study on this. Do you know if there is good work done one questions of this sort?

  3. Ken Shubin Stein says:

    Matt,

    Great question – you focused in on one of the toughest aspects of innate and acquired cognitive biases. Knowing about them, even studying them deeply, does not completely immunize a person from their influence. There are a number of studies, some even on psychology PhD students, where the experimenter tells the subjects that they are being tested for a certain bias, and the subjects still exhibit the bias.

    In my experience the only things that partially work are: 1) behavioral changes designed to avoid the stimuli that would cause the bias response – such as not going to an open outcry auction, or aligning compensation in the same direction for all stakeholders; or 2) building tools to help mitigate the biases impact and allow the slower, more rational part of the brain to get involved – checklists, re-framing exercises, breaks of time and place before decision making, etc.

    A few resources I found helpful are: Influence by Cialdini, Thinking Fast and Slow by Khaneman, and The Checklist Manifesto by Gawande.

  4. Although the second title is well known, just in case (typo): Daniel Kahneman.

  5. Ken Shubin Stein says:

    Another resource that has great re-framing tools in it is a de-classified CIA document: The Psychology of Intelligence Analysis by Richards Heuer.

    https://www.cia.gov/library/center-for-the-study-of-intelligence/csi-publications/books-and-monographs/psychology-of-intelligence-analysis/PsychofIntelNew.pdf

    We use some of his tools at our firm and in our class, and a few members of the US intelligence community recently told me that they regularly use his techniques for decision making when facing difficult choices.

  6. Great article! Charlie Munger has not been shy to include such authors as Robert Cialdini among his favorites, and it seems Buffett and Munger ascribe an increasing portion of their success to rationality over time.

    As young investors, we tend to believe that success is due to some superior analytical or information-gathering ability. Over time, most of us tend to realize that, to the extent we have been successful as investors, it is because we have kept a cool head when the world was panicking.

    I would argue that people like Ken Shubin Stein, Guy Spier and Mohnish Pabrai have set up their investment businesses in ways that maximize avoidance of psychological errors. They have copied aspects of Berkshire Hathaway even in the context of privately managed investment firms. The positive effects of the right structure may still be underappreciated in the investment world, but they deserve to be studied and emulated.

  7. Great read, enjoyed reading it.

  8. Amar Sendro says:

    Great read indeed. Re. WB and anchorin: http://www.youtube.com/watch?v=sLXNn-im4ec

    (at the 2.25 min mark)