Risk Management II: Duped by Success?
“Past performance does not guarantee future results.” I thought about this warning commonly seen on mutual fund prospectuses when reading an excellent column by Robert Samuelson in the Washington Post on the dangers of success, “Oil Spill Reveals the Dangers of Success.” Samuelson’s piece provides an excellent corollary to a David Brooks column and risk management that I wrote about last week, “Risk Management: Art or Science? ”
Samuelson opens with the apparent triumph of technology and the success of deepwater drilling and its excellent safety record. However, he believes this led to overconfidence that possibly caused the failure and remarks on “the stark contrast between the disaster’s magnitude and the previous safety record…Continuing achievements obscured the dangers.”
Samuelson also sees this pattern in other setbacks:
- The financial crisis: (Subprime mortgages did not cause the crisis but rather the decision by sophisticated investors to buy these products.) He asserts that this was reasonable behavior at the time as the economy seemed less risky and there was less volatility in the market.
- Toyota scandal: Toyota was a model company with an enviable reputation. Its very success explains the slow response by both the government and the company—the problems were out of character.
As Samuelson notes, the current assumption is that the disaster at Deepwater Horizon could have been prevented because it was caused by human error. He suggests that the post-crisis investigations will complete the story and we will learn what happened.
However, for in-house counsel (and those charged with responsibility for compliance and risk management for their employers), he goes on to ask the more important question, not “what happened?” but “why?”
He concludes with the theme that there is “a cycle to our calamities, or, at any rate, some of them. Success tends to breed carelessness and complacency. People take more risks because they don’t think they’re taking risks.”
Of course, after each crisis or catastrophe we analyze and study and in many cases the “risk” becomes more obvious because we have the benefit of looking back at what happened; we suffer from ”hindsight bias.”
In short, we celebrate success by relaxing; then unknowingly take on more risk. For lawyers, risk managers and society, Samuelson succinctly describes the challenge. How do we “acknowledge this urge without being duped by it?”
