One of the things that we have been conditioned to believe in both business and in life is that mistakes and errors need to be avoided. This idea pervades our education system, our mindset as employees, and our behavior as business owners. It is important to understand that mistakes cannot be completely avoided. Thus, an attempt to "eliminate" mistakes generally results in hiding them until they are so large that they become devastating.
This is what precipitated the financial crisis of 2008. A long history of regulations that consolidated power in major banks, and policy decisions that attempted to "fine tune" the economy and seemingly avoid a crisis resulted in a financial disaster that is beyond the ability of most people to comprehend. The thing that is important to understand is how the financial crisis emerged from an attempt to disguise risk and hide errors instead of any particular lack of regulation.
The financial system was built for "stability" since each bank purchased a "diversified" portfolio of debt from other banks. This meant that all of the major banks had access to a regular stream of capital... until investors became justifiably concerned that they might not be paid back. This happened because the banks financial decisions became progressively more risky, until the plank finally broke and Bear Sterns announced they would not be able to pay their financial obligations since nobody would lend them new capital, and their investment portfolio contained a large amount of toxic debt. What precipitated was a freeze of credit markets as all the players became concerned that they would lose their investment if they loaned to the troubled entities.
What all of this demonstrates is how is necessary for a robust business, life, and economy. Making mistakes is how we learn. It is much better to learn from small mistakes than from large ones, and a system that is built around steady course-correction from many small errors is much more robust than one that attempts to conceal errors and mistakes with bailouts and guarantees. Sooner or later these concealed risks will become too large to conceal, and will result in a collapse.
An example of this phenomenon in the physical world is to consider driving an automobile. If you run into a wall at 5 mph, it will cause a small degree of damage to your car, but will not result in any permanent harm. Furthermore, it will serve as a legitimate warning to avoid driving habits that could cause collisions. In fact, you could reasonably sustain 100 of these 5 mph collisions without significant adverse effect, outside of the nuisance associated with re-painting your bumper. However, let's assume that a new technology designed to avoid collisions warns you when you are about to hit something. Furthermore, let's assume that the quality of your automobile rises such that you can run at very high speeds and receive preliminary warning before a crash occurs.
Carrying this analogy further, let's assume that you are able to drive your car at 500mph, achieving incredible mobility and with no perceived risk because of your warning system. You have increased the efficiency of your transportation by a factor of one hundred. You are a genius of efficiency and mobility... until something in the system doesn't work. What happens when your warning system does not signal correctly while you are moving at 500 mph? The answer is that you become involved in a crash that is fatal to you, everybody riding with you, and everybody around the area of the accident.
Now take this same principal, and apply it to the entire financial system. What results is the situation that precipitated the financial crisis of 2008. The way that future disasters of this variety can be mitigated is by ensuring that mistakes are localized instead of centralized. In the realm of our personal lives, this means taking more small risks. This allows us to learn from our failures and evolve them into future successes. It also avoids a situation where years and years of playing it safe back us into a corner where we must take large risks all at once, and place our entire future on a single roll of the dice.
In the end, mistakes and errors are impossible to avoid. They can be hidden or concealed for a certain amount of time, but they will eventually come to bear. The key principal for people to understand is not how to avoid mistakes, but how to ensure that the impact of our mistakes stay small and localized so that we can learn from them to achieve more in the future. Ultimately, each of us are responsible for our own personal, professional, and financial future. In order to get there, it turns out that a perpetual cluster of (minor) errors is a necessary part of the growth and development that we all need to reach our goals.
Sincere Thanks,
Douglas J Utberg, MBA
Founder - Business of Life LLC:
http://BusinessOfLifeLLC.com/
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Doug Utberg
Economics Article FeedFind More ArticlesSearchSimilar Articles7 Financial Blind SpotsBuild a Better TeamLooking For More Business Deals That Need None of Your Dollars? They Are Out There, Just AskLaunching a Sales Presence in the Global Distribution ChannelHome LoansRecent ArticlesHow To Solve The Homeless SituationProgressivism Isn't Progress, VIIIHow Secure Is Your "Secure" Job?A True Comparison Of Increasing Debt Between Bush And Obama AdministrationsHow To Compete With ChinaWould Einstein Think Us Insane?What Will Happen If Greece Defaults?The US Recovery Is Producing SurprisesA Sigh Of Relief For The Economic Status Of The USHuman Nature, Capitalism, and Greed and Power DiscussedSubmitted On January 20, 2012. Viewed 9 times. Word count: 822.MLA Style Citation:Utberg, Doug".".20 Jan. 2012EzineArticles.com.26 Jan. 2012
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