Monday, May 01, 2006

Do we learn from mistakes?

Not necessarily.

Our assumption that we learn from mistakes is one of many such fallacies that arise from confusing logical deduction with logical induction. Other such fallacies include "taking high risk for high returns".

Allow me to delve little deep here. Its happens to be my favorite subject. Logical deduction implies a guarantee that if the premise if true, the conclusion would be true.

Lets take a classic example. "If it rains the ground would be wet". If you know that it has rained today then you can deduce that the ground would be wet.

However when you see a wet ground in the morning and say that "it must have rained tonight", you are using inductive logic. In logical induction, a premise provides some degree of support for the conclusion but not a guarantee.

Nothing new..Right?? Just look around and you would find that this is THE MOST COMMON mistake we make regularly and we never learn from it.

A learning process requires assimilation of knowledge and putting it to practical use. When we venture out in open, with `less than perfect' knowledge, we make mistakes. It's a part of learning process. But its not the mistake, per se, which teaches you. It requires a rigorous amount of discipline and analysis to be able to figure out what went wrong. An Iranian saying goes like this "man is a donkey which falls twice in the same ditch" . Leaving aside the question "are women any better", I tend to agree with this saying. More often than not, you would find a pattern of mistakes getting repeated in your life. That's what you call your weaknesses.

Coming back to original question.

We commit mistakes in the learning process but committing mistakes doesn't teach us anything. It's the analysis and corrective measure that enables us to learn. Unless this feedback loop is established you can continue making the same mistakes forever.

My personal experience suggests that the costliest mistakes of my investing life didn't teach me anything worthwhile. Its like having a crush on someone as a teenager. You don't really learn anything. You aren't mature enough to be able to analyze otherwise you wouldn't have been in that situation in the first place. In the initial few years, I lost lot of money in trading but I didn't learn anything from that. You can argue that I learnt the lesson that you can't make money in trading. I use the same argument to justify that foolishness but the fact of the matter is, I was sowing seeds in an arid land. It was waste of time and money.

There is no correlation in the number of your own mistakes and learning. I've leant a lot by reading and analyzing mistakes made by other people. At this stage I don't need to commit a mistake to be able to learn.

So my advise to new investors is that unless you are sure that you have, what it takes to learn from mistakes, don't commit them. Stay away from direct equity investments. You don't have to be jack of all trades. You got to be good at what you doing for living.

This doesn't mean that you can't be master of all trades. You can(my mind is saying I am!). Its difficult, time consuming, complex and confusing task but not impossible.

Posted: Mar 21, 2006

1 comment:


Many folks do not learn.