It Is Better to Fix Your Mistakes Faster Than You Can Make Them
Charlie Munger explains that while mistakes are inevitable, one can learn to make fewer mistakes than others and fix them faster. He illustrates this with the USAir investment example, highlighting the dangers of psychological denial and the consistency principle that lead people to throw good money after bad.
THE IDEA
Charlie: “We were not buying stock in USAir on the theory that the common shareholders were certain to prosper—because the history of the airline business in terms of taking care of shareholders had been terrible. It was a preferred stock with a mandatory redemption. In effect, we were loaning money to USAir, and we had this equity kicker.
“We were not guessing whether it would be a great place for the shareholders. We were guessing whether it would remain prosperous enough to pay off the credit for the investment—carrying a fixed dividend and a mandatory redemption. We guessed that the business would not get so bad that we’d have a credit threat for which we were not being adequately compensated by the high rate we were getting. As it happened, USAir went right to the brink of going broke. It was hanging by a thread for several months. It’s since come back. And we’ll probably get all our money back plus the whole coupon. But it was a mistake. I don’t want you to think we have any way of learning or behaving so you won’t make a lot of mistakes. I am just saying that you can learn to make fewer mistakes than other people—and how to fix your mistakes faster when you do make them. But there is no way that you can live an adequate life without (making) many mistakes. Failure to handle psychological denial is a common way for people to go broke. You’ve made an enormous commitment to something. You’ve poured effort and money in. And the more you put in, the more that the whole consistency principle makes you think, ‘Now it has to work, if I put just a little more then it’ll work.’”
When to use it
When an investment turns sour, reassess the situation quickly and decide whether to cut losses or pivot, rather than pouring more money in hoping for recovery.
In software development, fix bugs immediately to prevent them from compounding, instead of deferring them and risking greater technical debt.
If a product launch fails to meet expectations, conduct a rapid post-mortem and adjust the strategy rather than continuing to invest in an unsuccessful approach.
In personal finance, if a budget or spending plan isn't working, identify the mistake early and adjust habits rather than ignoring the problem and accumulating debt.
FROM THEORY TO EVERYDAY LIFE
In practice
USAir Investment Mistake
Charlie Munger and Warren Buffett invested in USAir preferred stock with mandatory redemption, believing it was a safe credit investment. They were compensated with a high dividend but underestimated the risk. The airline nearly went bankrupt, and they had to hold on for months before recovering. Fixing mistakes quickly is better than succumbing to denial and doubling down.
A MOMENT TO REFLECT
Put it to work.
Think of a time you made a major mistake in a project or investment. How quickly did you recognize and correct it? What psychological factors delayed your response?
How does the consistency principle (the desire to remain consistent with past actions) lead to poor decisions in your personal or professional life?
In what situations are you most prone to psychological denial? What steps could you take to recognize and overcome it when you start to go down a bad path?
CONTINUE THE CONVERSATION
Source texts
- The Art of Being Rational Charlie Munger