Posts Tagged ‘Iceland ash cloud’

Iceland and The Calculus of Risk

April 19, 2010 Leave a comment

Corporate risk management is supposed to be an exact science: a bespectacled number-cruncher generates risk scenarios, assigns probabilities and impact assessments to them, and then based on its risk appetite, the firm decides which risks to accept, which to reject and which to mitigate or transfer via say insurance or other contracts.

Or so we’d like to think. The current calculus of risk of flying over Europe after Iceland belched a cloud of noxious anger into the air to protest its treatment during the credit crunch, illustrates how we REALLY deal with risk. We never do it rationally. We start with our emotional or self-interested positions, then look for data to support our views. Basically, we do what we feel like, then justify it by rationalisation and tendentious data.

When the cloud of ashy anger first grounded flights, we were ok with it. We could live with not travelling for a couple of days as long as the reason was to keep us safe. Then the costs of not flying mounted up. Airlines were losing millions by the day, corporations couldn’t do business, travellers were stuck at airports. Suddenly, rather than being the prudent saviours of peoples’ lives, air traffic controllers became ‘over-reacting’ bureaucrats.

Emotionally, we were fed up, and just wanted to fly. So KLM, Air France and other airlines sent up ‘test flights’, which proved- surprise, surprise- that it was safe to fly. We’d found the data to support the risk we wanted to take. So the lobbying began– let us fly, the airlines pleaded. Now, it looks like the authorities will cave in to the pressure and let the airlines loose to profit.

We have no idea what the real risks are. Because we present data to support our a priori positions, which are always biased by our incentives, data is meaningless. For decision-makers in business, this is just a high-profile case study on why risk management- like most systematic decision-making- is really a farcical comedy of errors. Let’s just hope nobody dies.