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Margin of Safety

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Worst Case Design

In systems with a critical measure at which the behaviour of the system changes dramatically, Margin of Safety provides extra cushion to such measure.

  • Designing bridges with a safety factor that can comfortably handle the maximum volume of traffic, high winds etc.;
  • Building a power grid that can safely handle the peak load;
  • Using preventative maintenance — replacing/servicing components within their predicted lifespan — to ensure that aircraft do not fail in flight, using the meantime-between-failure (MTBF) benchmark;
  • Using data back-up systems.

“At a certain scale, a system reaches a critical mass or limit where the behavior of the system may change dramatically [an example would be a spring that, if stretched too far, merely deforms rather than returning to its original position].

Small interactions over time slowly accumulate into a critical state — where the degree of instability increases. A small event may then trigger a dramatic change like an earthquake. A web of cracks over time may increase vibrations that cause an accident. The underlying process may be simple and easy to understand but still remain unpredictable.”

-Seeking Wisdom by Peter Bevelin

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Jakub Smrček
Jakub Smrček

Written by Jakub Smrček

Qualitative investment analysis is about understanding a business before taking out your calculator. This blog teaches you how to do it for common stocks.

Business Modeling
Business Modeling

Published in Business Modeling

Models allowing you to Read a Business Like a Book!