When we interact with complex systems, we need to expect the unexpected. Systems do not always function as anticipated. They are subject to variable conditions and can respond to inputs in nonlinear ways.
A margin of safety is often necessary to ensure systems can handle stressors and unpredictable circumstances. This means there is a meaningful gap between what a system is capable of handling and what it is required to handle. A margin of safety is a buffer between safety and danger, order and chaos, success and failure. It ensures a system does not swing from one to the other too easily, causing damage.
« This world of ours appears to be separated by a slight and precarious margin of safety from a most singular and unexpected danger. »
Arthur Conan Doyle1
For example, engineers know to design for extremes, not averages. In engineering, it’s necessary to consider the most something might need to handle—then add on an extra buffer. If 5,000 cars are going to drive across a bridge on an average day, it would be unwise to construct it to be capable of handling precisely that number. What if there were an unusual number of buses or trucks on a particular day? What if there were strong winds? What if there were a big sports match in the area, and twice as many people want to cross the bridge? What if the population of the area is much higher in a decade? Whoever designs the bridge needs to add on a big margin of safety so it stays strong even when many more than 5,000 cars cross it in a day. A large margin of safety doesn’t eliminate the possibility of failure, but it reduces it.
For investors, a margin of safety is the gap between an investment vehicle’s intrinsic value and its price. The higher the margin of safety, the safer the investment and the greater the potential profit. Since intrinsic value is subjective, it’s best this buffer be as large as possible to account for uncertainty.2
When calculating the ideal margin of safety, we always need to consider how high the stakes are. The greater the cost of failure, the bigger the buffer should be.
To create a margin of safety, complex systems can utilize backups—in the form of spare components, capacities, or subsystems—to function when things go wrong. Backups make the system resilient. If an error occurs or something gets broken, the system can keep functioning. One way to think of backups is as an alternate path, like how you might have multiple routes to your office in mind so you can still get there if there’s a car accident blocking one road. A system can’t keep working indefinitely without anything breaking down. A system without backups is unlikely to function for long.
As with margins of safety, the higher the stakes, the greater the need for backups. If a part in your pen breaks, it’s not a big deal. It’s a different story if a critical part in an airplane breaks. If you’re going to the local shops, taking your phone in case you need to communicate with anyone is sufficient. If you’re going hiking in the wilderness alone, you might want more than one communication method. You’re safer in an airplane than a car, in part because it has so much backup; after all, the cost of failure is higher.
We have to be careful with margins of safety, as they can make us overconfident. If we get too reckless, we cancel out the benefits. When humans are involved in a system, too much margin of safety or backup can lead to risk compensation. For instance, we all know we should wear a seat belt in a car, but do they make us safer? Some research suggests they might not reduce car accident fatalities because people drive with less care, feeling there is a margin of safety between them and injury. This puts pedestrians and passengers at a higher risk even if drivers are safer.3
The risk of a system failure is not fixed. Failure rates can remain consistent when humans are involved because margins of safety sometimes create perverse incentives. If we change our behavior in response to the knowledge that we have a margin of safety in place, we may end up reducing or negating its benefits. Setting your watch to be 15 minutes fast could help you be on time more often. If you follow the time it displays, you’ll have a buffer in case of delays. But if you remember the time is wrong and amend it in your head, it won’t make any difference to your punctuality.
Conversely, margins of safety and backups can also make us too cautious. Not all situations we face are like building a bridge, where it either stands or it doesn’t and collapsing results in death. There is a difference between what’s uncomfortable and what ruins you. Most systems can be down for an hour. Our bodies can go without food or water for days. Most businesses can do without revenue for a little while. Too much margin of safety could be a waste of resources and can sow the seeds of becoming uncompetitive. If you know it’s impossible to fail, you get complacent. But too little margin of safety can lead to destruction. You can’t weather inevitable shocks.
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The difference between medicine and poison is in the dose. Too much of a beneficial substance can be harmful or lethal, and a tiny amount of a harmful substance can have beneficial effects. It’s necessary for doctors to give patients doses of medication that are big enough to be effective but not so big as to be dangerous. Prescribing a bit less than the harmful amount isn’t much good. A patient could take too much or take their doses too close together.
So pharmacologists calculate the minimum effective dose: the lowest possible amount of a medication to achieve a meaningful benefit in the average patient. Then they calculate the maximum tolerated dose: the largest amount an average patient could take without suffering harm. For example, a vaccine contains the minimal possible dose of a virus necessary to get the body to produce an immune response. Too much could cause actual illness; too little would not be protective. Knowing this window means doctors can ensure a margin of safety by starting with a low dose they still know is likely to work.
How can we develop a margin of safety in our lives? Things go wrong, at least once in a while, and it would be ideal to have a way of increasing our resilience in the face of dramatic change by having a built-in margin of safety. Learning is one way of applying this model on an individual level.
The more we learn, the fewer blind spots we have. And blind spots are the source of all mistakes. While learning more than we need to get the job done can appear inefficient, the corresponding reduction in blind spots offers a margin of safety. Knowledge allows us to adapt to changing situations.