Translator: Leonardo Silva Reviewer: Mile Živković
"Failure is not an option."
How many times have we heard that phrase?
But is it the right way to approach an important task?
True, most things worth achieving in life require perseverance,
maybe even 10,000 hours worth, according to some pundits,
but there are times when maybe all that effort might be for nothing,
instances where the original goal was misguided
or circumstances changed along the way.
In those cases, the strategy of "failure is not an option"
doesn't prevent failure; it magnifies it.
In life-and-death situations, we use predefined exit plans to reduce risk.
In earning my pilot's license,
I learned it was critical to stick to a set of rules
or checklist for each flight,
which clearly predefined when to abandon the original flight plan.
This is the best defense against the lethal mental conditions pilots call
"get-there-itis."
What makes these decisions whether to quit or to persevere fascinating and difficult
is that we have to make them without being able to perfectly see the future,
a problem known as decision-making under uncertainty.
You probably heard that term before
because people have been talking about it a lot recently.
It's a whole new field of inquiry
pioneered by the Nobel-winning economist and psychologist Danny Kahneman
and his coresearchers.
Let's start by looking at this problem in the context of financial markets,
where decision-making under uncertainty is pretty much what everybody is doing
all the time.
Jack Schwager wrote a series of books called "Market Wizards,"
that featured interviews with the most successful traders of the past 40 years.
At the end of each interview, Schwager asked for one piece of advice.
Remarkably, the vast majority of these champion investors gave the same answer
to this open-ended question:
"Cut your losses early and let your profits run."
Speculators as celebrated as George Soros and Paul Tudor Jones
attribute much of their success to this one basic rule.
To cut their losses early,
traders rely on a predetermined exit plan known as a "stop-loss."
A stop-loss sets a price below the purchase price,
where the investor self-commits to sell,
thereby stopping the loss from getting even bigger.
In the absence of extreme market jumps, a stop-loss doesn't make the loss go away.
It puts a limit on it.
The things that's so interesting and puzzling
is that the use of stop-losses by these fabled investors
not only limited their losses when they were wrong,
but also helped them to make big profits when they were right.
Why was that the case?
In a word, momentum.
When people form large groups, they tend to behave as a herd,
and herding creates trends.
And financial markets in particular have been prone to trends, or momentum,
as far back in history as we care to look.
In effect, the creed of "cut your losses early and let your profits run"
is a kind of trend following.
It protects you from big losses fighting the trend,
but, once you're riding it,
well, you'll be trying to make it a nice, long run.
You might ask, "Why follow a stop-loss discipline
rather than just keep an open mind and change course
when the situation warrants it?"
Unfortunately, for most of us,
it's tough to escape the many hardwired cognitive biases
that cloud our judgment.
We see these decision-making biases everywhere.
For example, the biggest risk in mountaineering
isn't falling off a cliff;
it's summit fever,
getting fixated on making it to the top
and pressing on in deteriorating conditions.
In poker, a well-know rookie mistake is to become pot-committed
and to keep on putting good money after bad,
even as new cards turned over clearly indicate folding as the right thing to do,
a cognitive bias known as "the fallacy of sunk costs,"
true in the world of new technologies too.
No one ever says the founders of Twitter were quitters,
but they wisely were just that.
They started off working on a podcast service which wasn't getting any traction,
so they quit pouring their time and resources into that
and then they stuck with what was working.
Quitting isn't a sexy thing to talk about,
but it's a surprisingly important ingredient for success.
Reflecting on my experience at LTCM,
I wonder how things might have been different
if we had used stop-losses as part of our investment strategy,
rather than structuring our business to be able to fly through any weather.
In conclusion, whether it involves our money or our precious time,
those wicked cognitive biases too often lead us
to cut our losses later than we should,
keeping us from enjoying the potentially more rewarding opportunities
we'd find if we changed course.
Or maybe we've just heard too many speeches about quitting being for losers.
I hope this talk redresses that imbalance
and you'll agree that, quite to the contrary,
quitting, when done with discipline and a plan,
is for winners.
Thank you very much.
(Applause)