The Near Miss Trap

It is worth paying attention to the psychology behind a “near miss”. A near miss is a failure to reach an objective which comes very close to being successful, e.g. demonstrably achieving a #2 ranking in conjunction with a tender offer. A near miss can also be defined as an event where an unfavorable outcome was highly likely to happen due to certain hazardous conditions but did not. Examples include averting in extremis a mid-air collision or an explosion in a petrochemical plant.


Most literature seems to focus on near misses which are either related to potentially favorable or potentially unfavorable outcomes (see references below). Such differentiation does not seem to be that relevant to me. I would rather focus on what all near misses have in common, which is that they are inherently “false positives”.


In the case of a potentially favorable outcome, a near miss may lead a subject, such as a salesperson in the example above, to try to win the next tender without questioning its approach to client opportunities. After all, the salesperson and its team were “almost there”. Next time will be the right one! Isn’t it only a matter of hard work and persistence? It can be demonstrated that near misses encourage future play even in games of pure chance, which is obviously a fallacy. Under such circumstances, a near miss fails to provide an opportunity to take corrective measures, thereby increasing the chances of near misses or misses in the future.


As for potentially unfavorable outcomes, near misses are susceptible of being de-emphasized by operators since they do not lead to an accident with reportable losses. Worse, a near miss may suggest system resilience as opposed to system failure. A Georgetown University paper observes that “people experiencing […] near misses can reason that the negative outcome did not impact them and then illegitimately underestimate the danger of subsequent hazardous situations.” For example, according to the study of people’s reactions to hurricane warning, people who experienced a near-miss event in the past (i.e. narrowly escaped harm) were less likely to take protective measures to avoid a forecasted hurricane. This phenomenon is well recognized in risk management, including in process industries as well as in the financial institutions sector (market risk, conduct risk).


Whereas they actually represent a system failure in one way or another, near misses can be perniciously construed as some form of success, supporting unjustified optimism and, with it, higher risk appetite. This has naturally negative implications for decision making processes. That is the near miss trap.


In fact, near misses could also be linked to the market cycle described in “Al Pacino, Kierkegaard & The Markets” last month: A stock market recovery after an acute “risk-off” episode bringing the market close to the abyss can be seen as a near-miss event which further emboldens investors, eventually leading to the formation of a ginormous speculative bubble which is nothing else than a big investor trap.


Under all scenarios, near misses should never be cause for comfort or celebration. Instead, every type of near miss should be documented as a failure from a management perspective, with lessons to be learned as a result.

Sources:

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