Monday, June 19, 2023

Ooops! Can failure be an option?

In the midst of the Apollo 13 flight to the moon, flight director Gene Kranz famously said of the rescue mission to return the damaged spacecraft "Failure is not an option" (and he wrote a book about it with that same title)

With lives at stake, Kranz was spot on.
Apollo 13 was a good example of a low probability -- high impact (or dramatic consequences) black swan sort of event that risks everything. 

1% doctrine
It's the stuff of the so-called "1% doctrine" which holds that, for some very low probability risks, the consequences are so great that their 'expected value' (probability x impact) is material to the well being of users, the enterprise, or the system. No question of it: the risk, no matter how small the chance, must be mitigated. 

Not a 1%'er?
But what about the more down-to-earth stuff of project risks?
Risks to assets?
Risks within processes?
Some kind of hybrid of assets and process?

Well, some risks may well be bet-the-company or bet-your-job risks. In those situations, you may feel like you've been captured by the 1% doctrine syndrome, even if others perceive it differently. You may think failure should not be an option, but the investment in mitigation may be prohibitive. Conclusion: even if there is failure, life goes on.

Usually, failure is on the table
There are facts, context, judgment, bias, and fear that all go into the mix of risk management.
With all those parameters being juggled, it's common to think about transferring the risk elsewhere. That's what drives risk insurance.

To make risk insurance work, expected value has to be relative to the frame of reference:
  • For the insurance beneficiary, the perceived expected value is high (and unaffordable): very high-impact consequences with a probability that is definitely not zero
  • For the insurer, the probability from all the insured in aggregate is low-moderate, but the strategic impact is very low for any one claim, so the expected value is low-to-moderate (and affordable)
  • The difference in expected values as seen in different frames of reference by the insurer versus the beneficiary is covered by the premium. Beneficiaries will pay to transfer the risk
  • Everybody sleeps at night!
What could possibly go wrong?
Lack of independence among insured risks is what can go wrong.
If there are a lot of beneficiaries who all at once have similar impacts because of correlated circumstances, the insurer's expected value (payout) is no longer low; the difference in expected values is wiped out by lack of independent failures. 

And, thus the insurance may not be there when you need it. Failure may indeed be an option (if you've not thought ahead to Plan B)!

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