George Soros
Knowing when you're wrong
Not right or wrong, but how much
Soros interviews; The Alchemy of Finance
A man famous for enormous bets credits his survival to admitting mistakes. This piece asks why those two things are not in conflict.
What actually happened?
His summary of himself is unexpectedly humble. I'm only rich because I know when I'm wrong. I basically have survived by recognizing my mistakes. Beside it sits the line traders keep on their desks: what matters is not whether you are right or wrong, but how much you make when you are right and how much you lose when you are wrong. Together they are a system. The judgement may be wrong often, and his frequently was, as long as wrong is recognised fast and cut small, and right is backed heavily.
Hit rate and payoff are two different accounts
Most people optimise the hit rate, wanting every call to come good, which leaves them too timid to size up and too invested to admit an error. This system optimises payoff. The precondition is moving your self-worth off being right and onto the shape of the wins and losses.
Nine of ten attempts fail, each failure costs two weeks, and the tenth becomes the business. That year beats five projects none of which was allowed to fail.
Admitting error needs a mechanism, not a mood
He said a backache told him a position was wrong. Underneath the mysticism is a real point: recognition cannot depend on your reasoning at the time, because a trapped judgement is the least trustworthy thing you own. Write the signs down in advance and act on them without debate.
When you take the position, write the falsifying condition and the exit beside it, and give a colleague the job of enforcing it. Wait a bit longer is what the rule exists for.
Small when wrong is what makes big when right possible
The nerve behind an enormous position does not come from courage. It comes from being certain you can get out fast. Loose stops force small bets, so the rare good opportunity arrives and you cannot fill it. Small losses are the infrastructure of large wins.
The teams that commit everything to a high-conviction bet are the ones who built the if it misses for three months we stop rule first.
How do I use it today?
Where you are: the world has gone against a call of yours and you cannot decide whether to hold.
Ask first: has the falsifying condition you wrote at the start actually been met? Is the case for waiting made of new evidence, or of pride?
Where it goes wrong: turning fast admission into no patience at all and bailing at the first jolt; or quoting right or wrong does not matter to excuse betting without doing the work.
Lines to keep
There is no shame in being wrong, only in failing to correct our mistakes.
Same situation, other people are asking
I was wrong weeks ago and I'm still holding on.Cutting it now would make the loss real.I was wrong and I'm still in it · all 2 questions →If this one named what you are going through,
send it to someone who needs it, or keep it somewhere you will find it again.