Saturday, August 6, 2016

Extreme risk management

Extreme risks: ever been there; done that?

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.

You're probably thinking: "Black Swan". But no, a black swan is unanticipated and not-thought of -- never happened before so, not on the radar.

No, I'm thinking of the knowable, if not the estimable. 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. Even Lloyds was near bankruptcy in the early 19th century before the risk factors were really understood in the trans Atlantic shipping business. Each of those voyages was more project than production.

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.

Precautionary Principle
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 -- standing in the school house door -- need not prove that the consequences are the most likely outcome.

Failure is not an option
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"

The One Percent Doctrine
Tom Friedman, writing in this essay, described the One Percent Doctrine, a phrase made famous by Ron Suskind in his book of the same title.

If there is even 1% chance of a horrific event happening, then even 1% is too likely. [ It's sort of a "infinity x zero = 1, i.e.: certainty" argument.]

The impact of the 1% doctrine is to make the impact x probability result so high that it subsumes all other risks.

  • Mitigate the risk as though it were a certainty; 
  • Promote its risk response to the head of the class. 
  • All possible measures must be undertaken to avert the risk event--failure is not an option!

Read in the library at Square Peg Consulting about these books I've written
Buy them at any online book retailer!
Read my contribution to the Flashblog