scorecardresearchWarren Buffett on why intelligent managers sometimes make irrational business

Warren Buffett on why intelligent managers sometimes make irrational business decisions

Updated: 29 Aug 2023, 06:33 PM IST

  • Warren Buffett identifies a critical unseen force in the business world, 'The Institutional Imperative,' explaining why companies often emulate competitors, leading to irrational decisions.

FILE PHOTO: Berkshire Hathaway CEO Warren Buffett

FILE PHOTO: Berkshire Hathaway CEO Warren Buffett

Warren Buffett, one of the most respected names in the investment world, often shares his thoughts and experiences with budding investors and business professionals. One such piece of wisdom that has gained attention over the years was unveiled in his 1989 letter to Berkshire Hathaway shareholders. In it, he spoke about a phenomenon he referred to as 'the institutional imperative' - a trend that even he hadn't noticed until deep into his career.

The Mysteries of 'The Institutional Imperative'

Buffett's "most surprising discovery," as he labeled it, is the dominance of an unseen force in the business realm - 'the institutional imperative.' This principle remained undiscussed during his time in business school. Buffett remarked, "In business school, I was given no hint of the imperative's existence, and I did not intuitively understand it when I entered the business world." This notion challenges the belief that experienced managers, with their wealth of knowledge, would naturally make rational business choices.

Buffett elaborates on the institutional imperative by explaining its various manifestations. It can surface when, for instance, "any business craving of the leader, however foolish, will be quickly supported by detailed rate-of-return and strategic studies prepared by his troops." Another example is when executives blindly mirror the strategies and behavior of their competitors without considering the consequences or the logic behind such actions.

The Risks of Following the Pack

The institutional imperative's influence can lead even the brightest leaders with exceptional credentials to embrace flawed strategies simply because their peers are adopting them. Why does this pattern emerge?

Buffett believes it roots from several managerial weaknesses. One of the primary ones being subpar capital management skills. Coupled with that, managers often latch onto any evidence, regardless of its authenticity, that justifies their aversion to change.

This tendency to follow the pack, especially when driven by the institutional imperative, highlights the challenges leaders face. These include the need for independent thinking, the value of thorough data analysis, and the necessity to make decisions based on long-term perspectives, not just transient business trends.

For many industry followers, Warren Buffett's reflections serve as a reminder to always question the status quo and to ensure that decisions stem from rational analysis and not just from a desire to emulate competitors.

(Several parts of the text in this article, including the title, were generated with the help of an AI tool.)


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First Published: 29 Aug 2023, 06:33 PM IST