How and why do you think economists have gotten this so wrong?
I would argue that the economists have not been all that good at working concepts of good and evil into their profession. Nor do they understand, at all well, the economic consequences of bad accounting.
In fact, they’ve made a profession of driving value judgments out of the subject.
Yes. They say it’s not economics if you think about the consequences of good and evil, and good and bad business accounting. I think what we’re learning is that when you don’t understand these consequences, you don’t have an adequately skilled profession. You have big gaps in what you need. You have a profession that’s like the man that Nietzsche ridiculed because he had a lame leg and was very proud of it. The economics profession has been proud of its lame leg.
So in order to cure the lame leg, you would lean more toward an approach to economics that takes human nature into account?
If you totally divorce economics from psychology, you’ve gone a long way toward divorcing it from reality.
The same could be said of psychology. If you divorce economics from psychology …
That’s what’s wrong with psychology professors. There are so few of them that know anything about anything else. They have this terribly important discipline that all the other disciplines need and they can’t communicate that need to their fellow professors because they know so little about what these other professors know. This is not an unfair description of much of academia.
You’ve often said that one of the keys to your success has simply been to avoid making the garden-variety mistakes that you see other people make.
Warren and I have skills that could easily be taught to other people. One skill is knowing the edge of your own competency. It’s not a competency if you don’t know the edge of it. And Warren and I are better at tuning out the standard stupidities. We’ve left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error.
If you had to characterize a few mistakes that you see executives making, which ones jump out at you?
An extreme optimism based on an inflated self-appraisal is one. I think that many CEOs get carried away into folly. They haven’t studied the past models of disaster enough and they’re not risk-averse enough. One of the very interesting things about Berkshire Hathaway is how chicken it is, how cautious, how low is its leverage. But Warren and I would not have been comfortable with more risk, entrusted with other people’s net worths. There was no reason for our financial institutions to stretch as much as they did, with the leverage, the shady people and the compromises.
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Update (Feb. 2010) - Video of Interview:
