Over the last few years our country and the world have experienced disasters that have exposed major gaps in our infrastructure, regulatory bodies, and overall planning capabilities. The levies failing in New Orleans is the most obvious example, but more recently the failure of our banking industry, mine safety, offshore drilling, and a plume of volcanic ash hanging over Europe all make evident that a chain is only as strong as its weakest link.
In business, we’re supposed to have a backup plan. We’re supposed to have redundancy. And we’re supposed to be penalized if we fail. All the examples listed above show that none of those things are happening.
So why not? One reason is that businesses and our government no longer put a proper value on risk. That thing that has a 1% chance of happening? It’s no longer factored into the cost/benefit analysis, instead it’s thrown out.
There are two major problems with this.
First, we have to question how that 1% was arrived at to begin with. We like to think that scientists and statisticians somewhere did a thorough risk analysis to come up with that probability. But if the banking industry is any indication, it’s more likely that someone was paid to arrive at a 1% probability. Just as likely, that number was an educated guess.
Second, even when 1% is considered, it’s not properly valued. Looking back and knowing that there was even a 1% chance of that oil rig collapsing out in the Gulf, would BP have made the investment, knowing the cost to plug the hole and clean up the mess is now running at $6 million per day? And that’s just their piece, without factoring in the costs that will be incurred in the fishing, freight, and tourism industries, not to mention costs incurred by individuals. Would BP factor those into an analysis? Not likely, but hopefully getting sued to the brink this time around will force them into thinking about it next time.
So why don’t we put a proper value on risk? One good reason is greed, which we’ve cleverly renamed optimism. We continue to be a society focused on the quick dollar. Most people don’t stay at a job for more than 4 or 5 years, so long term thinking no longer comes into play. To add to that, most organizations compensate far more lavishly to identify opportunity than they do to identify risk.
The government could certainly do more to change this way of thinking, such as tightening regulations, or simply stop watching porn, but society as a whole ultimately needs to change. Looking at our stock portfolios now and realizing they look exactly the same as they did ten years ago might turn a light bulb on. But one thing is for certain, until we start focusing on that 1%, we are 99% screwed.
In business, we’re supposed to have a backup plan. We’re supposed to have redundancy. And we’re supposed to be penalized if we fail. All the examples listed above show that none of those things are happening.
So why not? One reason is that businesses and our government no longer put a proper value on risk. That thing that has a 1% chance of happening? It’s no longer factored into the cost/benefit analysis, instead it’s thrown out.
There are two major problems with this.
First, we have to question how that 1% was arrived at to begin with. We like to think that scientists and statisticians somewhere did a thorough risk analysis to come up with that probability. But if the banking industry is any indication, it’s more likely that someone was paid to arrive at a 1% probability. Just as likely, that number was an educated guess.
Second, even when 1% is considered, it’s not properly valued. Looking back and knowing that there was even a 1% chance of that oil rig collapsing out in the Gulf, would BP have made the investment, knowing the cost to plug the hole and clean up the mess is now running at $6 million per day? And that’s just their piece, without factoring in the costs that will be incurred in the fishing, freight, and tourism industries, not to mention costs incurred by individuals. Would BP factor those into an analysis? Not likely, but hopefully getting sued to the brink this time around will force them into thinking about it next time.
So why don’t we put a proper value on risk? One good reason is greed, which we’ve cleverly renamed optimism. We continue to be a society focused on the quick dollar. Most people don’t stay at a job for more than 4 or 5 years, so long term thinking no longer comes into play. To add to that, most organizations compensate far more lavishly to identify opportunity than they do to identify risk.
The government could certainly do more to change this way of thinking, such as tightening regulations, or simply stop watching porn, but society as a whole ultimately needs to change. Looking at our stock portfolios now and realizing they look exactly the same as they did ten years ago might turn a light bulb on. But one thing is for certain, until we start focusing on that 1%, we are 99% screwed.
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