The Failure of Risk Management: Why It's Broken and How to Fix It

CHAPTER 4

The “Four Horsemen” of Risk Management: Some (Mostly) Sincere Attempts to Prevent an Apocalypse

History is a race between education and catastrophe.

 

—H. G. WELLS

 

 

The market turmoil that started in 2008 and every other major disaster generates a search for cause and, in response to that demand, experts will provide a wide variety of theories. Most of these theories are judgment-laden. Explanations involving conspiracy, greed, and even stupidity are easier to generate and accept than more complex explanations that may be closer to the truth.

A bit of wisdom called Hanlon’s Razor advises us, “Never attribute to malice that which can be adequately explained by stupidity.”¹ I would add a clumsier but more accurate corollary to this: “Never attribute to malice or stupidity that which can be explained by moderately rational individuals following incentives in a complex system of interactions.” People behaving with no central coordination and acting in their own best interest can still create results that appear to some to be clear proof of conspiracy or a plague of ignorance.

With that in mind, we need to understand how very different forces have evolved to create the state of risk management methods as we see them today. Like most systems, cultures, and habits, the current state of risk management is a result of gradual pressures and sudden events that happened along the way. Influential individuals with great ideas appear where and when they do more or less randomly. Wartime ...