Blog of the Day: What Mike Tyson Teaches Us About Risk Management

RiskViews, a fine blog about managing enterprise and other risks, has a great compendium of quotes on the topic. They recently posted their 10 favorite additions to the library from 2011, of which my favorite is this one from Mike Tyson:

“Everyone has a plan ’till they get punched in the mouth.”

The boxer’s quip brings to mind one of the criticisms a Japanese government panel made of Tokyo Electric Power Co., the operator of the Fukushima nuclear plant, in a just-released report on that post-Tsunami disaster. According to an article in The Wall Street Journal, the report “criticized Tepco’s stance that before the accident it had met government standards for disaster preparedness, criticizing the company for essentially shirking responsibility by labeling the events soteigai, Japanese for ‘outside our assumptions.’ ”

The Journal quotes a Japanese official as saying: “People have a tendency not to see what they don’t want to see, not to hear what they don't want to hear, not to think about things they don’t want to think about. ... The latest disaster taught us the importance of recognizing such tendencies and incorporating such risks in our disaster responses.”

Tepco, in other words, had a plan until they got punched in the mouth.

In financial services, the assumption that the improbable is impossible, the Tepco tendency, has shown up in all kinds of disastrous ways. Think of Long-Term Capital Management’s fatal overreliance on mathematical models, or more recently the wrongheaded mid-aughts consensus that there could never again be a nationwide decline in housing prices.

Planning is important, but when plans fail to account for contingencies outside our assumptions, the results can be, as Tyson would say, discombobulatingly devastating.

How can risk managers train banks so they don't get knocked out by a surprise left hook? Post a comment below.