Failure and Idiocy

Overconfidence can kill

Hubris and Nonsurvival

The ability to concentrate one’s attention on the matter at hand is a prerequisite for a survival strategy in a hostile environment or when under stress. Erasmus, the Dutch scholarly reformer who sought refuge in Basel, Switzerland, where he was free to continue to write satire of the Roman Catholic Church, had some good advice when under stress:

Keep cool.[i]
—Erasmus (ca. 1466–1536), Dutch humanist, theologian, and philosopher, in a letter to Luther

This was surprisingly good advice then and still is. While humour, keeping cool, and controlled fear are good, hubris is not. Hubris was a human trait well-known to the ancient Greeks, one that many financial professionals can relate to. To Louis Moore Bacon (b. 1956), an American hedge fund manager, hubris is one of five warning signs when analyzing a manager.[ii] Turnaround artist Albert J. Dunlap found a way to spot hubris in corporations:

[T]he success of a corporation is inversely proportional to the size and opulence of its headquarters.[iii]
—Albert J. Dunlap (1937–2019), American business executive

Many financial institutions’ nonsurvival is attributed to hubris. How to avoid hubris? Become a Stoic philosopher:

What is the first business of one who practices philosophy? To get rid of self-conceit. For it is impossible for anyone to begin to learn that which he thinks he already knows.[iv]
—Epictetus (ca. ad 55–ca. 135), Greek Stoic philosopher

As much as I like quoting philosophers, there is an element of risk in becoming one. Intellectual overconfidence and self-conceit are not entirely unheard of in finance and elsewhere. There is an element of risk when quoting philosophers, too, especially as I do, when quoting out of original context and applying to something else, finance and risk management in my case. Here is one way of putting it. It is from one of my all-time favourite films, A Fish Called Wanda:

Otto: “Apes don’t read philosophy.”
Wanda: “Yes they do, Otto, they just don’t understand it.”

Wanda, hilariously well performed by two-time Golden Globe–winning and Emmy Award–nominated Jamie Lee Curtis, Tony Curtis’s daughter, then goes on:

“Let me correct you on a few things. Aristotle was not Belgian. The central message of Buddhism is not “Every Man for Himself.” And the London Underground is not a political movement. Those are all mistakes, Otto.”[v]
—Jamie Lee Curtis (b. 1958), American actress and writer of books for children, as Wanda

Ignorance and Death

Laurence Gonzales in “Deep Survival” tells the story of a US Army Ranger, arguably someone well trained for survival in hostile environments, who took a guided commercial rafting trip, fell off the boat, and drowned in shallow water. The ranger refused rescue. (Army Rangers fail the training program if rescued; their credo is “death before dishonor.”) He floated calmly downstream. He felt he was in no real danger because of all the training he had undergone in much worse conditions. Then he arrived at a place where a big rock blocked the middle of the current. He was sucked under, pinned, and drowned. The official report said, “The guest clearly did not take the situation seriously.”[vi] This was brought to the point well by Minna Antrim, author of Don’ts for Girls: A Manual of Mistakes:

Experience is a good teacher, but she sends in terrific bills.[vii]
—Minna Antrim (1861–1950), American writer

Ueli Steck died aged forty on April 30, 2017. Ueli Steck was a Swiss extreme rock climber, a self-acclaimed “control freak,” lauded for his speed and innovation, and nicknamed “Swiss Machine” for he did not actually climb mountains; he “sprinted” them, often alone. To nonmountaineers he was suicidal, as BASE jumpers or free solo climbers are often perceived.

In an interview in 2013, after a solo speed climb up Annapurna, the tenth-highest mountain in the world, the sympathetic and humble Steck said that he consciously took risks of dying. He barely survived his first attempt up Annapurna in 2007, where he got hit by a stone and fell two hundred meters. Although married, he consciously, reasonably, commendably, and probably presciently did not reproduce. (His wife, a passionate rock mountaineer, too, nearly died during a “casual” local Sunday hike they took together in 2010. She slipped and fell thirty meters while overtaking other, more risk-averse hikers.) It is not just nonmountaineers who “perceive” the risk to be terminal; mountaineers know it too:

Life and death are part of the rope team.[viii]
—Mountaineering wisdom/French saying

Walking on thin ice is risky; literally.

Walking on thin ice is always risky.[ix]
—David Attenborough (b. 1926), English naturalist and broadcaster

Reinhold Messner, a surviving mountain adventurer famous for being the first man to climb Mount Everest with no supplemental oxygen and who lost a brother during his first major Himalayan climb in 1970, keeps track of famous deaths. At the entrance of his museum, he maintains a plaque with a list of top mountaineers, “the rock and ice stars,” who managed to turn seventy, i.e., survived. Messner says that over the past two hundred years, roughly half of the top mountain climbers have died in the mountains and did not reach the age of seventy. Messner argues luck is part of the game:

The real art [in rock climbing] is to survive. To survive we all need a bit of luck though.[x]
—Reinhold Messner (b. 1944), German-speaking Italian mountaineer

Rock climbing, then, is quite different from nature. In nature, it is the toughest snow leopards that survive high altitudes, not luck.

Only the toughest can survive among the savage beauty of the world’s highest mountains.[xi]
—David Attenborough (b. 1926), English writer, producer, and director

The practical relevance here is that Steck did not die on a mission but during preparation for a mission. His next mission was running up Mount Everest, and then he proceeded with a traverse to the peak of Lhotse, the world’s fourth-highest mountain, all without supplemental oxygen. This planned endeavour, of course, makes perfect sense to nearly anyone.

He fell a thousand meters during a solo but routine exploration tour, most likely underestimating risk. (He was alone, and his partner was staying at the base because of frostbite that day, so “bad luck” was involved, too.) Reinhold Messner, who knows the place where Steck died, said that a small stone falling on your hand is enough to kill you. This means the risk-taker is exposed to an entirely trivial and noncontrollable occurrence. Death, therefore, is a macabre form of being “fooled by randomness.” Here is how one BASE (B = Building, A = Antenna, S = Span, E = Earth) jumper put it:

It’s all about the taste of fear and lack of control. I love it.[xii]
—Paul Fortun (b. 1968), Norwegian BASE jumper and base-jumping event organizer

Micro Risks and MicroMorts

There is a book called The Norm Chronicles, and it includes stories and numbers about danger. The authors, a journalist and a statistician, use a measure called a MicroMort, a unit that allows for comparing different dangers. The word is derived from the term micro risk, i.e., very low-probability risks like breaking your neck while showering, being struck by lightning, drowning in a beer flood, falling off a bridge and being sniped midway, etc., “Mort” means death in French.

One MicroMort is roughly the probability of a normal person in a normal country experiencing a non-natural death during a normal day by just going about their normal business. It is about a one-in-a-million chance, i.e., roughly the same probability of tossing twenty coins into the air and having all of them fall heads, facing up. (Or playing Russian roulette seventy-six times in a row and still remaining standing.)

By using extensive statistics, the two authors can quantify and compare dangers. For example, one MicroMort is roughly like riding a motorbike for seven miles (in the UK), driving a car for three hundred and thirty-three miles, flying commercial for seventy-five hundred miles, or being hit by an asteroid during a lifetime. Scuba diving is about five MicroMorts per dive; skydiving is around ten per jump, and base-jumping is around four hundred and thirty MicroMorts per jump.

Running a marathon is around seven MicroMorts. (After all, its founder, Pheidippides, dropped dead after running twenty-six miles to announce victory at the Battle of Marathon.) Your risk of being accidentally killed in a (UK) hospital due to an avoidable safety lapse is about seventy-six MicroMorts per day, i.e., roughly the same as seven to eight skydiving jumps. The funny thing, therefore, is that if you break your leg during a skydiving jump and are brought to the hospital, your risk of dying increases by a factor of fifty.[xiii]

Giving birth in the UK is about one hundred and twenty MicroMorts per birth for the mother, and it is much safer than elsewhere. (For the baby, it is about forty-three hundred MicroMorts in the UK and forty thousand MicroMorts globally per birth.) Serving in Afghanistan at peak risk period is forty-seven MicroMorts per day, which compares to around twenty-five thousand MicroMorts of flying a bomber command in the Second World War, per mission.

Mountaineering above seven thousand meters is about forty-three thousand MicroMorts per climb, i.e., a bit like playing Russian roulette with a twenty-three-chamber gun once. One of many aspects of danger the two authors highlight is that, for example, in skydiving, the probability of a novice dying is smaller than that of the expert. As in many other fields, there is less hubris among non-experts. The nonexperts are more aware of their own ignorance than are the experienced macho daredevils.

At what level risk-taking becomes suicidal or idiotic is difficult to judge and subjective. The authors wrote in 2013:

Taking sky-diving, scuba-diving, marathon-running and other moderately extreme sports, there seems to be some natural level of risk—up to around 10 MicroMorts—that most participants are prepared to accept while remaining reasonably sensible. This does not include base-jumping or climbing to high altitudes.[xiv]
—Michael Blastland and David Spiegelhalter

With respect to risk-taking and mountaineering, I believe the following sums up the situation well:

To those who are enthralled by mountains, their wonder is beyond all dispute. To those who are not, their allure is a kind of madness.[xv]
—Robert Macfarlane (b. 1976), British writer

Elite Training and the Turkey Problem

The takeaway of the Ranger and Swiss Machine stories is twofold. First, elite and extensive training can cause overconfidence, resulting in an underestimation of risk. In the case of the Army Ranger, this was clearly the case. Rumor has it that mountaineering legend Reinhold Messner was returning late to his castle in the Dolomites from a social occasion in 1995, could not find his house keys, climbed over the wall, fell, and broke his heels. Other examples include mountain climbers who climbed in the Himalayas yet died at their local beginners’ mountain that they thought they knew well, thereby underestimating risk.

If you are alive today, you survived all your risk-taking. Nassim Taleb calls this the turkey problem: a turkey might think it is a great survivor after waking up every morning and being fed. And then comes Thanksgiving. A turkey has it all: overconfidence, ignorance, risk-delusional, hubris, etc. It does not take too much imagination to apply this to mountaineering and finance. Reinhold Messner phrased the overconfidence of extreme mountain climbers, of which he, at the time of writing, is a surviving specimen, as follows:

We always go with the happy camper feeling. We think we are invulnerable. This, of course, is completely naive and false.[xvi]
—Reinhold Messner (b. 1944), German-speaking Italian mountaineer and author

Second, experience is certainly good. Most professionals with experience and training know they have experience and training, which inflates confidence. This self-confidence is beneficial when the experience and training apply to the current environment. However, experience and training can become ignorance when circumstances change, and the experience and training do not apply anymore. It can happen to all of us. This is only one way of putting it:

I have great faith in fools—self-confidence, my friends call it.[xvii]
—Edgar Allan Poe (1809–49), American writer

Changing environments can cause a mismatch between true risk and perceived risk and impact one’s ability to deal with it. As Will Rogers put it:

You know everybody is ignorant, only on different subjects.[xviii]
—Will Rogers (1879–1935), American humorist

Failure is grossly underappreciated, though, despite the iron law of failure being solid.

Mistakes and Success

In a sense, and misquoting Gordon Gekko, failure is good. Failure, survived failure, that is, is a great tutor. It is also what a great tutor tries to pass on:

Pass on what you have learned. Strength, mastery. But weakness, folly, failure also. Yes, failure most of all. The greatest teacher, failure is.[xix]
—Yoda, grand master of the Jedi Order

Failure is embarrassing. That is one reason why it is a great tutor. America has an advantage over other societies in terms of failure. It is okay if you fail. At least you tried. In Japan, for example, failure is treated differently. In earlier times, seppuku was one option to restore honour. Even today, there are ritualized apologies and deep bowings from company executives when something goes wrong. The reason “failure is good,” a pun on Gordon Gekko’s famous line, is because of its learning effect. However, one prerequisite to failure having a learning effect is survival. It is a Japanese martial artist who succinctly made the point of failure being good:

Failure is the key to success; each mistake teaches us something.[xx]
—Morihei Ueshiba (1883–1969), Japanese martial artist

There is no progress without trial and error:

Error is the price we pay for progress.[xxi]
—Alfred North Whitehead (1861–1947), British mathematician

Failure and surrender are two different things. At one level, failure is good:

Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength.[xxii]
—Arnold Schwarzenegger (b. 1947), Austrian-born American bodybuilder, actor, and politician

This wisdom, i.e., the idea that failure is key to success, was applied to finance by Paul Tudor Jones, a hedge fund manager not necessarily famous for his failures:

One learns most from mistakes, not successes.[xxiii]
—Paul Tudor Jones (b. 1954), American hedge fund manager

Bottom line

Overconfidence can kill, literally. Survivors can control fear and remain cool when under duress. Self-confidence is beneficial when the experience and training apply to the current environment. However, experience and training can turn into ignorance and hubris when circumstances change.

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[i] Will Durant, The Story of Civilization, Volume 6: The Reformation (New York: Simon & Schuster, 1957). In a letter from May 30, 1519 to Luther. Passage in which quote occurs: “…It might be wiser of you to denounce those who misuse the Pope’s authority than to censure the Pope himself. So also with kings and princes. Old institutions cannot be rooted up in an instant. Quiet argument may do more than wholesale condemnation. Avoid all appearance of sedition. Keep cool. Do not get angry. Do not hate anybody. Do not be excited over the noise you have made…”

[ii] As presented at the 2000 Hedge Fund Symposium in April 2000 in London. The other four red flags were: too much money, too much leverage, issues with funding, and, interestingly, too much transparency. This latter point is interesting as investors want a lot of transparency. The regulator too wants money managers to show their hand. However, when in distress, the market knowing your positions is a negative. He used the Hunt brothers and their position in silver as an example. See chapter two of Alexander Ineichen, Absolute Returns: Risk and Opportunities of Hedge Fund Investing (New York: John Wiley & Sons, 2003) for more detail.

[iii] Albert J. Dunlap and Bob Andelman, Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Fireside, 1997), 7.

[iv] Epictetus, The Discourses, book II, chapter 17.

[v] A Fish Called Wanda (1988), British American heist comedy film directed by Charles Crichton and written by John Cleese. It stars John Cleese, Jamie Lee Curtis, Kevin Kline, and Michael Palin.

[vi] From Laurence Gonzales, Deep Survival: Who Lives, Who Dies, and Why (New York: W. W. Norton, 2003), 60.

[vii] Minna Antrim, Naked Truth and Veiled Allusions (Philadelphia: Henry Altemus Company, 1901). Antrim was paraphrasing Heinrich Heine (1797–1856), the German poet, author, and literary critic. There are many variants of experience being costly.

[viii] Original: “La vie et la mort font partie de la même cordée.” Author’s own translation. Source of the quotation and 2013 interview reference are from Karin Steinbach Tarnutzer, “Tod eines Ausnahmebergsteigers,” Neue Zürcher Zeitung (NZZ), May 2, 2017. In the days after Steck’s death, some letters to the editors showed compassion. Others suggested that he had it coming, Steck being broadly perceived as suicidal. In essence, Stein’s Law, Murphy’s Law, and the iron law of failure all applied.

[ix] “Mountains,” Planet Earth II, episode 2 (BBC, 2016). Quotation is from section where Attenborough discusses the highest colony of flamingos in the world, who live above fourteen thousand feet; and there’s a lot of ice. Full quote: “Walking on thin ice is always risky. And it’s hard to retain one’s dignity especially when you’re wearing stilts.”

[x] Natascha Knecht, “Ein kleiner Stein reicht,” Interview with Reinhold Messner, Schweizer Illustrierte, May 5, 2017. Translation is my own.

[xi] “Mountains,” Planet Earth II, episode 2 (BBC, 2016). Quotation refers to snow leopards’ ordeal to survive at high altitudes with little prey. Whether snow leopards, like elite rock climbers, rely much on luck when trolling around in the mountains, I do not know; I doubt it. They seem risk savvier or less suicidal or both.

[xii] As quoted in Michael Blastland and David Spiegelhalter, The Norm Chronicles: Stories and Numbers about Danger (London: Profile Books, 2013), 176.

[xiii] I assumed a five-day hospital stay, implying three hundred and eighty MicroMorts. In this section, I also ignored that going to hospital most often isn’t an option, while skydiving and mountaineering are. Furthermore, I also ignored all the good aspects of modern medicine and hospitalization, as I focus on danger and risk only.

[xiv] Blastland and Spiegelhalter, The Norm Chronicles, 179–80.

[xv] Jennifer Peedom, Mountain (2017), documentary film narrated by William Dafoe.

[xvi] Reinhold Messner, Stuttgarter Zeitung, August 6, 2008. Original: “Wir gehen immer mit dem Jung-Siegfried-Gefühl los. Wir denken, wir seien unverwundbar. Das ist natürlich völlig naiv und falsch.” Translation is my own.

[xvii] Edgar Allan Poe, Marginalia (New York: Harper & Brothers, 1838).

[xviii] Will Rogers, “From Nuts to the Soup,” New York Times, August 31, 1924.

[xix] Yoda speaking to Luke when the latter seems to be having a juvenile tantrum. George Lucas, Star Wars: Episode VIII—The Last Jedi (Burbank, CA: Lucasfilm, 2017).

[xx] Morihei Ueshiba, The Art of Peace, trans. John Stevens (Boston: Shambhala Publications, 1992).

[xxi] Alfred North Whitehead, Process and Reality: An Essay in Cosmology (Cambridge: Cambridge University Press, 1929).

[xxii] Arnold Schwarzenegger, “Winning According to Schwarzenegger,” interview by Marian Christy, Boston Globe, May 9, 1982. Full quote: “Strength does not come from winning. Your struggles develop your strengths. When you go through hardships and decide not to surrender, that is strength. When you make an impasse passable, that is strength. But you must have ego, the kind of ego which makes you think of yourself in terms of superlatives. You must want to be the greatest. We are all starved for compliments. So we do things that get positive feedback.”

[xxiii] Jack Schwager, Market Wizards: Interviews with Top Traders (New York: CollinsBusiness, 1993), 123. First published in 1989 by the New York Institute of Finance.