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The Magic In Mistakes

By: Alan Quasha, Quadrant Management 12.21.07 In

How did so many talented and informed people in the high ranks of savvy financial institutions
become active, collective participants in the colossal crisis now roiling the U.S. financial
markets? This is the primary question on the minds of business and government leaders at home
and abroad. But the more important question: What can be learned from this mess?
To answer that, we first must acknowledge what should be obvious: Mistakes happen. And, in
fact, contrary to popular perception, that’s a good thing. As the great UCLA baseball coach John
Wooden once said, the team that makes the most mistakes wins.
Mistakes only become a problem when very smart people or institutions lack the humility to
acknowledge the likelihood of mistakes; fail to adequately plan or measure downside risk; or
dismiss information that challenges a decision in favor of data that reinforces initial beliefs.
History consistently shows that success comes not from playing it safe, but by expecting to make
mistakes, learning from them quickly and using that knowledge to devise a winning strategy.
And the lessons are no different in the current situation. Many of the institutions that have
avoided the current mess–like Goldman Sachs (nyse: GS – news – people ) also happen to be
those that have typically taken the most risk.
As a society, however, we are trained from our earliest days to be afraid of mistakes. We learn to
react to mistakes with anger–outrage, on one hand, and fear on the other. We operate in a system
in which we’re rewarded for not making mistakes and punished when we do make them. Rather
than make or admit mistakes, we tend to either be risk-averse or try to cover them up.
What’s missing from this equation is growth and integrity. To learn from mistakes, we have to
admit them early. To avoid big mistakes, we have to acknowledge at the outset that they are a
possibility. Appropriately so, risk managers are increasingly becoming top firm managers–and
firms with greater risk management controls set themselves apart from those that don’t.
Better risk management is certainly part of the answer, but the larger part of the answer lies in
the constant search for better solutions and continuous improvement that begins with a
constructive attitude toward mistakes, which leads to early recognitions, and in turn, to learning,
growth and improvement. This virtuous cycle leads to the most important asset a person or
organization can have: integrity.
There can actually be a certain magic to mistakes, because if we consider in advance that we are
likely to make them, we are then free to face mistakes early and treat them primarily as
information we can share with others as we seek to improve the next decision and set a
company–or our lives–upon the path to a sound strategy.
In an increasingly complex world, risks are often not obvious when decisions are initially made,
and the consequences are increasingly dependent upon decisions others may make. This issue of
“non-obvious mistakes”–and their potentially random and unknown consequences–is a very
interesting one, but the answer reinforces the basic paradigm. If we embrace the possibility of
making a mistake, when we make any hard or key decision, we will carefully analyze the
consequences of being wrong.
Today, obvious mistakes have led to a financial calamity with very devastating effects, and even
greater aftershocks are likely coming. As the chasm between Wall Street and Main Street is
already too cavernous, there is a real need to recapture integrity. Leaders must begin to
acknowledge and measure the downside extent of the debt crisis and explain–soon–how well
prepared we are to deal with this potential downside.
A key test will come in early 2008, when institutions such as Merrill Lynch (nyse: MER – news
– people ) and Citigroup (nyse: C – news – people ), which have already announced major writedowns,
are set to release audited figures. If, at that point, it seems clear that these large financial
institutions have essentially admitted to all their mistakes, and the investing public believes the
value of the banks’ assets, the country will begin to regain confidence in the integrity of the
financial system, and we will be able to move past this debacle. If their reports appear less than
credible, however, fears of a recession could easily come to pass.
Alan Quasha is founder, president and CEO of Quadrant Management, which invests in and
advises underperforming, mid-sized companies as well as emerging businesses. He also serves
as chairman of Carret Asset Management Group, a money management firm, and chairman of
Brean Murray Carret & Company, an investment banking firm.

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