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Wisdom of Warren Buffett: On Innovators, Imitators, and Idiots

Posted by Bill Taylor on October 9, 2008 9:52 AM

I'm not sure who said it first, but I agree with the sentiment: "A crisis is a terrible thing to waste." We're all struggling to make sense of the financial crisis that has spread around the world, to learn some lessons that will guide us as we go forward. One of my worries is that many of us will learn the wrong lessons--specifically, that we will become too conservative and risk-averse, that we will learn to fear creativity rather than embrace it.

It's easy to portray the credit crunch as a case study of creativity run amok. Who's the genius who invented subprime loans? Weren't we all better off before the creation of a $500-trillion market in derivatives, hard-to-understand financial contracts that are at the root of so much of what's gone wrong? Shouldn't we declare, once and for all, that our fascination with "disruptive" technologies, "breakthrough" innovations, and financial "reengineering" does more harm than good?

Leave it to Warren Buffett, one of the world's richest men, to offer the most valuable advice on this score. In a recent hour-long television interview, Buffet gave a masterful course on how the world got into this financial mess.

At one point, his interviewer asked the question that is on all our minds: "Should wise people have known better?" Of course, they should have, Buffett replied, but there's a "natural progression" to how good new ideas go wrong. He called this progression the "three Is." First come the innovators, who see opportunities that others don't. Then come the imitators, who copy what the innovators have done. And then come the idiots, whose avarice undoes the very innovations they are trying to use to get rich.

The problem, in other words, isn't with innovation--it's with the idiocy that follows. So how do we as individuals (not to mention as companies and societies) continue to embrace the value-creating upside of creativity while guarding against the value-destroying downsides of imitation? The answer, it seems to me, is about values--about always being able to distinguish between that which is smart and that which is expedient. And that takes discipline. Can you distinguish between a genuine innovation and a mindless imitation? Are you prepared to walk away from ideas that promise to make money, even if they make no sense?

It's not easy--which is why so many of us fall prey to so many bad ideas. "People don't get smarter about things that get as basic as greed," Warren Buffett told his interviewer. "You can't stand to see your neighbor getting rich. You know you're smarter than he is, but he's doing all these [crazy] things, and he's getting rich...so pretty soon you start doing it."

Andrew Oswald, a professor of economics at the University of Warwick, has a more poetic way of making the same point. Oswald is a pioneer of a field that might be called "happiness economics"--the study of the interplay between money and human satisfaction. His rigorous academic work confirms the advice that we hear in our churches and from our shrinks--the relentless pursuit of wealth may fill your bank account, but it will leave you empty as a human being.

"The curse of humanity is that people feel compelled to look over their shoulders," Professor Warwick told my colleague Polly LaBarre a while back. "Happiness and self-esteem depend on rank and relative income. We are consumed by relativism. If your neighbor drives up in a new Lexus, and you're still driving the Toyota that you were perfectly satisfied with yesterday, you start to become dissatisfied."

So don't use the financial crisis as an excuse to stop taking chances or downsize your ambitions. But do use the crisis as an opportunity to take stock of what really matters--and to stop looking over your shoulder.