Lessons in Risk Management: A Hierarchy of Learning from Ignorance

The seemingly indestructible baseball legend Satchel Paige asked, “How old would you be, if you didn’t know your age?” *

I’ve worked during this summer vacation to review and refresh the syllabus of my MBA-level course in risk management and decision-making, where the related question is, “How smart can you be, if you don’t know your own ignorance?”

At its core, the course seeks to identify potentials for success, from the lessons of failure. Recent weeks have provided an abundance of “teaching moments”:

• Tony Hayward’s long-postponed but inevitable defenestration as CEO of BP – another demonstration that public perception of a tone-deaf executive’s culpability will prevail – incidentally inflicting major collateral harm to what had been an advancing discussion on the benefits of splitting the roles of corporate chairman and chief executive.
• By contrast, Goldman Sach’s achievement of a speedy and affordable settlement of the SEC’s suit over a toxic subprime mortgage-based derivative product, for the relative pittance of $550 million. Love or despise the “vampire squid” – Goldman will survive and thrive in no little part for its ability to maintain both calm and quiet under pressure, keeping beneath the flame-throwing and appreciating the benefit of avoiding additional fueling of the short-lived news cycle.
  
• The release by WikiLeaks of a massive volume of raw documentation from the Afghanistan war. The trove will be well-combed by future historians, but even on a superficial reading of the official manipulations, naïveté and mendacity, the fundamental lessons remain unlearned -- from China, Algeria, Viet Nam and Afghanistan itself -- that short of annihilation, no level of mighty foreign military technology will prevail in a house-to-house conflict against forces able to blend seamlessly into a village-level local population.

Thinking with students about these scenarios, with special concern for the availability of awareness and action in time to actually affect an outcome – that is, before the inflection point at which a threat tips over to become a disaster – there emerges a kind of hierarchy of learning opportunities. Consider: 

• As the last of the helpless dinosaur population dwindled around the tar pits, while tiny furry mammals disported at their feet, the combination of climate change and evolution reduced their survival chances to zero.
• Innocent species lacking defensive measures were equally doomed – including those wiped out by humans, from carrier pigeons to the great whales.
  
• Human societies also innocent in their ignorance have doomed their viability – whether the Easter Islander destroying their only timber sources to replace their great canoes, or the Greenland settlers unwilling to adopt the diets and hunting techniques of the natives (see Jared Diamond’s “Collapse,” 2005).
• Further up the ladder of chargeable responsibility is the blinkered denial built into herd behavior – no better exemplified than by the last-gasp claim of Citigroup’s Chuck Prince in the summer of 2007, that, “As long as the music is playing, you’ve got to get up and dance.”
  
• And finally – or at least to stop just short of conduct warranting indictment – there is the evidently deliberate and self-interested exploitation of the credulous, wrought by Goldman and its now-isolated foot soldier, Fabrice Tourre, in designing a financial derivative with characteristics maximizing its likelihood of failure.

As I would like my students to learn from such an array, in daily life no less than in the classroom, the ability to avoid the next problem is measured by the capacity to take heed from the last. 

*My review last May of Larry Tye's delightful biography of Paige is here. 

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