I Make Many Mistakes

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In
the 1946 movie, The
Big Sleep
, the Sternwood family butler says to Philip Marlowe
(played by Humphrey Bogart) "I make many mistakes." This
is true of me too: I make many mistakes. I make them constantly.
Big ones, small ones, ones I remember, ones I forget, and a large
number that I am not even aware of.

I
have adopted this saying as a useful truth about my life: I make
many mistakes. I think there are good reasons why I tell you this,
or else I wouldn't, but I could be wrong.

I
realize that I am writing in a public forum. Sooner or later, no
doubt sooner, I am going to write something foolish, contradictory,
or in error, something misspelled, or with distorted grammar, or
with an idea so ridiculous that I will be amazed that I could have
expressed it. Not being all-knowing, I will make errors of omission
or mis-emphasis. I will express misleading ideas and not even know
it. Weeks, months and years from now, I will look back and wonder
who wrote that and what he could have been thinking. If there is
an error that can be made, then with probability 1, I will commit
it.

You
already know at some level of consciousness that what I communicate
can easily be mistaken. A great deal of communication, often argument
and discussion, is a give and take about what to do, what's the
right way, the wrong way, the good way, the bad. We seem always
to be searching to eliminate error. I don't really have to tell
you that I make many mistakes, but I'm doing it for my own good,
to get off the psychological hook of hanging on to mistakes, defending
them, and painting myself into a corner.

No
matter what I write, I am bound to use some hidden premises, some
deep philosophical assumptions about life, reality, good and evil,
monism vs. dualism, materialism vs. idealism, and I am reasonably
sure that my premises are not in good order. I do not know what
they are, for one thing. Every so often I try to find out, but after
awhile I give up. Even so, with high probability, I simultaneously
hold contradictory theories about life and reality, and this is
bound to lead to confusion and error in my thought. As the man said:
"I make many mistakes."

Having
read a good many books many years ago, but not in a good many years,
I am bound to express some idea that seems original to me that is
actually the repetition of another's thought. While the idea may
not be in error, my thinking that it originated with me will be.
The only credit I can take is that the rusty mechanism of memory
served up a deeply-buried thought, and I cannot even take credit
for that, not having created myself. I did eat my blueberries though
to stave off the inevitable.

Finance,
which is my field, is a branch of economics, in which I have some
training. A professor often does research. This involves creating
new knowledge. There is a community of finance scholars and we have
a culture, and from what I know, the cultures of other disciplines
are somewhat similar. We expose our ideas to our colleagues and
they criticize them mercilessly. After we publish these ideas, supposedly
vetted of mistakes, they are open to further examination by anyone
who cares to do more research. We constantly have to be deciding,
using our own judgment, what is right and what is wrong. This mirrors
life, mine and yours. We decide, we act, and we make many mistakes.
It pays to acknowledge that up front. As you are aware, everything
I say is my opinion and could be wrong in some degree. But what
you may be less aware of is that everything you are saying could
be wrong too. Admit it to yourself, you make many mistakes. Of course,
you do a few things right too. No need to get depressed over this.

After
you admit your mistakes to yourself a few times, you will feel better.
You'll be able to get on with your life and not hold on to the past.
Your regrets will come and go more quickly. There will be less psychological
pain. Admitting your mistakes is like confessing. When you're right,
you're right, but don't gloat about it. You will find that harms.
And when you're wrong, you're wrong. Best to admit it, get over
it, and get on with things. Forgive and forget. Forgive yourself
and forget. If you admit your error, you can keep the guilt down.
Those of you strong individuals who have no idea what I am talking
about, you do not need my advice. This is for the weak, like me.
I could be wrong, maybe the strong ones need it too. Well, that
is another subject, namely, how little I know.

Now,
another side of me is that I occasionally speculate. This is very
difficult and humbling for me. If you buy a stock at $20 and it
declines, your purchase may be a mistake. Should you admit it right
away and sell out, or should you hold on? It depends. Usually you
are wrong if the stock falls. You need rules. For example, if it
goes down by 10%, I made a mistake in when I began my purchases,
although maybe the stock still should be bought at some point. The
rule is to sell. Or if it goes down three days in a row after I
bought it, then I began wrong and it is best to sell out, let the
nerves settle, and think this through again. Occasionally, the correct
thing to do is realize that the mistake is not yours, but Mr. Market's.
Then you may wish to buy more. You are always asking: Am I right?
Am I wrong? Did I mis-evaluate this situation? Is there some news
I am unaware of? This questioning can go on endlessly, but it cannot.
No speculator is ever 100% correct. The percentage of errors is
often very large. In speculation it pays to discover one's errors
fast and cut them. Cut your losses and let your profits run is the
old adage. Successful speculators admit their mistakes and admit
them quickly, before the losses mount up to unmanageable proportions.
So both my scientific training and my speculation hobby have taught
me to admit my mistakes.

If
you admit that you make mistakes, then you are more likely to recognize
that you make them in the first place. You may discover that it
pays to hedge your bets, to insure against your possible mistakes.
If you think a stock is so terrific, you could be wrong. Instead
of buying your 1,000-share position all at once, buy 200 shares.
If the stock goes up and it looks as if your judgment is correct,
then buy some more. Buying as a stock rises, which few non-professionals
can bring themselves to do, is an admission at the outset that your
speculation can be in error. It's a form of insurance.

I
will offer you the comfort of the idea that our mistakes are helpful.
Propounding a wrong, false or mistaken hypothesis is useful in the
social order of things. Doing nothing is not much use. I really
like to hear a clearly made statement or hypothesis, even if I think
that it is wrong. If acting is reacting, then thinking is often
counterthinking. If I say that buying a stock as it rises is a good
way to speculate, you can now react to that idea, positively or
negatively. You can perhaps show me to be wrong, or find a better
rule, or a more refined or careful rule. If I hypothesize nothing,
where does that get us? It is said that we learn from our mistakes.
But before we can learn, we have to see the mistake, admit that
we made it, acknowledge that it is there.

All
of this business about mistakes and error is easier to handle if
you tone down your pride in yourself, but not your confidence. Pride
goeth before a fall. In other words, too much pride is a mistake.
Maybe Aristotle says that too little pride is also a mistake. I
just can't remember.

July
12, 2005

Michael
S. Rozeff [send him mail]
is the Louis M. Jacobs Professor of Finance at University at Buffalo.

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