Wednesday, May 25, 2016

Failure and the need to learn from mistakes

Baseball fans believe a consistent .300 batter is a hall of fame candidate. A basketball player can shoot three-point baskets at less than 50% success and be viewed as special. However, the failure rate for a successful traders is less clear.

Obviously, high returns relative to risk is critical, but returns are generated from the trades undertaken. Often traders do not have a high success rate for trades. In fact, success as measured by a winning percentage is often not a good indicator. The gain relative to loss is critical especially if success rate is lower than 50 percent. The adage is to cut loses quickly and hold on to gainers is implanted in the brain of most traders. Yet, traders with high failure rates need by definition higher win to loss ratios.

The old saying, "It does not matter whether you win or lose, but how you play the game",  is a nice  thought but not accurate. It matters whether you win, but you only get better by understanding how to play the game. Improvement playing the game is based on learning from mistakes. This is why it is so critical to undertake performance attribution analysis. It is also why due diligence is concerning the investment process is so important. If you do not believe me, listen to those who think learning from failure is critical.

Perhaps the history of errors of mankind, all things considered, is more valuable and interesting than that of their discoveries. Truth is uniform and narrow.. but error is endlessly diversified. 
-Ben Franklin 

A real failure does not need an excuse. It is an end in itself.
-Getrude Stein 

Ever tried. Ever failed. No matter. Try again. Fail again. Fail better.
-Samuel Beckett

The purpose of science is not to fool yourself - and you are the easiest person to fool.
-Richard Feynman

The things I remember best from college were the questions I got wrong on the exams.
-Kathryn Yatrakis 

Medicine is a science of uncertainty and an art of probability 
-Sir William Osler founder of Johns Hopkins Medical School 

If a machine is expected to be infallible, it cannot also be intelligent.
-Alan Turing

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