Technically Speaking, December 2018 – January 2019

Originally published September 2000

In the past two months, I have introduced the thesis stating that the process of judgment is identical for pilots and traders.  Furthermore, traders can learn from the errors in judgment that pilots have made which cost many their lives.  Traders can adapt the work done by the Federal Aviation Administration (FAA) on the judgment process to become aware of potential errors in judgment processes and implement the changes needed to correct those errors.

In past articles, I introduced The Five Hazardous Attitudes that each of us possesses to some degree:

 

Attitude	What Someone Possessing This Attitude Might Say
Anti-Authority	“Don’t tell ME what to do!”
Impulsiveness	“Oh no, this looks wrong.  I’ve got to do something RIGHT NOW!”
Invulnerability	“That won’t happen to ME!”
Macho	“It hasn’t been done because I haven’t tried it yet!”
Resignation	“Oh well, I guess it doesn’t matter now.”

 

I examined at the three factors that comprise the Judgment Environment – the framework within which pilots/traders make decisions.  This framework has three components:

1. Environmental Factors – the big picture factors like weather or the markets.
2. Mechanical Factors – machinery or systems that either work or do not work.
3. Human Factors – those things that affect our own readiness for making decisions.

This month, I will introduce the last element in the judgment process: The Poor Judgment Chain.  I will also tie all these concepts together by reviewing the tragic crash that killed John F. Kennedy, Jr., his wife and sister-in-law.

The Poor Judgment Chain

The Poor Judgment Chain concept is based upon the simple premise that by making one error in judgment, an unintended result is the removal of one or more possible solutions.  Making one error in judgment also increases the probability of another error in judgment on top of the first one.  The key becomes breaking the Poor Judgment Chain.  Nearly all pilots can handle one problem or error, but very few can handle as many as three. 

For a pilot, the classic example is continuing a flight into deteriorating visibility, trying to get to his destination. This, in turn, removes his ability to fly by visual references and forces him to fly by instruments alone – which many pilots are not able to use effectively. 

For a trader, a classic example is failing to honor a stop, trying to get a profitable trade, which in turn removes the positive outcome of preserving his capital.  This error in judgment also increases the probability that the trader will make further errors in judgment with regard to exiting a losing trade, thereby preserving less and less capital.  While this sounds straightforward and common sense, how many traders, amateur and professional alike, have “killed” their capital by failing to honor stops? 

Get-There-Itis

Why do pilots continue to fly into deteriorating visibility then crashing and dying, when it is common knowledge among pilots that this is a deadly error?  There is sometimes an overpowering desire to get to the destination that has come to be known as a state of mind called Get-There-Itis. 

This desire to get to the destination becomes such a powerful force that logic and sound decision-making are pushed aside in the name of reaching the goal.  This desire brings out the worst in a pilot’s Hazardous Attitudes and causes a pilot to fly when he knows he is not fully functional. Once a single error in judgment has been made, the Poor Judgment Chain keeps growing, compounding error upon error until disaster results.

For the trader, the process is identical, except that the overpowering state of mind should be called “P & L-itis.”  Perhaps the most extreme example of P & L-itis is Nicholas Leeson, who as a 28-year-old futures trader single-handedly brought down Barings Bank in February 1995 by losing $1.4 Billion. 

“By trading on a fraudulent account, numbered 88888, Leeson began to buy Nikkei 225 futures on a large scale in an attempt to almost single-handedly push up the Nikkei 225.  This proved unsuccessful and eventually Leeson’s losses were so large the bank eventually collapsed.¹”

Case Study: John F. Kennedy Jr.

The following information is extracted from the National Transportation Safety Board (NTSB) report and articles from The Washington Post from July 16 to July 31, 1999.

JFK Jr. obtained his private pilot certification in April 1998.  At the time of the crash, he had approximately 310 hours of flight time, which is considered to be relatively inexperienced as a pilot. 

Kennedy had purchased a much higher performance airplane less than three months earlier.  This airplane had a cruising speed of 160 knots as compared to 120 knots on the airplane he had most of his experience with, which means that he had to make decisions faster.  Additionally, it had more complex mechanical systems and instruments including an autopilot system.  This means that he had to deal with more variables in his decisions.  He had only 36 hours in this new airplane, 33 hours with a flight instructor on board, and only three hours by himself and not even a full hour of experience by himself at night. 

Six weeks before the crash, he broke his left ankle. The cast was removed only one day before the crash. Witnesses reported the pilot was using crutches while loading luggage.  After working a full day in New York City, he met his wife and sister-in-law at the airport in Caldwell, NJ.  They had all been delayed by heavy traffic out of New York on a Friday night, which delayed takeoff until after dark. 

He obtained a weather briefing two hours before takeoff, which indicated acceptable weather conditions for the flight.  He did not file a flight plan, which was not required by law.  His last known radio communication occurred less than 30 seconds after takeoff.  This means he did not request in-flight weather updates, nor did he request assistance of any kind from Air Traffic Control (ATC).  He flew along the Connecticut and Rhode Island coastline, then across 30 miles of ocean towards Martha’s Vineyard.  The NTSB recreated the last 7 minutes of the flight from radar tracking data and determined that the airplane began a right turn that resulted in a loss of control of the airplane with “increasing bank angle, rate of descent and airspeed.” 

The NTSB determined the probable cause of the crash to be “the pilot’s failure to maintain control of the airplane during a descent over water at night.”

Lessons from “The Judgment Process”

The following are primarily the opinions of the author.  My purpose is education, by applying The Judgment Process to this case, and not criticism of the pilot.

First, let us examine which of The Five Hazardous Attitudes may be inferred:

 

Attitude	Indicators from this Case
Anti-Authority	No Flight Plan.  No requests for Air Traffic Control (ATC) assistance.
Invulnerability	Success in other areas of life.  Relatively inexperienced as a pilot, yet had “I can do it” attitude despite late departure and injury.
Macho	His flight instructor had offered to fly with him that night and he declined, saying “He wanted to do it alone.” (From NTSB report)
Impulsiveness	None
Resignation	None

 

Next, let us examine the three components that comprise the Judgment Environment.

1. Environmental Factors: The actual weather was far worse than forecast, primarily due to thick haze on a dark, moonless night.  Three pilots flying in the same area that night reported being unable to fly by visual references.  These pilot reports were available from ATC simply by asking over the radio while in flight.
2. Mechanical Factors: The NTSB reported that all systems on the airplane were operating normally at the time of impact.
3. Human Factors: There were problems in two of the seven areas of evaluation.  This is certainly enough to raise caution flags and to lean towards aborting the flight.

I	Illness	A broken ankle certainly counts as an illness.
M	Medication	None reported
S	Stress	None Reported
A	Alcohol	None reported
F	Fatigue	Probably.  A late departure AFTER a full day of work.
E	Eating	Cannot determine from information available.

 

Finally, let us examine with the benefit of hindsight, The Poor Judgment Chain. 

The first link in the chain was to take off at all, given the Hazardous Attitudes and Human Factors involved.  The next links were the decisions to not file a flight plan and not request ATC weather advisories en route.   Had the pilot known of the worse-than-forecast weather, he MAY have decided to divert to another airport on the mainland and NOT continue across 30 miles of ocean at night. 

Of course, “Get-There-Itis” was a significant factor in that decision.  The final link was the pilot’s inability to maintain control of the airplane solely by reference to instruments. 

I trust this case study illustrates how these concepts are intertwined.  In this case, the Hazardous Attitudes of “Macho” and “Invulnerability” were the driving forces in making the flight at all and declining a flight instructor’s assistance, despite the late departure, his injury and inexperience with his new airplane. 

The Hazardous Attitude of “Anti-Authority” caused the pilot to cut off the only source of weather information that might have caused him to divert to a safe airport.  The Environmental Factor of worse-than-forecast visibility proved to be a critical problem.  The Human Factors of “Illness” and “Fatigue” certainly contributed to the unfortunate outcome.  “Get-There-Itis” was a silent partner in forging The Poor Judgment Chain to the point where it could not be broken.

A Trading Analogy

In order to parallel the case of JFK Jr., the analogy must come from the ranks of amateur investors.  However, The Judgment Process applies equally to all, professional or amateur, pilot or trader.

An individual has been successful in his professional life and wants to take up investing.  He/she completes an investment course at the local college (private pilot).  He joins an investment club and is successful buying and holding stocks over a few months (relatively inexperienced).  He begins trading options on his own (new high-performance airplane).  He experiences the 2^nd Quarter of 2000, sustains heavy losses and margin calls that wipe out his accounts (fatal crash).  Many of the same elements of The Judgment Process would apply, although space does not permit going into greater detail.

I hope this series has been enlightening and that it will add value to your trading efforts.  Good luck, good trading and most of all, good judgment!

 

¹ Gross, Felicia, “Systemic Risk in the Financial Markets,” Duke Journal of Economics, Spring 1996, Volume VIII.

Note:  This article is adapted from a publication “Pilot Judgment,” by the Federal Aviation Administration, now out of print.