Embrace trading failure: lessons from Black Box Thinking

Black Box Thinking by Matthew Syed outlines two major industry approaches to learning: the airline industry's ability to learn systematically from its mistakes, and the medical industry's history of cover-ups and failing to learn from errors. I use these examples as an analogy for trading.

• Elite traders have more in common with the airline industry's attitude to learning, whilst inexperienced and newer traders align with medical thinking and attitudes to education.

That fundamental difference between the two professions is what makes the difference between winning and losing consistently. As traders, we should learn how to embrace failure and learn from the experience.

Experienced traders embrace the 'logic of failure'. Markets constantly give them plenty of feedback through their trading statements, a feedback loop that doesn't lie. There are two types of feedback loop: 'closed' and 'open'. Pilots (good traders) use an 'open' loop, where failures are embraced and analysed, and the experience is learned from.

Doctors (aka weaker traders) use a 'closed' loop. In a closed loop, failure is not recognised and errors are repeated. Weaknesses are misinterpreted or, worse still, ignored. In trading this is easily done. A poor trade is forgotten after a long day, the winning trades live long in the memory, and there is no active system to record what is working and what is not. These behavioural failings lead to something called cognitive dissonance.

Cognitive dissonance is prevalent in many new traders' behaviour, and it is a whole topic and blog on its own. We use it to hide and cover up failures, so no learning takes place. The truth hurts, goes the cliché!

When confronted with evidence that challenges our beliefs, our minds tend to play tricks on us and make rational explanations for our mistakes out of thin air. Doctors also don't like to own up to mistakes; it leaves them vulnerable to their peers and to their own ego. Does this sound familiar?

Progress, in large part, comes from our willingness to learn from failure. Traders who talk a good game, and whose egos are bound up in their predictions and outcomes, are the most likely to reframe their mistakes and fail to learn from them.

Pilots and experienced traders, on the other hand, have an open loop. At a collective level there is an ethos of learning, where the best lessons come from our mistakes. The more we analyse and track the 'error signal' (timing, sizing, entries, exits and so on, and how often they happen), the better we understand their cause and effect. Then we use that learning to whittle them out over time.

PractiseOne other feature: pilots practise, practise, practise! Learn on the ground, not in the air. They test their ideas in a continuous, iterative structure, identifying and improving, and they never accept the status quo. Pro traders still use a demo to test new strategies or to run ideas over multiple scenarios.

Avoid failure in the short term and the inevitable outcome is that we lose bigger in the long term! Just learn and bounce back.

Create a growth cultureRegard failure as a learning process, and trust in the power of process over improvisation. Difficult times come to everyone, and how we choose to learn and adapt, in typical Darwinian fashion, dictates whether we survive and thrive or dwindle and die.

Have a deep learning process and embrace failure of all kinds as a learning opportunity, so that your motivation and self-belief are not threatened by it.

The fear of being wrong and the desire to protect the status quo are particularly strong, so mistakes can persist in plain sight almost indefinitely. Admit to a minor flaw now, today, to avoid admitting to a much more threatening one later. Embrace your failure and use it as a powerful growth tool.

Here are some fantastic quotes from the book. They are also great tips that I try to live by.

Learn from the mistakes of others. You can't live long enough to make them all yourself. (Matthew Syed)

The reason is not difficult to see: if we drop out when we hit problems, progress is scuppered, no matter how talented we are. If we interpret difficulties as indictments of who we are, rather than as pathways to progress, we will run a mile from failure. Grit, then, is strongly related to the Growth Mindset; it is about the way we conceptualise success and failure. (Matthew Syed)

One last thing

The difference between science and previous ways of trying to find out truths is, in large part, that scientists are willing to test their ideas because they don't regard them as infallible… You have to put questions to nature and be willing to change your ideas if they don't work. (Matthew Syed)