2022-07-25

Sometimes your room for error, isn't enough

In Psychology of Money by Morgan Housel, he writes about the idea of living with a margin of safety or room for error. It's a common idea, but an uncommon practice. In the book, Housel explains living with room for error means having more cash on hand than you think may be necessary to wither the unexpected storms that life brings.

The difficulty, though, is knowing how much room to give yourself. Living with too much room for error in the context of personal finances means you'd be losing out on some returns from stocks or other illiquid investments. Not enough room for error means you could be wiped out completely if something terrible happens. So living with room for error is a good thing, but knowing exactly how much room to live with is difficult.

Harland and Wolff, a shipbuilding company, had a practice for all of their vessel's maiden voyages. National Geographic explains, they sent men, called the Guarantee Group, aboard the ship who were experts in skills like "plumbing, electrical systems, carpentry, and machine fitting." Essentially, if anything went wrong, they were there to fix it. Harland and Wolff were living with room for error.

One of the most famous Harland and Wolff creations was the Titanic, so indeed, the Guarantee Group was aboard the vessel at the time of its sinking. Still, there was no stopping the ship's inevitable doom. Harland and Wolff's room for error wasn't quite enough.

So it goes with things in life.