Warren Buffett’s Simple Rule: Bad News First

Warren Buffett has a somewhat interesting approach when it comes to his annual letters to shareholders. Rather than trying to beat around the bush, he dives head first into any bad news that needs to get out of the way.

For example, in his 2012 letter to his the shareholders of Berkshire Hathaway, Buffett opens with a very simple sentence letting everyone know that there were plenty of good things to discuss, but first they’d have to read the bad.

“I could never have dreamed that a year in which we had a gain of 24.1 billion would be sub-par… But sub-par it was. For the ninth time in 48 years, Berkshire’s percentage increase in book value was less than the S&P’s percentage gain.”

That’s quite an opening. Not only that, he seems to be a rule with Buffett’s letters. If there is bad news to be delivered, he tends to open with it. Psychologist Robert Cialdini, emeritus professor of psychology and marketing at Arizona State University and CEO of Influence at Work, thinks this tactic is genius.

Cialdini recently wrote a book titled “Pre-Suasion” in which he further analyzes Buffett’s bad news first rule. Cialdini offers a few explanations for this strategy: First, that Buffett is trying to get his shareholders to listen to him better— a simple bait and hook strategy.

The second explanation Cialdini offers is that Buffett wants to gain trust. When right out of the gate you are willing to admit that you made a mistake, people are going to think you are honest and trustworthy. Not only that, they will be more inclined to pay attention throughout the remainder of the letter— where Buffett explains why the company fell short and where improvements can be made.

“It reassures customers— not only your existing customers— that you know the drawbacks, you know the failings, and you have undertaken an analysis that allows you to change those failings into pluses,” Cialdini commends.

This is no new rule for Buffett, in his early years as the head of Berkshire Hathaway he was known to expect managers from insurance units such as GEICO to always deliver bad news first. It’s a simple rule to follow, that could help earn trust and in turn build better relationships.

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