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30 April 2013

How do you handle failure?

Ever heard of Reinhart and Rogoff?

Carmen M Reinhart, is a Professor of International Financial Systems at Harvard Kennedy School and Kenneth S Rogoff is the Thomas D Cabot Professor of Public Policy and Professor of Economics at Harvard University.

These two Harvard economists wrote a paper in 2010 titled 'Growth in the time of debt'. The central point in the paper was that if the Debt to GDP ratio of a country crosses 90%, the country will slide into recession. 90% debt / GDP was the inflection point, the tipping point, where the growth turns into recession.

This theory, that excessive debt is bad for the country, had a certain ring of ethical overtones to it. It sounded right. All of know that excessive debt is bad, don't we? Don't we teach kids that borrowing is not good? Don't we all know of families who were ruined by debt? That debt was not good was intuitive. And now we have famous economists who told us that what we were thinking about all these days was correct. Debt was indeed bad for people, and it was bad for countries.

Many politicians and leading economists across the world accepted this thesis. In US, this was a manna from heaven that conservatives always wanted. They were always arguing for government to cut spending, and now their argument had a theoretical underpinning. In Europe most of the economists and politicians embraced this premise. 

Austerity wave hit Europe, Spain went into recession, Greece followed suit, Germany was struggling to recreate growth, Britain was elated that it grew 0.3%...

Unemployment mounted, the health benefits of old and infirm people were cut, businesses shut down...

Misery all around.

So what if people were suffering? We have Reinhart and Rogoff to prove that debt is bad.

That was till Thomas Herndon entered the picture. This 28 year old graduate student of Massachusetts Institute of Technology, was looking for a paper to prepare for his graduate thesis. He decided to analyse the findings of R&R. On review he found that the authors had made a terrible mistake in one of the formulas in their Excel calculations. Instead of selecting cells 30-49, they selected cells 30-44, missing out 5 key cells. When the data in these cells were incorporated into the calculations, at 90% debt level, the average growth rate was 2.2% and not -0.1% as propounded by R&R !!

Terrible mistake with catastrophic consequences. One with global impact, one which led to severe recession in countries of Europe, with many people becoming unemployed, old people not getting the medicines and food that they desperately needed...

All because 5 cells in an excel spreadsheet was missed. Rarely in history, you will find such rookie mistakes with such disastrous consequences.

Of course, this article is not about Reinhart or Rogoff, it is about you.

How will you handle this if you were either Reinhart or Rogoff? How will you handle mistakes? How do you approach failure? How have you approached failure? Of course you have failed sometime in life. All of us have. How did we adapt? What did we learn? Did we get over it? I know that I have not got over some of my failures. They still rankle.

The point is that all of us fail some time in our lives. There is no one out there who have been 100% successful in whatever we do. To the outside world, our failures may not look as gigantic as that made by R&R. But to us, they are the biggest. We know that no one out there has suffered failures as much as we have. 

We may have made mistakes, we may have been failures in the past, but we have to get over and move on. While we are in our failures, there is one thing that we can and should do. Reflex. Think about your failure. Learn from it / them. Take positives from your failures, leave the negatives behind.

After all, that is called growth.

Here is a list of 50 people who failed initially before becoming international successes.

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