Judgment Call on the Oil Spill (June 2010)

This technological and environmental catastrophe in the Gulf of Mexico illustrates the increasing degree of interdependence in today’s world. In financial terms, this means that numbers of organizations not only mis-manage their risks internally, but impose the negative consequences on others outside (notion of security externalities introduced in the book Seeds of Disaster, Roots of Response). Think also of the financial turmoil caused by just a few financial institutions or of those people living in disaster prone areas who do not undertake risk reduction measures (and then need to be bailed out).

Why is this happening? Because human mind is not good at understanding low-probability events. Decision makers in organizations rarely think disasters will happen to them. But they do.

What to do? Map interdependencies among organizations and across risks; create incentive systems with proper level of responsibility over several consecutive years to avoid the “next quarter’s mentality”; have your Board run un-conventional crisis exercises so they are reactive when surprises happen.