Learning from the Mistakes of Others

Learning from the Mistakes of Others

The interests of a system can differ from those of its individual parts. It is often the mistakes of others that benefit the rest of us—and, sadly, not them. In the right context, stressors provide information. For the antifragile, harm from errors should be less than the benefits. We are talking about some, not all, errors, of course; those that do not destroy a system help prevent larger calamities. The engineer and historian of engineering Henry Petroski presents a very elegant point. His counterfactual is that, without the Titanic disaster, ever-larger ocean liners might have been built before an even worse accident exposed their vulnerabilities. The argument concerns the possibility of learning from a disaster; it cannot establish how many lives a different history would have cost. The story of the Titanic illustrates the difference between gains for the system and harm to some of its individual parts.

Fukushima likewise exposed problems in reactor risk assessment and preparations for low-probability events. Whether it prevented a larger catastrophe is a counterfactual question. (Note that the errors of naive stress testing and reliance on risk models were quite obvious at the time; as with the economic crisis, nobody wanted to listen.)

Investigating a plane crash can reveal failures and lead to changes that improve subsequent safety. Swiss flight 111, TWA flight 800, and Air France flight 447 allowed the improvement of the system. But these systems learn because they are antifragile and set up to exploit small errors; the same cannot be said of economic crashes, since the economic system is not antifragile the way it is presently built. Why? There are hundreds of thousands of plane flights every year, and a crash in one plane does not involve others, so errors remain confined and highly epistemic—whereas globalized economic systems operate as one: errors spread and compound.

Again, crucially, we are talking of partial, not general, mistakes, small, not severe and terminal ones. This creates a separation between good and bad systems. Good systems such as airlines are set up to have small errors, independent from each other—or, in effect, negatively correlated to each other, since mistakes lower the odds of future mistakes. This is one way to see how one environment can be antifragile (aviation) and the other fragile (modern economic life with “earth is flat” style interconnectedness).

The contrast is between learning that reduces future failures and contagion that makes further failures more likely. We need to eliminate the second type of error—the one that produces contagion—in our construction of an ideal socioeconomic system. Let us examine Mother Nature once again.

The natural was built from nonsystemic mistake to nonsystemic mistake: my errors lifting stones, when I am well calibrated, translate into small injuries that guide me the next time, as I try to avoid pain—after all, that’s the purpose of pain. Leopards, who move like a true symphony of nature, are not instructed by personal trainers on the “proper form” to lift a deer up a tree. Human advice might work with artificial sports, like, say, tennis, bowling, or gun shooting, not with natural movements.

Some businesses love their own mistakes. Reinsurance companies, who focus on insuring catastrophic risks (and are used by insurance companies to “re-insure” such non-diversifiable risks), manage to do well after a calamity or tail event that causes them to take a hit. If they are still in business and “have their powder dry” (few manage to have plans for such contingency), they make it up by disproportionately raising premia—customers overreact and pay up for insurance. They claim to have no idea about fair value, that is, proper pricing, for reinsurance, but they certainly know that it is overpriced at times of stress, which is sufficient to them to make a long-term shekel. All they need is to keep their mistakes small enough so they can survive them.