Failure has become one of the hottest themes for graduation speeches, blog posts, and self-help books. It is often worn as a badge of honor. But, let’s face it, failing is painful, sometimes even fatal. So how, and under what circumstances, can there be value in falling short?
Let me start with a section from How Google Works by Eric Schmidt and Jonathan Rosenberg (Grand Central Publishing, 2014) entitled “Fail well.” They recall Google Wave, “a technological marvel but a major flop.” It failed well because it created some valuable technology that migrated to Google+ and Gmail. “As Larry says, if you are thinking big enough it is very hard to fail completely. There is usually something very valuable left over.”
We have all heard and have come to believe that a good failure is a fast one, “but one of the hallmarks of an innovative company is that it gives good ideas plenty of time to gestate.” How can we reconcile short-term successes or failures with long-term goals? “The key is to iterate very quickly and to establish metrics that help you judge if, with each iteration, you are getting closer to success. Small failures should be expected and allowed, since they often can shed light on the right way to proceed. But when the failures mount and there is no apparent path to success (or, as Regina Dugan and Kaigham Gabriel put it, when achieving success requires ‘multiple miracles in a row’), it is probably time to call it a day.” (p. 188)
In Fail Better: Design Smart Mistakes and Succeed Sooner (Harvard Business Review Press, 2014) Anjali Sastry and Kara Penn offer techniques for managing projects from their launch through their iteration to build and refine, and finally to embedding the learning.
(For those like me who thrive on the tangential, the book’s title comes from Samuel Beckett’s Worstward Ho—“Try again. Fail again. Fail better.” As the authors note, “Cast as a mantra that turns failure into success, the phrase caught on with tennis players, tech entrepreneurs, and many more, infusing it with an optimism that no literary critic would credit to ‘the twentieth century’s most depressing writer.’” [p. 15])
Fail Better is of course a business book that assumes a team trying to implement a project, so not all of its recommendations are applicable to lone traders and investors. For today’s post I decided to continue with the theme of managing time frames since I think everyone struggles with this issue.
The authors suggest that “we need a systematic method for managing our innovation projects because what looks like a failure at one time scale could actually be a success at another, if you manage things well. Or, it could go the other way: you may scrape together some quick apparent wins and declare an early victory, yet later discover that things are actually worse, when negative side effects subsequently emerge.” (pp. 215-16)
Why, the authors ask, do we get timing wrong so often? Perhaps the major reason is that “people tend to underestimate the effects of nonlinear rates of change. Consequently, they are blindsided by effects that appear to come out of nowhere but are actually the result of compounding processes playing out within the system. A similar tendency is at work when people assume that the future will be similar to the recent past: the normal human tendency is to guess that the future will continue current trends. … For anything that’s cyclical or exponentially growing or declining, this heuristic ensures that you will at some point be wrong—and that you will be dead wrong at those crux moments when rates of change are greatest (peaks and troughs in cyclical markets, for example).” (p. 228)
Both of these books are good reads, and I’ve shortchanged them by zeroing in on a single topic. But I hope that the passages I’ve quoted will inspire you to find ways to fail well in your trading and investing.
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