The Pre-Mortem: sidestepping disasters before they happen.

Projects fail for many reasons, even after enormous effect and planning.

Projects fail for many reasons, even after enormous effort and planning. Pre-mortems can help avoid disaster.

Let’s suppose your team needs to decide whether to pursue a project (investment related or not), and it’s time to discuss the risks. What’s the best way to do it? Gary Klein, a research psychologist and currently Senior Scientist at MacroCognition, found that ‘prospective hindsight‘ — imagining that an event has already occurred — increased the chances of identifying the reasons for failure by 30%! In any risk management context, that’s worth learning more about.

Enter the Pre-Mortem.

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Be Prepared

The scout motto tells us to be prepared. My children’s schools practice fire drills and intruder drills as often as monthly. And first responders practice the “be prepared” philosophy as well. At least Boston’s clearly does. I just read an inspirational article in the Wall Street Journal about the preparedness of their emergency medical teams and the speed with which they were able to save people’s lives. “The efficiency of the rescue reflected careful planning, heroic execution and elements of good fortune.” The article went on to state that “Rescuer reaction was so instantaneous that it appeared to be rehearsed.” It appeared that way because in fact, it was. I know of no better way to be prepared than to rehearse. Thespians do it before the curtain rises, politicians do it before a debate and athletes do it before a game. So why don’t more portfolio and risk managers do it before a market crash?

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Italy’s Penchant for Convicting Scientists

No, this post isn’t about Galileo’s persecution and how Italian authorities suppressed scientific advancements for the past four hundred years.  But that tradition appears to be alive an well on the Apennine Peninsula.  After today’s verdict – in which seven geophysicists were convicted because they didn’t predict an earthquake– all I can say is that Italy really doesn’t deserve to have scientists anymore.  Four hundred years ago they burned Giordano Bruno for his heliocentric beliefs.  Ten years later, they confined Galileo to his house for the same crime.  Today, they convicted seven risk experts for not predicting an earthquake.

The earthquake leveled L’Aquila.

It is sad but true that the Italian city L’Aquila lies in what you might call earthquake alley.  It’s been hit many times in the past and I’m quite sure it will be hit again.  But the matter before the court was about the quake that struck on April 6, 2009 and that geologists in charge of risk didn’t warn the people enough.  The prosecution stressed that their crime was not an inability to predict the quake, but rather, that they did not adequately characterize the risks to people who live on a peninsula known around the world for catastrophic volcanoes and earthquakes.

Let that sink in a bit.

You can read the BBC account of the verdict here.  It stretches the farthest limits of my imagination to try and understand this court’s decision.  It demonstrates a complete failure to understand risk, chance, probability and uncertainty.  The prosecution maintained that the scientists made misleading statements and used the power of authority to put people in danger.  Well, duh.  Probabilities – chance – is inherently unclear and difficult to understand.  To all but the most knowledgable experts, this stuff is misleading, difficult to grasp, and easily misinterpreted.  And fundamentally, it is impossible to ‘adequately characterize’ the risks of a single event.  It’s impossible — even after you know the result!

If I make a probabilistic prediction that something has an x% chance of happening, it is fundamentally impossible to know if I was right or wrong by looking at only one event.  If I say there is only a 2% chance of rain tomorrow so you don’t need to take your umbrella and then it rains, that doesn’t mean I was wrong.  It’s quite possible that we just happened to have been in the 2% zone of “rain.”  In order to test my accuracy, I need to make several predictions and each of then needs to be tested.  And it is impossible – not hard mind you, but impossible – to correctly determine if a probabilistic prediction is accurate with only one observation.  In today’s court case, the judge clearly believes that the risks were higher than the scientists said.  This is probably the case because he only sees this one result – which was unfortunately fatal.  But he fails to understand that a fatal earthquake can occur even if the chance of it happening is extremely small.  And the chance of an earthquake happening at any point in time is extremely small.  So exactly how much warning should the geophysicists have given to these inhabitants of earthquake prone Italy?!?  Not more than it deserved, which is about as much as they gave.  Accurately.  His ignorance of probabilities results in a no-win situation to anyone who understands even the basics of risk management.

I can get quite passionate about science, education, and about a real need to understand probabilities even on a normal day.  In this case, my blood is boiling.  It’s simply sickening to think that experts’ careers are over and they are suffering in jail because the person in charge of deciding if they should suffer is ignorant of a basic understanding of what they’re accused of failing to do!

The seven scientists were sentenced to prison and barred from holding public office after only four hours of deliberation.  They were all members of the National Commission for the Forecast and Prevention of Major Risks.  I wouldn’t be surprised if all of the other members resigned today and left.  I know I would.

Is It Better To Have Loved and Lost?

Alfred Lord Tennyson may have had a thing with words, but he didn’t always get his facts right.  But then again, a good poet never let reality get in the way of composing compelling verse!  On this Valentine’s Day, let’s take a closer look at Tennyson’s haunting words (In Memoriam: 27, 1850):

“I hold it true, whate’er befall;
I feel it, when I sorrow most;
‘Tis better to have loved and lost
Than never to have loved at all.”

According to both behavioral economists and recent advances in neuroscience, it’s actually much worse “to have loved and lost / than never to have loved at all.”  In fact, it’s twice as bad to lose the same amount than to gain it.  The amount of pleasure we extract from winning something is about 1/2 the amount of pain we feel at losing the same amount.  In other words, losing a love imposes as much grief as there is pleasure in having two such loves.  Perhaps Tennyson should have written:

“The mind holds it true, whate’re the mood
Avoiding loss is what we do;
To have loved and lost is as bad for us,
As loving twice is good.”

I know, I know: “stick to your day job.”  So why do behavioral economists claim that the pain associated with losing something is twice the strength of the pleasure at gaining the same thing?  Here are three supporting stories:

  1. They’ve conducted plenty of experiments with physical objects (coffee mugs seem to be the canonical choice) in which students are divided into two groups: mug owners and mug purchasers.  The owners are allowed to take the mug home that night and the next day they have to sell the mug to one of the ‘buyer’ students.  Sellers usually want about twice as much as the buyers are willing to pay.
  2. Imagine a simple game of fair chance (50/50) in which you bet a certain amount of money.  Tails, you lose your money.  Heads, you win $X.  When people are asked what value of $X would entice them to play — the answer is that X has to be twice the amount you can lose.
  3. In brain studies, they have measured a factor of two in the sensitivity of the brain to pain than to equal pleasure.  For some reason, getting and losing a certain amount of gourmet chocolate is the canonical prize.

In all of these studies, it seems that the human brain is twice as sensitive to an object’s loss than to its gain.  If only poets read more science, they might get it right!

But hang on … perhaps Tennyson knew this all along, and his words are meant to express how valuable love is in the first place – so valuable that it’s worth the (doubled) pain of loss!

Now that is completely irrational.  And it’s also very human.  🙂

No (prospect of) Pain, No (prospect of) Gain

Did you know just about every year, someone falls to their death from the Rim of the

Following the Park Ranger along the Kaibab trail.

Grand Canyon, but that no one has ever fallen off the trail while hiking into the Canyon?!  When I heard this – from the National Park Ranger who was guiding us down the one and a half mile South Kaibab Trail to Cedar Ridge in the Canyon this past summer – I couldn’t help wondering why.  The trail is somewhat narrow – about six feet wide, with a sheer drop on one side.  But the Rim has a sturdy fence or stone wall to protect all those would be Ansel Adams-es.  Why do people fall at the Rim but are OK on the trail?  The explanation I settled on last summer came up in a conversation last week on a seemingly unrelated topic: how to grow a successful business.

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Downward Trend Risk

“Will the trend continue?  Will the numbers keep dropping?  They’ve been getting worse — every day! — for several months now.  It’s already getting quite bad and it’s only getting worse.  What can we do to reverse the trend?”

I’m not talking about the stock market or the value of European Sovereign Debt.  I’m talking about the number of hours of daylight for people living in the Northern Hemisphere.  Historically, humans did a lot of [what we now consider] crazy things to reverse the very real and downward trend of diminishing sunlight through the fall months.  In other words, they did whatever they could to get the powers that be to increase the number of daylight hours.  Their actions – some gruesome and tragic – were based on their understanding of how the diminishing sunlight phenomenon worked.  Similarly, our actions today to reverse downward economic trends are based on our understanding of how markets work.  My claim is that the current understanding of our economic issues is not much better than the ancients’ understanding of the dynamics of planetary orbits and the Winter Solstice. Read more of this post

Optimism Risk?

Time Magazine has a solid article about the optimistic nature of the human mind.  Instead of summarizing its points, I suggest you read it before continuing this post.  While some may complain that I should provide a short version of the pieces I refer to, I think it’s better to take the 10 minutes it requires to absorb the author’s intended interpretation.  Besides, many of my previous posts already summarize it.  How’s that for justification.

Our optimism has obvious implications for how we think about risk and the last paragraph really sums up the situation nicely.  We’re all inclined to overestimate our chances of success and we downplay the negative consequences.  This approach has many benefits to the survival of our ancestors (uh, and for our decedents!) but it can cost us individually because we suffer the consequences when things don’t go our way.  Risk Management is about much more than preventing loss — it’s about keeping us in the game to take advantage of future opportunities.  The author’s last paragraph is key — knowledge about the downside of optimism is a very good way of preventing those losses.

As a very optimistic person, and a risk taker, I’m fascinated by the simultaneity of the benefits of believing we will prevail with the need for limiting danger that directly contradicts that optimism.  Since our brains appear to be hardwired to discredit (and sometimes not even notice) the downside, it’s that much more important for us to learn about how we naturally tend to view the world.  I for one do not plan on trying to be less optimistic.  Rather, I want to better understand the chances of different losses and what might lead to them.  That, it seems to me, gives me a solid chance of having the best of both worlds.

A Childish View of Risk

Figure 1: Teenagers are missing part of their brains. Click the image for full size.

As a parent of three – my kids are 14, 11 and 9 – I try to teach my children how to make better choices.  It’s easy to just tell them “do this” or “don’t do that.”  Sometimes they even listen.  But what I really try to do it have them understand what’s behind the decision – what makes one activity safe and another dangerous.  For those readers who don’t have children, this is much harder than it sounds.  When I say something like “don’t you think that was a dangerous thing to do?” my children’s first reaction is usually something like “but Dad – Nothing bad happened!”  Their justification for taking a risk is that they didn’t get hurt.  “See – I’m OK.”  Read more of this post