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Creating a Solution to a Risk Management Problem

Posted in on
March 30, 2021

Author: Ron Dembo

Often, a system fails because it mistakenly attempts to apply a deterministic solution to a radically uncertain or stochastic situation. When you face uncertainty, there’s often no ‘correct’ or ‘perfect’ solution to a problem – no perfect hedge that can save you from all the potential downside or a course of action that can infallibly capture the maximum upside. So you need a strategy that can handle uncertainty: you need risk thinking.

Take Airport Security, For Example

The American solution is to have a rules-based system that tries to mitigate potential risks with a set of questions and processes out of a guidebook. They have a low-grade employee with a rule book who mindlessly applies instructions: “No liquids. Take off your shoes and put them on the conveyor,” etc. It doesn’t matter if you’re quite obviously tramping around in flat shoes — the rules say take them off. The notion is that with enough rules we can solve the problem.

When U.S. Homeland Security officials evaluated the TSA in 2015, they pretended to be terrorists and tried to smuggle guns and bombs onto planes 70 different times. And they succeeded 67 of those times despite the TSA’s lengthy screening process. That’s a failure rate of over 95%.

An Alternative Way of Doing Things

The Israeli Airline El Al has a very different approach, one which I would classify as risk thinking. The 1960s and 1970s saw Palestinian terrorist groups commit a large number of hijackings. El Al and others quickly developed a risk thinking approach to the problem. They have a psychiatrist who interviews every passenger before boarding. And they look at you on cameras to examine your body language as you enter the airport. They start generating scenarios about you from the moment you walk into the terminal.

The Israeli notion is that because there is no solution, they have to hedge against the unknown and the uncertain. If a terrorist could be anyone and look like anyone, a rule book won’t cut it. But a trained behavioural analyst might. The Israelis’ ultimate hedge, however, is to stick a guy in the plane in plain clothes – looking just like a passenger – armed and prepared to counter any threat, just in case all else fails. And their solution works well. The first and last successful hijacking of an El Al aircraft took place in 1968.

The nature or form of the solution is what matters, not the amount of manpower or computing power you can throw at it. In a radically uncertain world, there is no single solution, there is only a strategy for hedging your risk to guide you through.

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