What learning from mistakes means
Learning from mistakes in investing means looking honestly after each big decision: what was I thinking when I made it, what happened, and what will I do differently next time. Simply thinking “I lost money, I’ll never go near that again” isn’t learning; it is often the wrong lesson.
The problem is that in investing, results arrive late and luck plays a large part. A good decision can still lose money, and a pure guess can still make money. So if you judge only by results, it is very easy to learn the wrong thing.
Say Nadia buys a share on a relative’s tip without looking into it, and makes 30% in three months. She thinks, “My instincts are great!” Next time she buys the same way with more money, and takes a big loss. The real mistake wasn’t made the second time but the first: buying without doing any homework. The first gain had hidden it. This is an imaginary example.
Why it matters to an investor
- To avoid repeating the same mistake: many losses come from the same kinds of errors, such as buying on rumours or putting all your money in one place.
- To separate luck from skill: mistaking a lucky gain for skill raises your confidence, and your risk with it.
- To avoid the wrong lesson: one loss doesn’t mean you should avoid a whole type of investment forever; you need to see where the mistake actually was.
- To learn at the price of small mistakes: learning early, with small sums, helps you avoid the same error when the sums are larger.
Good decisions versus good outcomes
In a 1988 study, psychologists Jonathan Baron and John Hershey showed that people rate the same decision as better when it turns out well and worse when it turns out badly, even though the information at the time of deciding was identical. This is called outcome bias. It showed up even in people who said outcomes shouldn’t affect such judgments.
So the question shouldn’t be “did I make money?” but “given what I knew, and what I could reasonably have known, was the decision sensible?”
- Good decision, bad outcome: you researched, invested within your limits, and the price still fell for unexpected reasons. That is bad luck, not a mistake.
- Bad decision, good outcome: you put everything in on a rumour and it paid off. This is the most dangerous kind, because the mistake was rewarded.
The “I knew it all along!” trap
Once something has happened, it feels as though it should have been obvious. In 1975 psychologist Baruch Fischhoff showed that once people know an outcome, they see it as far more “inevitable” than it seemed beforehand. This is called hindsight bias.
In investing it does two kinds of harm. After a fall you feel “I knew it”, which breeds overconfidence in your ability to predict. And after a loss you blame yourself unfairly for something that couldn’t really have been known at the time. The best remedy is to write things down at the moment you decide.
A simple investment diary
A notebook or a note on your phone is enough. On the day of each big purchase or sale, write a few lines, then read them again six months or a year later. You will see what you really thought, not the story you built afterwards.
- What I bought or sold, for how much, and the date.
- Why: the main reason in a line or two, and where the information came from (my own reading, or someone’s word).
- What would tell me I was wrong: written in advance, it is harder to fool yourself later.
- My state of mind: calm, excited, scared, or rushing for fear of missing out.
Common mistakes
- Calling a decision good or bad purely on profit or loss.
- Blaming the market, the broker or “big players” for losses while taking personal credit for gains.
- Hiding mistakes out of embarrassment, even from yourself. A mistake you haven’t admitted is one you can’t learn from.
- Swinging to the opposite extreme after one loss, such as giving up investing altogether.
Judge the quality of the decision, not just the outcome, and write down your reasons on the day you decide, so you can be honest with yourself later.