Preface for Swans, Swine, and Swindlers

PREFACE

Testifying to the Financial Crisis Inquiry Commission, the body established by Congress to determine the causes of the Wall Street debacle, Lloyd C. Blankfein, the chairman and chief executive of Goldman Sachs, drew most of the fire.

Mr. Blankfein parried repeated questions over his bank’s extraordinary profits and salaries. At one point, when he likened aspects of [the great financial crisis] to a “hurricane” and similar acts of God [that is, natural disasters], the commission’s chairman, Phil Angelides, a Democrat and former California state treasurer, cut in to say, “Acts of God, we’ll exempt. These were acts of men and women.”

—SEWELL CHAN, New York Times, January 14, 2010

The potential impact of crises caused or exacerbated by humans is increasing exponentially. As the quote above suggests, the current financial crisis was not an act of God; it was an act of men and women. So are all crises. And there are at least three major human causes of crises.

Swans refers to false assumptions and mistaken beliefs in particular, and the inability to manage assumptions and beliefs in general, that can lead to crises. We derive the term from the book The Black Swan: The Impact of the Highly Improbable, by Nassim Nicholas Taleb. Black swans are highly improbable events that have extremely large impacts.¹ What turns a black swan event into a crisis is mismanagement.² For instance, the current financial crisis happened partly because Wall Street has fostered a culture that systematically ignored black swan events. Note that the current financial crisis was not a black swan event.³ Financial crises have been with us for a very long time and happen almost on a regular basis.⁴

Swine refers to greed, hubris, or arrogance, and the inability to design and operate systems that can minimize those traits. If drilling the deepest oil and gas well ever in history reflects BP and Transocean’s “intensive planning and focus on effective operations,” as the Transocean CEO had said,⁵ then causing and failing to contain one of the largest oil spills in history shows much more than negligence, foolishness, or a lack of crisis management capacity. It shows the greedy, arrogant, and even narcissistic side of these organizations. It also shows that these types of organizations are not designed and monitored effectively, sanctioned, or punished such that they are deterred from engaging in behaviors that put the rest of us and nature at risk.

Swindlers refers to unethical and corrupt behaviors, and of course, the inability to monitor, detect, and stop such behaviors. Bernie Madoff’s Ponzi scheme, Enron’s collapse, and Worldcom’s bankruptcy are just a few examples. The types of crises caused by swindlers send out a trail of early warning signals long before they occur. But for various reasons, such as confused organizational priorities, and individuals’ and organizations’ inability to pick up signals or connect the dots, these crises are often not prevented before they happen.

Of course, these three types of causes are interrelated and not mutually exclusive. Downplaying the significance of black swan events may be due to arrogance, over-confidence bias, or situational factors such as a dysfunctional reward-incentive system, whereas intentionally failing to prepare for black swan events can be due to low or nonexistent ethical standards. Cutting back on safety without violating regulations may be due to greed, arrogance, habit, cost-cutting pressures, normalization of deviance, or a lack of understanding of the complexities of a system. Violating regulations intentionally because paying off fines is cheaper than adhering to regulations can be due to low ethical standards as well as ineffective regulations and intense competition. While, as noted, the potential impact of crises is increasing exponentially, our ability to prevent or respond to crises properly seems to increase only linearly at best. A proper response to a crisis requires at a minimum a more comprehensive set of critical thinking skills, a higher level of emotional intelligence, and a higher level of moral development. Our goal in this book is to provide a set of tools, concepts, frameworks, and perspectives that the reader can use to understand crises better and manage them more properly.

CENTRAL CONCEPTS : CRISES AND MESSES

Two critical concepts—crises and messes—play central roles throughout this book. As a result, both concepts are not only used constantly but continually refined and redefined as we proceed. Nonetheless, precisely because they are so central and critical, we need to give some preliminary definitions and understandings of both terms.

Russell Ackoff was the first to appropriate the expression mess to stand for a system of problems that are so interrelated that they cannot be separated in principle, in practice, or, most fundamental of all, in their basic existence:

[People] are not confronted with problems that are independent of each other, but with dynamic situations that consist of complex systems of changing problems that interact with each other. . . . I call such situations messes. Problems are abstractions extracted from messes by analysis.⁶

Therefore, when a mess, which is a system of problems, is taken apart, [i.e., analyzed] it loses its essential properties and so does each of its parts. The behavior of a mess depends more on how the treatment of its parts interact than how they act independently of each other. A partial solutionto a whole system of problems is better than whole solutions of each of its parts taken separately [emphasis added].⁷

In other words, none of the problems that are parts of a mess can be taken apart and analyzed independently of all the other problems that constitute the mess. In slightly different words, a mess is a complex system of problems that are so tightly bound together that the problems are not only inseparable, they don’t even exist apart from the system of which they are a part. For instance, the “education problem,” or better yet the “education mess,” doesn’t exist apart from other messes such as crime, health care, poverty, real estate values, and so on. In this way, the concept of a “mess” is essentially synonymous with the concept of a “system.”

If we substitute the term crisis for problem in the preceding definition of a mess, then as we show later, every crisis is part of a larger mess. In fact, there is no such thing as a single crisis that is not embedded in a system of other crises. Thus, while crises and messes are often taken to be the same, they are not. The most important difference is, while all crises are messes, not all messes are necessarily crises.

The reverse also holds true: if a supposed crisis can be addressed or resolved completely independently of other crises, then it is not a crisis. Moreover, the common notion that a crisis can be addressed or resolved independently of other crises (for example, the belief that the current financial crisis can be addressed only by financial remedies completely independently of all the other crises that contributed to it or those that the financial crisis contributed to) is a surefire recipe for a bigger crisis or mess.

MEGA-CRISES AND MEGA-MESSES

Given the preceding, the “Great Financial Crisis of 2008–9” is by any measure a mega-crisis. It will make it harder to cope with a set of already existing crises such as the drug-trafficking crisis in Central America, homeland security, inner-city crime, and so on. It may also set off new crises such as currency wars or even actual wars, as the history of financial crises had demonstrated. In fact, if the prognosticators are right, and if this crisis is anything like what Japan went through in the 1990s, it could be decades before it’s over.

If this weren’t bad enough, the financial crisis is also a mega-mess; that is, it is a whole system of interdependent messes that must be addressed simultaneously.⁸ For instance, the mess that is Wall Street is not independent of the health care mess or the social security mess or the global warming mess. There is little doubt that the huge deficits that the United States is incurring to bail itself out of the current fiasco will be felt for years. Furthermore, unless they are managed very carefully, the actions the U.S. government takes in responding to today’s mega-mess could well lead to even worse crises in the future.

A mega-mess is a bigger mess. But the difference between the two is not only something out there in the world, something that exists independently of all observing minds, or something that all observing minds agree on. There is no agreed-upon scale or scope, and often the absence of scale and scope becomes a big part of the mess. This is the point of Chapter 7, that, at different levels of awareness, these definitions differ drastically. In all seriousness, sometimes, “clear” definitions are what get us into a mess. Think about a clear definition of fetus in the context of abortion, how such definitions differ on both sides of the aisle. Also consider the following: a crisis cannot be managed independently of other crises. Doing so may create mega-crises by intensifying a number of other crises and create new ones. All crises are messes, and a mess is a system of problems. A mega-mess is a bigger mess; it is a system of messes. A mega-mess may refer to a crisis because all crises are messes.

At the time of this writing, national and international public health organizations have responded to the H1N1 swine flu epidemic. In retrospect, it was not the crisis it was presumed to be. Nonetheless, if it had been a true epidemic—indeed if it had become a pandemic—then it could have further hampered economic recovery. If people were afraid to leave their homes and venture out in public, then this could have seriously depressed consumer traffic in shopping malls, attendance at sporting events, and so on. After all, the economic cost of the 2003 SARS crisis was estimated to be around $11–18 billion and the economic output losses in Asian countries around 0.5–2 percent.⁹

The point is that in today’s world, it is not enough, if it ever was, to prepare for individual crises in isolation. One must plan and prepare for the simultaneous occurrence of multiple crises or catastrophes. One also needs to consider how the effects of multiple crises can reinforce one another so that the overall result is worse than if merely one occurred by itself. The fact that this process is complex, uncertain, and never perfect is not an excuse for doing nothing. How one can most effectively manage mega-crises and mega-messes is the subject of this book.

All Crises Are Human-Caused

While it has become commonplace to say that the current financial crisis is the biggest economic crisis we have faced since the Great Depression, it is far less of a truism to suggest that it is also one of the largest man-made or human-caused crises that we have ever experienced. Indeed, recall the statements of Lloyd C. Blankfein, the chairman of Goldman Sachs, to the Financial Crisis Inquiry Commission in the epigraph to the Preface. Contrary to Mr. Blankfein’s contentions, the financial crisis is not a natural disaster over which we have no control and, therefore, “like earthquakes and tsunamis just happen from time-to-time.” In fact, as we shall see, all crises are human-caused. (As of this writing, the world has responded, however imperfectly, to a horrendous earthquake in Haiti. As we explain later, the earthquake is without any doubt a serious natural hazard, but the crisis is human-caused. Humans are responsible for the substandard and shoddy construction that collapsed in the quake, not Mother Nature.)

Consider the following: If the financial system works well and, in fact, if it works too well in the sense that it’s less volatile and more predictable, then people are encouraged to take more risks.¹⁰ This stands in sharp contrast to the ideal of other systems, such as the airline industry, in which accidents and mishaps are a mandate to take even fewer risks and to keep reducing the accident rate. To repeat, if the financial system is stable and it tolerates a certain level of risk taking, then people take even greater risks, which eventually leads to a crisis.¹¹ Indeed, as we show later, the culture of the finance industry is such that it virtually guarantees the production of major crises on a regular basis.¹²

Follow the chain further: the more that the finance sector invents financial instruments to spread individual risk by combining them into shared packages, the more that the financial system tolerates risk. As a result, banks lend or borrow more money relative to the funds that they keep in reserve to pay off debts. But in this way, the spreading of individual risk also increases systemic risk.¹³ Since neither leveraging nor the spreading of risk is sustainable, when a crisis eventually happens, it is even worse than if it occurred sooner. The point is that every step is due to the collective actions of people, not impersonal forces of nature.

Perhaps John Cassidy of the New Yorker said it best: “The real causes of the [financial] crisis are much scarier and less amenable to reform: they have to do with the inner logic of an economy like ours. The root problem is what might be termed ‘rational irrationality’—behavior that, on the individual level, is perfectly reasonable but that, when aggregated in [a complex system], produces calamity”[emphasis added].¹⁴

General Lessons, General Patterns

As big as the current financial crisis is, it is not the only huge crisis that we can expect in our lifetimes. In fact, new crises are constantly brewing, some of which are due to the current financial crisis. Therefore it is absolutely imperative that we learn—as quickly as possible—the lessons that the crises we have experienced have to teach us. It is even more imperative that we put those lessons into practice.

For the purposes of this book, we need to examine a broad range of crises. Only in this way can we see both the general and the precise patterns that virtually all crises follow. Furthermore, although they are certainly not identical by any means, essentially all crises obey the same patterns. This only makes the following questions more critical: “Why have we been so unable and unwilling to learn from past mega-crises?” and “What are the prospects for our doing a better job of anticipating and preparing for future mega-crises?”

Crises Involve Every Known Field of Inquiry

There is another daunting fact about modern crises. Due to their messy, that is, complex, nature, they involve every known field of inquiry and profession in their definition and treatment. This is precisely why crises and messes are so difficult to understand and manage. Their “definition,” let alone “solution,” cannot be found in any single field of inquiry or profession. No field or profession has a monopoly on dealing with them. In more pithy terms, no field or profession “completely owns” a crisis or a mess.

As a result, every crisis calls for interdisciplinary, and even transdisciplinary, thinking. They also call for intense cooperation and deep integration across the widest possible array of professions. It only stands to reason that if crises are the result of a system of problems that are highly interactive, then their solutions, if they exist, can only be created by a system of disciplines and professions that are highly interactive as well. Unfortunately, this rarely occurs.¹⁵

Consider the environmental aspects of the financial crisis. There are not only the obvious environmental components such as how to create new green jobs and industries that will hopefully get us out of the crisis by decreasing our unhealthy dependency on foreign oil, but also slightly less visible environmental dimensions as well. If people have less income, let alone no job, then cities and states stand to receive significantly less in tax revenues; therefore, cities and states are less able to maintain public parks and green areas and, in many cases, to prevent or contain wildfires. They are also less able to enforce environmental standards and regulations. Contributions to environmental organizations also decrease, further affecting the deterioration of the environment.

Consider public health and safety. It is well known that when people lose their jobs, then incidences of crime, such as child abuse and spousal abuse, go up in number, thereby constituting a potential public health and welfare crisis. In addition, people put off going to their doctors, so the chances of epidemics increase. If another crisis such as swine flu also occurs simultaneously, then because of the economic downturn, there is potentially less money available to treat it. But if people are afraid to leave their houses because of the flu, then this can have the extra effect of further decreasing economic activity. In this way, if not managed properly, every crisis has the potential to spread.

There are many more perspectives than environmental, public health, and public safety that one needs to consider in order to understand the causes and consequences of the financial crisis. In the following chapters, we give a more detailed, comprehensive, and transdisciplinary explanation of this and other crises.

Crises and Messes Are Not Like Exercises

As Charles Schultz reminds us, crises and messes are not like the nice neat tidy exercises that are found at the ends of the overwhelming majority of textbooks. Textbooks constitute the bulk of K–12 and even college undergraduate education, so most people are primed to expect exercises even when they are not appropriate. Because many people experience extreme discomfort when they first encounter real problems, far too many “crisis exercises” end up being overly structured and predictable, even though they are supposed to be open-ended and, therefore, more like problems.

Unlike real problems, exercises have one and only one solution at which everyone is expected to arrive. Even more fundamental, exercises have only one definition or formulation. It is, in fact, precisely the single definition that is “given” to students in the typical, so-called “statement of the ‘problem.’” Indeed, the phrase “the statement of the ‘problem’” is a misnomer because a more correct statement is “the statement of the ‘exercise.’” Furthermore, once solved, exercises remain solved forever. This is not so with real problems.

Real problems have none of the characteristics of exercises. If anything is symptomatic of crises and messes, it is the fact that they are unbounded. They resist our attempts to confine them and rein them in by reducing them to a single discipline or point of view. For example, different stakeholders rarely have the same definition of the individual problems that constitute a mess and of the entire mess itself. Indeed, the fact that different stakeholders have different perceptions of a mess is itself one of the key defining attributes of messes! As a result, “problem negotiation” is one of the most important aspects of managing messes. Before one can “solve” a problem one first has to agree on the “nature” of the problem. And if agreement is arrived at all, it should be reached only at the end of an intense debate about the “nature” of the problem instead of the all-too-common pressure to get a quick consensus.

Every Crisis Is a Crisis of Meaning

Virtually every crisis has a religious or spiritual component. Consider the religious and spiritual aspects of the current financial crisis.

Crises as great and as profound as the financial crisis constitute a severe threat to our psychological health and well-being. They do this by threatening our basic assumptions about the goodness, predictability, and stability of our fellow beings and the world itself. Great catastrophes and crises test our fundamental philosophical, religious, and spiritual beliefs and principles to the very core of our being. In short, they test our mettle in ways like nothing else. For example, people may become more religious and spiritual; fundamentalists, on the other hand, may try to blame others for causing the crisis.

There are also less obvious consequences. Crises bring out aspects of religion that are normally hidden from view. For instance, the San Francisco Chronicle reported that Islamic funds have suffered less during the current economic crisis:

Renouncing interest is the high-profile element of Islamic finance that relates to the current economic crisis. For Islamically [sic] correct investors, that means there are limits to how much debt that a company can have or how much profit it can derive from interest-based payments. That criterion eliminated the possibility of holding stocks in financial services companies, like Citigroup or Washington Mutual, whose stocks lost 86 percent of all their value last year, respectively.

Islamic finance also prohibits selling assets you don’t own, selling someone’s debt and engaging in high-risk investments. Thus, there was no participation in practices that have been blamed for Wall Street’s melt-down: complex derivatives trading, short-selling and the $30 trillion market in credit default swaps.¹⁶

This is not to say that Islamic funds are without problems. For instance, they often underperform the S&P 500. Nonetheless, the point is that one doesn’t have to dig deep and far to show that crises involve every known field of human inquiry and profession. Once again, they involve every aspect of our lives—especially those that we consider to be the most personal and private such as religion and spirituality, and that seemingly have the least to do with the crises at hand.

The Moral

The moral is, unless one learns how to understand, treat, and manage crises as messes, then one cannot understand, treat, and manage crises at all. The trouble is that the vast majority of crises are never understood, treated, and managed as messes. The result is that most crises are managed poorly. The consequence is an even bigger crisis and mess than the original one.

THE AIM OF THIS BOOK

The aim of this book is to help the reader deal better with mega-crises through a better understanding of how and why mega-crises are mega-messes. To achieve this aim, the chapters are focused on the key elements of crises and messes, and especially the key lessons they have to teach.

The book is organized into three parts. Part I is concerned with uncovering or surfacing the key underlying assumptions that often lead to crises and that with almost no exceptions all crises undermine and invalidate. Each of the five chapters in Part I identifies a different type and body of assumptions.

A major crisis does not merely challenge or upset our key operating assumptions. It does something far worse. It “destroys” all or nearly all of the key assumptions we make about ourselves, others, our organizations and institutions, and the world in general. By invalidating and destroying our key beliefs, a crisis literally pulls the proverbial rug out from under us. Because different crises invalidate different types of assumptions, we have to explore as many different types of crises and assumptions as we can in order to reduce the number of missed assumptions to as few as possible.

If Part I is concerned with identifying as many key assumptions as possible, then Part II is concerned with how we can better manage assumptions and, thereby, crises and messes. Specifically, Chapter 6 discusses a set of strategies to overcome the emotional difficulties of managing assumptions, crises, and messes; Chapter 7 outlines a set of philosophical frameworks to overcome the cognitive difficulties of doing so. Part III applies to the financial sector some of the central concepts discussed in the book. Whereas Chapter 8 outlines an inquiry methodology one can use to make sense of the financial crisis, Chapter 9 examines in greater detail the role of mistaken beliefs, false assumptions, and trust in financial systems. It also suggests four essential trust-enhancing elements for a high reliability financial sector.

This book is concerned with assumptions because assumptions, not facts, are the fundamental building blocks of reality. Assumptions are basic because there is no way that we can ever know with complete certainty everything we need and would like to know about the world. We have no choice but to make assumptions if we are to function.

Ordinarily, we have no need to examine and to challenge our everyday assumptions. But preparing for crises is another matter. Effective crisis preparation demands that we know and debate the key assumptions upon which all our crisis plans and procedures rest.

While this book draws heavily from the traditional academic literature on crises, it also ventures far beyond it. It considers ideas that are not contained in the typical treatments of catastrophes, disasters, crises, and so on. The fundamental reason is that the topic of messes necessitates it. For this reason, we use ideas from fields as diverse and varied as human development, philosophy, the psychoanalysis of organizations, and organizational health.

We would be remiss if we failed to note that, at best, the concept of messes has only been touched on in passing in previous books on crisis management.¹⁷ The idea of mega-messes has not been broached at all, let alone received the systematic attention it deserves.

For the most part, the academic research on crisis management has focused mainly on the study of a few isolated variables.¹⁸ As a result, previous research has not focused on one of the key characteristics of mega-crises, the fact that they are parts of complex and messy systems. By not recognizing and treating both the systemic and messy nature of crises, the danger is that we make crises worse.