The Risk of Crashing on a Slippery Slope: Bankers and Lugers on Parallel Tracks

A Risk Management class of bright, perceptive MBA students devoted their meeting this weekend to Olympic sports – scrutinizing the death on February 12 of Georgian luger Nodar Kumaritashvili, who lost control on the last curve of the world’s fastest track at the Whistler Sliding Centre and crashed into a steel pillar.

The students’ usual focus is on the manifold failures in risk identification, appreciation and evaluation over the last three years. They look to specify and learn from such displays of bias, error and miscomprehension as Jimmy Cayne’s loss of control of the real estate funds of Bear Stearns, the confession by Ramalinga Raju of a multi-billion dollar fiction in the accounts of Satyam Computer Services, and Akio Toyoda’s tone-deaf bungling of the world’s largest vehicle recalls.

What they found was a set of questions with compelling resonance for the financial crisis:

• ·      Was a fatal crash the result of an overly aggressive and under-trained youngster, turned loose in a competitive environment beyond his skills and capabilities?
•  ·      Was there a simple but overlooked design flaw in the structure – in Vancouver, an unpadded steel pillar squarely in the path where a loss of control would eject the 90 mph victim of a small but highly consequential mistake?
• ·      Or did the designers who pushed the limits of knowledge and technology compromise the need for safety to the desire for high-speed achievement, failing to recognize that traditional measures of safety were outmoded and insufficient?

Just like the world’s tightly-linked capital markets, the Whistler track is wonderfully designed for success. Its users describe it as challenging but thrilling – the demands are huge, as are the rewards.

But like any other advanced and sophisticated device designed and operated by humans – whether a space shuttle or a nuclear reactor or this decade’s leading-edge array of exotic financial instruments -- a luge track is subject to the non-zero possibility of catastrophic error.

Even the engineers of the most prosaic highways, who strive to improve both safety and overall speed, are mindful of speeders who will test their design limits. Where pressing the outside limits of speed and safety is the very goal of the participants – recall the Olympic motto: “Citius, Altius, Fortius” – it is hollow and unresponsive to the point of irresponsibility to claim that the track is "relatively safe" (here).

As elsewhere, average performers disappear into the obscurity of the crowd. Outliers achieve prominence in two ways, both beyond the boundaries of ordinary expectations:

At the Games, one athlete wears a gold medal and salutes his national anthem from the victor’s podium. But at the opposite tail of the performance curve, the one who crashes earns only a memorial wreath and a home-town funeral.

In the marketplace, where the gold-medal outlier may be Warren Buffett, the opposite tail is populated by the likes of Dick Fuld of Lehman, Fannie Mae’s Franklin Raines and Countrywide’s Angelo Mozillo.

There is one huge difference between the “failure study” of the Whistler designers – who promptly lowered the luge start, re-shaped the fatal curve and padded the unfortunately-located steel pole – and the finger-pointing scapegoaters of Washington and London and Brussels.

Namely, every failure in the engineering field is an opportunity for learning – even if belated. Thanks to the iceberg, the Titanic’s design was no long the model for generations of at-risk ocean liners. Nor, after 9/11, would high-rise towers ever copy the World Trade Center.

But in the politically-motivated bickering over the allocation of blame for the financial markets’ debacle, by contrast, there is not even a civil forum in which to ask the pertinent questions – much less make progress on a search for answers. 

Which, as I remind my Risk Management students, invokes the observation on learning of the 5^th century BC playwright Aristophanes:

Youth matures

Immaturity is outgrown

Ignorance is curable by education

Only stupidity is forever

 

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Comments

[Francine McKenna]

I love Aristophanes. I also like this one by Euripides. “There is something in the pang of change More than the heart can bear, Unhappiness remembering happiness.”

[Charles H. Green]

An excellent and thought-provoking metaphor; thanks Jim