“You’re going to make a lot of mistakes in this business by accident, don’t make any on purpose”
– Eugene Fama

Mistakes were made. Mistakes will be made. Sorry, I made a mistake. Many think that an apology for mistakes is all forgiving. But the definition or type of mistake makes all the difference. Don’t make them on purpose.

What is a purposeful mistake? An action that could have been avoided with a minimum of effort or should have been known to be a mistake in advance is a purposeful mistake.

Action that may result in failure but sized correctly by probabilities are not mistakes. If there is an 80% chance of being sunny and it rains, this, by itself, is not a mistake. It was a calculated bet that had an unfavorable. Hearing that there is a 100% chance of rain tomorrow and you don’t bring an umbrella is a clear mistake. If you knew the odds, but did not act appropriately, it was a purposeful mistake.


If risk is the chance of loss times the size of a bet, then mistakes, at a high level, can be divided into two parts. There could be a mistake with the probability of the risky event, or a mistake with the sizing of the bet.

Investors cannot immediately determine the type of mistake with any probability of an event. There needs to be a large enough sample to determine if forecasts are biased. A repeated bias in probability assessments of an event without any adjustment is a purposeful mistake. Your forecasts are systematically wrong and you have not adjusted. This is a purposeful mistake.

The size of the risk taken, however, can be measured and looked at immediately. A sized bet that will cause significant financial harm could be viewed as a purposeful mistake. While we can wait for the harm to be realized, an oversized bet if wrong can have immediate ramifications.

Not gathering information to make a decision is another purposeful mistake. Using the weather example, if you are planning a sailing trip and you don’t check the weather, it is a purposeful mistake. Being subjected to a surprise storm is not a purposeful mistake. Ignorance is a purposeful mistake.

Most important, “There is only one kind of shock worse than the totally unexpected: the expected for which one has refused to prepare.” Mary Renault from FT article by Agustin Carstens of BIS