Intelligent Errors: Learning from Financial Mistakes

There are distinctive patterns in the errors people make. The reasons for this are many. Daniel Kahneman, in his excellent work “Think Fast and Slow,” takes his reader down a thoughtful path to uncover how and why we make decisions, and most importantly how and why we make the same mistakes over and over again. These mistakes, Kahneman asserts, represent a learning opportunity and allow us to turn failure into success.
Throughout the progression of the book, Kahneman explains why observable error gives us our greatest opportunity for success. These observable mistakes give us the opportunity to identify fallacious thinking so that we have greater odds of success the next time we’re presented with a similar situation. In this way, errors are the parents of good outcomes. We simply learn best after we’ve stepped in it. But even after we’ve made great decisions there’s another covert, a more hidden form of “error,” – luck.
It takes a slight nudge in paradigm to view luck as favorable error – but that’s exactly what it is. Most of us prefer to take credit or discredit for an action, but we feel uncomfortable handing over outcomes of personal or professional success to that blind god of fate called luck. This is an especially difficult concept within financial services because we all want to be smart. We all want to believe our intelligence is the key component of our success – but often it plays a very minor role. It doesn’t rain because you have an umbrella – it just rains.
In financial markets, luck is too often played off as experience or expertise. Before 2008, many money managers were viewed as expert investors who were extremely knowledgeable about the investment practices of their funds and the amount of risk they were taking. Unfortunately, it turns out that many of them were simply in the right place at the right time for many years. When the economic downturn hit, these “experts” were left picking up the pieces of their reputation. Weathering the ups and downs of economic cycles requires more than luck, it requires experience.
I believe that that Kahneman is correct in the sense that as we make decisions that don’t end well we have the greatest opportunity to elevate the probability of the next decision rendering better results. In the financial markets, there is always luck involved, but those who learn from their mistakes can withstand the market over time. As a financial planner, I make mistakes. We all do. The key to eventually becoming successful is learning from errors and making sure not to repeat them in the future. Error is like bricks in a wall, and to the extent we can build upon error we can build stronger, more stable portfolios and lives.