Which mistakes – in policymaking and in investing – are acceptable, and which not? It’s an important question which doesn’t get the attention it deserves.
I ask because of Lord Agnew’s recent resignation from the government in protest at the fact that billions of Covid bounceback loans have been lost to fraud.
We must remember here the context in which these were made. In 2020 lockdowns threatened to force the collapse of tens of thousands of normally sound businesses and the destruction of millions of jobs: in April 2020 the OBR warned that unemployment could rise by more than 2mn. In this crisis, it was necessary to shovel support to businesses as quickly as possible. That meant that some bad loans were inevitable because in the time taken to screen good loans from bad many companies would have gone bust unnecessarily.
For me, this is forgivable: loan write-offs are a price worth paying for the survival of thousands of businesses. It’s even forgivable that some loans were fraudulent. What’s not so forgivable, however, would be the failure to pursue those fraudsters vigorously.
The distinction between acceptable and unacceptable errors, however, isn’t confined to Covid loans. It exists everywhere.
For example, former MPC member Andrew Sentance has called for a “serious review of the conduct and performance” of the MPC. Certainly, it has made errors in forecasting inflation and hence in setting interest rates. But these are sometimes inevitable and acceptable: the future is largely unknowable and so forecast errors are unavoidable. Sentance, however, makes a stronger charge against the MPC, that it has lost some diversity of debate. If he is right, this is less acceptable because we know that cognitive diversity and the avoidance of groupthink is vital for good decision-making. The failure of RBS’s board to stand up to Fred Goodwin, for example, was one cause of the financial crisis.
Investors face the same distinction. Some of our losses are inevitable and we should not beat ourselves up about them. We cannot possibly time the market perfectly or have a one hundred per cent record in picking stocks. The world is not that predictable, however smart or diligent you are. Sometimes even the most rational decision will be wrong. What’s not so acceptable are those losses which arise from, say, big investments in speculative Aim shares or hanging onto losing stocks in the hope they’ll come good. We cannot predict the future and shouldn’t blame ourselves from failing to do so, but we can avoid the best-known errors and should blame ourselves if we don’t.
Be it in politics, business, investing, sport or life, some mistakes are inevitable because the world is unpredictable. Sometimes, it is impossible to do the right thing and we must instead choose which mistake to make. If you are not making some mistakes, you might not be taking enough risks. (Although, as often, context is everything: this is more true of artists or venture capital managers than airline pilots.)
But we lack the resources to distinguish between acceptable and unacceptable errors. Even our language fails us. 'Mistake' and 'error' imply a shortfall from an acceptable standard and so don’t capture what I’m getting at – decisions which, while wrong, are not blameworthy. And in politics, there’s little incentive to makes the distinction: what matters is which allegation 'cuts though' and not which one is justified. Which is one way (of many) in which we persist in bad policymaking.
