Saturday, December 19, 2009

Extreme Risk Management--The One Percent Doctrine

Ideas about extreme risk management have been around a long time. Extreme risks are those for which the consequences are irreversible, and the impact is near-catastrophic. In most cases, the likelihood of the event is low.

Insurance from high-risk underwriters--most famously Lloyds of London--has been a traditional mitigation.

But for some projects and some circumstances, insurance is not practical.

There are a couple of principles that guide action, and it's no surprise that 'utility theory' that takes into account the nonlinear, sometimes irrational, reactions of people--in this case, risk managers--is involved.

Probably the oldest is something called the Precautionary Principle. In a few words what it means is that burden of proof about consequences is shifted to the advocate of the action and away from the pessimist who is blocking the action. That is to say, for impacts so horrific and irreversible that such an outcome is unaffordable in every sense of the word, the advocate of an action that might lead to such an outcome must prove the consequences can be avoided; the pessimist need not prove that the consequences are the most likely outcome.

One project example is the decision in Houston regarding the return of Apollo 13 after the explosion that damaged the spacecraft. Gene Kranz, lead Flight Director, essentially turned back the advocates for a quick return and directed an orbit around the moon for the return. The consequences of an early return, if not successful, were fatal since the moon lander lifeboat had to be abandoned if the early return option was selected. A good description of the decision making process is found in Kranz's book: "Failure is not an option"

Tom Friedman, writing in the New York Times, described the One Percent Doctrine, a phrase made famous by Ron Suskind in his book of the same title. It described the precautionary principle as espoused by Dick Cheney: If there is even 1% chance of a horrific event happening, then consider the 1% a certainty.

The impact of the 1% doctrine is to make the impact x probability result so high that it subsumes all other risks. In the face of the 1% principle, all possible measures must be undertaken to avert the risk event--failure is not an option!

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2 comments:

  1. It’s the System, Stupid!



    In “Going Cheney on Climate” Thomas Friedman creatively relates the unrelated, namely, Dick Cheney and climate change. Friedman’s system thinking connects the dots, i.e. the interaction between climate and America’s top current economic and political challenges: our trade deficit and dependency on foreign dictators.



    Sustainability begins with system thinking is the message of carbonRational’s recently released, "Thinking About Management from a Climate Change Perspective". This white paper is based the philosophy of W. Edwards Deming, the guru often credited for the Japanese postwar economic miracle and is available at: http://www.carbonrational.com/ClimateChangeandMgt.pdf

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  2. Hugh: you're right about the system focus!

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