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February 25, 2002—Don't Worry About the Copperheads; The Big Bear Will Get You First Copperheads and Big Bears. A friend up North gave me this adage as we restruck our friendship over the phone last week. It strikes right to the heart of this week's letter How do you pay attention to the risk that really matters when 1,000 calamities press their claims upon you? It also is the title of a new dictum added to the Global Province this week. Year of Risk. Last March, when we were working on our Annual Report on Annual Reports 2001, we were tempted to call it "The Year of Risk." At no time did we anticipate the monolithic meltdowns we have seen since -- California's electricity debacle, the World Trade Center tragedy, Enron, Global Crossing, Argentina, etc. -- but we spied a deep, wide, and pervasive systems breakdown, even if the much vaunted Y2K tempest had ostensibly been avoided. The irony of 2002 is that we see disaster all about us now -- to the point of paralysis -- but we still don't see the big pileups coming down the track. More often than not, we are consumed by the wrong risks, fearfully preparing for things that are not going to happen. We're watching the copperheads, yet the big bear is lurking in the bushes. We have been, we are, and we will be bushwhacked. Lone Wolves. What's uncanny is that there are chaps around who do foresee the big risks and anticipate, in vivid detail, the calamitous events that will ensue because the risks are unattended. Such was Rick Rescorla whose sad, wonderful, charming tale is retold in James Stewart's "The Real Heroes Are Dead" (The New Yorker, February 11, 2002). From Cornwall in England, he had fought against insurgents in Cyprus, Rhodesia, and Vietnam. Cancer survivor, Zen Buddhist, and novelist, Rescorla did a stint teaching criminal justice at the University of South Carolina, with a textbook to his credit on that subject. He wound up as security chief for Morgan Stanley Dean Whitter at, where else, the World Trade Center. With the aid of his wartime buddy Dan Hill, a Moslem convert, he anticipated the first 1993 bombing of the WTC, and the airstrike last year. "Drawing on his research" for his novel about the air-cavalry, "Rescorla envisioned an air attack on the Twin Towers...." In the first instance, he alerted Port Authority officials; they did not pay attention. In the second, he alerted Morgan Stanley's own brass; they did not pay enough attention. Inside almost every system, there are mid-level, somewhat alienated managers -- usually brighter than their superiors -- who spot clear and present dangers that the bigwigs simply don't see. They are not wedded to inertia, but respond vigorously to the promptings of their senses and their intelligence. If you are, on the other hand, too much part of a system, chances are you won't spot the torpedo coming your way you will believe in the system so much that you will implicitly believe it is impregnable. Lone wolves -- people of principle and intelligence who march to a different drummer -- seem to divine the real threat. It's the lone wolves, not the panoply of risk managers at banks, insurance companies, and detective firms, who can give us a little security if we will listen. Churchill and Other Rank Amateurs. It was Churchill who saw World War II coming and who, when the call finally came, could deal with it, even in woefully under-prepared Great Britain. Despite some military postings and his naval overseer duties in World War I, he was an amateur warrior. Yet, oft as not, he understood what had to be done better than the professionals around him. That is the intriguing thing about crises. The professionals rarely anticipate the big ones; that takes lone wolves. And the professionals -- as is so often demonstrated in wars ranging from the Civil War, to two world wars, into Vietnam -- don't do very well at leading us out of crisis. That takes splendid amateurs. Probably this is one of the lessons implied in Peter L. Bernstein's excellent Against the Gods The Remarkable Story of Risk. Again and again, we discover that the chaps who lay the basis for containing risk don't come from the professional guilds, but are independent, curious minds who come from intellectually fecund family lines. Bernstein has this to say about the utterly fascinating Francis Galton: "Galton was an amateur scientist with a keen interest in heredity but with no interest in business and economics. Yet his studies ... led him to a statistical discovery that is essential to forecasting and to risk management." He was not part of the academy or officialdom -- he was just curious. In Chaos Opportunity. Risk, it seems, is always one step ahead of our experts, always putting us in need of civilized rebels such as Rescorla and Galton who can foresee and devise against risks. Clearly the magnitude of present risks has outrun our risk-management and mathematical apparatus. We would think that chaos and complexity theory will have to come into play in order to grapple with the sheer numbers that have to be analyzed to contain risk in a world of a billion-trillion possibilities. This need not depress us. The very term risk raises the spectre of fear and danger in an affluent, coddled society. But as Bernstein points out, it is the successful management of risk that has established the basis of modern commerce. All the quantitative heroes in the history of risk, he says, "have transformed the perception of risk from chance of loss into opportunity for gain, from fate and original design to sophisticated, probability-based forecasts of the future, and from helplessness to choice." P.S. You will find a few companies that have made risk their business. We have mentioned before that Duke Energy (NYSE:DUKE; www.duke-energy.com) has appointed one of its top executives Chief Risk Officer. And also that a Canadian grain company, United Grain Growers (TORONTO:UGG; www.agricoreunited.com) has tried to codify and hedge all its risks, having enumerated 47. In a major strategy shift, Gates of Microsoft (NASDAQ:MSFT; www.microsoft.com) announced in January that the company is moving computer security and privacy to the center of its stage, its record badly flawed in both areas up to now. The insurers, meanwhile, are cashing in on all fronts, with AON (NYSE:AOC; www.aon.com), for instance, trumpeting its political risk coverage (see the New York Times, February 24, 2002, Business Section).
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