Why is it that we seem to run into catastrophic decision making failures on Wall Street, large corporations, government and military every few years? Why are we not learning from past failures to mitigate future failures?
When a failure or crisis occurs, we tend to blame it on greed, incompetence and/or corruption. We seem to go through the perfunctory routine, after a failure or crisis, of having a congressional investigation followed by new regulations to prevent that failure from occurring again to gain people's confidence in the organization, till, of course, the next failure or crisis occurs.
After the stock market crash of 1987 one would have thought that we would never again come close to the brink again. Yet, since then, we have had the Savings & Loans Crisis, dot-com bust, Long Term Capital Management (hedge fund) failure, accounting scandals that led to the collapse of Enron and other companies, and, the “mother” of all failures, the financial meltdown resulting from the housing bubble.
Since these failures keep happening, there has to be an explanation for all this. It can’t be always explained away as result of greed, incompetence and/or corruption. As it turns out the explanation for these failures is not that simple.
To better understand this, one has to look at the work done by Diane Vaughn in her seminal book, “The Challenger Launch Decision.” When the Challenger space shuttle blew up in 1986 shortly after the launch, the cause was attributed to the O-ring erosion resulting from cold temperatures at Cape Canaveral, Florida.. The media blamed the explosion on the faulty decision to launch the shuttle. Even the Rogers Commission that investigated the explosion came to a similar conclusion and barely covered what may have led to the faulty decision.
People were satisfied that the cause was identified and that it was highly unlikely that future explosion will occur from an O-ring erosion or launching the shuttle in cold temperature. People and the media moved on with their lives, but not Diane Vaughn.
Diane Vaughn, a sociologist, wanted to focus on what led to that launch decision, and went back from that fateful decision to look into NASA’s culture and how it evolved that may have contributed to the explosion. She went beyond the technical cause of the failure and looked into NASA’s organizational structure and behavior and the change that led to the failure. This exhaustive and meticulous research took her nine years.
She attributed the cause of the Challenger accident to a theory she coined the “Normalization of Deviance.” Normalization of Deviance is said to occur when a large-scale organization over time starts accepting small risks which leads to their taking bigger risks that subsequently results in a catastrophic decision making failure. Since this takes place over a long time, it is essentially invisible and no one person or one event is responsible for the failure. The main cause of a failure is the the culture that has become established over time.
During her research Vaughn found that NASA did every thing by the book. There were redundancies built in to mitigate risks. There was no evidence of groupthink, and no one individual made the fateful decision. Everything NASA did for the Challenger space shuttle launch was consistent with what they had done on previous launches. Everything NASA did was routine.
This highlights the insidious nature of Normalization of Deviance, since it is invisible and routine and Vaughn points out in her book that NASA fell into the trap where “unexpected became expected became accepted.”
NASA did not initially expect O-ring erosion. When they were discovered in early missions, engineers thought it was an anomaly. But then it happened again. Gradually it came to be expected. Engineers didn't seem concerned since they felt there was sufficient redundancies built in to prevent a failure. They gradually now accepted the O-ring erosion. At this point they had crossed the Rubicon on preventing a catastrophic decision-making failure.
This explains why it is so difficult to prevent catastrophic decision-making failures on Wall Street and large corporations. They keep taking bigger risks to satisfy the board, investors and high expectations such that it eventually leads to a failure. People don’t see anything wrong with what they are doing.
Are there current examples of any Normalization of Deviance in the making? I believe there are at least three that could lead to major crisis.
First one is our rising deficit and debt, which has bee going on for some time and we, collectively, focus on it for a short time, make some quick fixes and then move on. Yet, the deficit and debt keeps rising unabated. Eventually, this will result in a major catastrophe that is not going to be the result of any one person, or one event, but the culture of accepting deficit and debt that we have come to accept. Where was the outcry when the debt reached $1 trillion. Now we have come to accept the debt as it approaches $16 trillion. There is still no sense of urgency. Since Wall Street is rising, people are betting with their money that this will not lead to any crisis.
The other major Normalization of Deviance is the coarsening of our politics where it is impossible to reach compromise on major issues. The genesis of this could be attributed to when the Republican party became a majority in the House during President Clinton’s administration. Since then it has become extremely difficult to reach a compromise on major issues, such as immigration, debt reduction, education, infrastructure spending, reforming the tax code, etc.
To highlight how difficult it is to reach a compromise, Ronald Reagan agreed to a $1 of spending cut to a $1 of tax increase with the Democratic Congress to save Social Security. When President Obama, during the negotiation for raising the debt limit, offered a $3 of spending cuts to $1 of tax increase, the Republican Speaker of the House, John Boehner, rejected the offer because he could not get the support from his party. During a recent GOP Presidential debate on Fox News, when a hypothetical 10/1 split was offered to the GOP Presidential candidates, not a single candidate raised his or her hand that he or she would accept that deal if it was on the table.
Just when we thought that Wall Street will finally learn from their numerous failures, a resignation letter by a Goldman Sachs Vice President, Greg Smith, published in New York Time on March 14, 2012 titled "Why I am leaving Goldman Sachs" shows that nothing has been learned. It is as business as usual. The author point that the secret sauce of Goldman Sachs was its culture of teamwork, integrity, humility and focus on the customer. This has now degenerated to focus on money only. The author feels that the new culture imperils the survival of Goldman Sachs and because of its interdependence the overall financial market.
Normalization of Deviance is a very important theory that clearly explains why we keep having major large-scale decision-making failures and why it is so difficult to prevent it from occurring. When the next crisis occurs, we will undoubtedly discover that it was in the making for a long time and we just never gave much thought that it would ever occur. It will again be devastating and will rush to apply a quick fix and then move on. The problem is that we may not be able to come up with a fix if the failure proves to be so intractable.
Source for this Blog:
The Great Courses, “The Art of Critical Decision Making,” from the Teaching Company; lectured by Professor Michael Roberto.