Running A Pre-Mortem On A Trade
Before putting a trade on, imagining that it has already failed and working backward to explain why surfaces risks that a forward-looking, hopeful review of the same trade tends to miss.
Most pre-trade review asks a forward-looking question: does this trade make sense, what's the thesis, what's the plan? A pre-mortem flips the question around and asks it from the future: imagine it's six months from now and this trade has lost money — what happened? Answering that question, before the trade is even on, tends to surface specific failure modes that a purely hopeful "here's why this should work" review skips over, because it's much easier to generate reasons for a story you're told is already true than reasons for a hypothetical you have to imagine yourself.
Why imagining failure works better than asking about it
Asking "what could go wrong with this trade" invites vague, generic answers — the market could move against me, I could be wrong — because the question is open-ended and the failure hasn't happened yet in the trader's mind. Asking "the trade has already failed, why" is a small framing change that produces much more specific answers, because the mind treats the failure as a fact to be explained rather than a possibility to be brainstormed. This is the same mechanism decision researchers use in other high-stakes fields: assuming the bad outcome already occurred and working backward pulls out concrete mechanisms that forward-looking optimism naturally suppresses.
A trader planning a pairs trade between two historically correlated names ran a quick pre-mortem before sizing it: "it's three months later and this trade lost badly — why?" The answers that came out fast were specific and useful — one name got acquired and the pair relationship broke permanently, or one company's earnings diverged from a sector-wide factor both names shared. Neither had shown up in the original thesis, which had focused on the historical correlation holding. Sizing the position smaller and adding a specific check for pending M&A rumors in either name came directly out of the exercise — protections that a standard "why should this trade work" review, framed entirely around the case for the trade, hadn't produced.
A pre-mortem takes a few minutes and doesn't require new information, just a change in framing — which is exactly why it's easy to skip under time pressure and easy to add back once it's become habit.
A pre-mortem asks "assume this trade has already failed — why" instead of "what could go wrong," and the small framing shift produces much more specific, useful answers because the mind treats an assumed failure as a fact to explain rather than a hypothetical to brainstorm. Running one before sizing a trade surfaces failure modes a purely hopeful thesis review tends to miss.
Further reading
- Klein, Sources of Power