For those who fear flying, facts and statistics are likely of little help. But flying has become a lot safer over the decades. The number of incidents for every one million departures has fallen from 50 in the 1960s to less than one in 2016.
This remarkable improvement has a lot do to with the aviation industry’s attitude towards mistakes, Matthew Syed explains in his book Black Box Thinking.
All planes have two indestructible black boxes – one records the conversations in the cockpit and the other the electronic data. When an accident occurs there’s plenty of information to review. Findings cannot be used in court, so staff are encouraged to speak up and the focus is solely on designing new procedures that minimise the chance of the same errors reoccurring, rather than apportioning blame.
Can investors learn from this attitude when dealing with their own mistakes?
The importance of good records
A reliable system to collect and store data is crucial. Having access to your original investment case and its underlying assumptions as new information becomes available is important. If there is evidence that the thesis is broken, having that information is critical to assessing where things went wrong and drawing useful lessons.
This process also helps to distinguish between luck and skill. Sometimes a stock price can increase for reasons that have nothing to do with your original investment case. This should count as a mistake, even if a profitable one, and treated as a learning opportunity.
Writing things down also helps to fight the tricks that our memory can play. Research shows that when trying to remember past events that could potentially hurt our egos, the brain tends to recall information that makes us look better.
So having a great system to record information is only half of the battle. Psychology also plays a role when dealing with failure.
To learn from mistakes we need to first own them. Often simply acknowledging that a mistake exists can be hard. Admitting that we made one is even harder.
Our brains tend to believe we’re right even if evidence says otherwise. Mistakes are reframed or ignored. It’s common – especially for value for investors – to blame ‘Mr. Market’ when anything goes wrong. They then move on as if nothing ever happened and the mistake was inevitable.
This occurs because people fear failure so much that they even struggle to admit mistakes to themselves, Syed explains. But this can be solved by redefining failure. Similar to what the aviation industry does, failure should be associated with the opportunity to improve rather than finger pointing. Ray Dalio of Bridgewater also highlights the importance of such an approach in this TED talk (around 2 minutes 40 seconds and also 13 minutes 30 seconds).
And when investing, as we discussed in a previous post, the number of times investors are wrong is not particularly relevant. What matters is how much money they make when they are right and how much they lose when they are wrong.
Nevertheless, errors offer the opportunity to learn valuable lessons and it would be foolish to ignore them. Keeping good records and actively fighting psychological biases should help with making the most out of mistakes.