operational risk

operational risk

Jason George shares an article that explores building contingency at the cost of agility, and why taking the safe route may be more costly. 

The next time you travel by airplane, look out the window and see if you can count how many engines are attached to the wings. Chances are pretty good you will find only one on each side. This holds true even on routes with long stretches over water or harsh terrain that provide no suitable diversion sites in case of mechanical trouble.

With few exceptions, most jets in commercial service now come fitted with two engines, a notable change from the status quo in the middle of the 20th century. In those earlier days of air travel the norm was to have four, and not because they provided the optimal ratio of power or efficiency. The main reason for this redundancy was the perceived unreliability of existing engines.

If there were only two to begin with, a blown piston or other mishap would leave just a single engine operating, a prospect too risky for regulators. This led manufacturers and their airline customers to converge on four engines as the standard. (For obvious reasons of symmetrical thrust an odd number wasn’t a popular choice, although some models featured a third engine embedded in the tail.)

What’s more, regulatory bodies like the Federal Aviation Administration in the U.S. mandated that aircraft couldn’t stray too far from possible landing sites, in case of emergencies requiring immediate help from the ground. This meant routes were carefully plotted not to take the shortest distance between origin and destination but to stay within range of potential diversion airports throughout the flight.

Key points include:

  • The great circle route
  • Known unknowns
  • Getting rid of the safety net

Read the full article, Calculated risks and the costly status quo, on JasonGeorge.net.

 

 

Jason George uses the evolution of the aviation industry as a means to explore the cost of risk aversion and how it can stymie growth.

Building in every possible contingency as part of a strategy can end up producing something so encrusted with extraneous elements that agility is compromised. Alternatively, it may hew so closely to known and safe paths that it ends up losing the novelty that would make it compelling. If you can’t cut yourself loose from a certain strategy or mental model, your degrees of freedom become limited. In the process new paths are closed off, even though they might unlock a different way of operating. Sometimes caution is a crutch whose real costs are not adequately calculated. A better path might involve getting rid of the safety net.

When faced with ambiguity too often we choose the guaranteed loss, which might be greater than the as-yet unknown costs of taking the riskier path. The safe route may be comfortable, but it is costly.

 

Points explored include:

  • Contingency as part of a strategy
  • Product cannibalization
  • The cost of the safe route

 

Read the full article, Calculated Risks and the Costly Status Quo, on Jason’s website.

 

There are four good reasons for holding on to a cash-based economy. Tobias Baer reveals the hidden economic benefits and explains why cash is still king.

Do we still need cash? More and more stores are going cashless. A whole country—Sweden—is intent on becoming the world’s first cashless nation in 2023. The attraction is the savings from avoiding the substantial handling costs of cash. In many places, increasing numbers of consumers have stopped carrying wallets because their phones have become viable substitutes. And government agencies fighting tax evasion love the trail electronic payments leave.

 

Four reasons to keep cash explored are:

-Operational risk

-Privacy

-Hidden economic benefit

-Financial exclusion

 

Read the full article, Why We Need Cashon LinkedIn.