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A Lesson from Warren Buffett on How to Make the Best Business Decisions

October 14, 2010

 

Warren Buffett speaking to a group of students...

Image via Wikipedia

 

When you’re about to make a business decision, who should you go to for advice?  People who will tell you what you want to hear, or people who will tell you what you need to hear?  Based on a lesson from Warren Buffett, the third richest man in the world according to the Forbes list of billionaires, you may want to reconsider your strategy.

A recent McKinsey Quarterly article mentioned that Warren Buffett hires an advisor to talk him out of making business deals, and  he compensates the adviser well only if the deal doesn’t go through.  In other words, when Mr. Buffett is thinking about purchasing a company, he hires someone to do his best to convince him why buying the company is a bad idea.  Not only does he pay the advisor to do this, he gives him a bonus if and only if the advisor talks him out of purchasing the company.

Why would Mr. Buffett do this?  He does this because, when making a decision of this magnitude, it’s worthwhile to look at every angle make sure the deal is a good deal.  If it’s not a good deal, the money lost from making a poor acquisition will be much greater than what an advisor paid.  In the end, it’s better to face criticism before you make a decision than it is to face the consequences of a bad decision.

So how does this apply to you?  Here’s how – it’s better to ask people for criticism than it is to ask them to agree with you.  For example, if you’re thinking about starting a company and pitch your idea to family and friends, it’s better to ask them what they don’t like than what they do like.  This is even more important if you really like an idea, because if you do, you’ll likely influence whether or not other people like the idea.  Instead of getting advice, you’ll get a cheer squad.  That’s not what you need.

What you do need are people who will tell you what you need to hear.  What you need are people who will poke holes in the idea and point out flaws.  Even if you end up starting the business, the fact that someone has already pointed out its weaknesses can make the difference between whether or not your business will succeed.

If you’re thinking about starting a business, make sure you find some smart people who aren’t afraid to tell you what they think.  You can even encourage them to find weaknesses instead of acting like a cheerleader.  Having someone like this in your corner can be the difference between succeeding and failing.

Other Posts:

7 Priceless Business Quotes from Warren Buffett

How to Personalize Your Facebook URL

 

Sources:

Andrew Campbell and Jo Whitehead, How to test your decision-making instincts, McKinsey Quarterly

Luisa Kroll and Matthew Miller, The World’s Billionaires, Forbes

 

 

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