I happened to be reading Malcom Gladwell’s excellent book, Outliers, just as MF Global was collapsing, and I came across Gladwell’s discussion about another kind of crash – those involving airplanes.
Gladwell offers an interesting observation about the causes of air disasters that could apply to the failures at financial firms, like MF Global, or the whopping trading losses reported two months ago at UBS.
Gladwell shows that air disasters aren’t caused by a sudden, dramatic mishap but an accumulation of small errors rooted in poor communication:
“The typical accident involves seven consecutive human errors. One of the pilots does something wrong that by itself is not a problem. Then one of them makes another error on top of that, which combined with the first error still does not amount to catastrophe. But then they make a third error on top of that, and then another and another and another and another, and it is the combination of all those errors that leads to disaster.
“These seven errors, furthermore, are rarely problems of knowledge or flying skill. It’s not that the pilot has to negotiate some critical technical maneuver and fails. The kinds of errors that cause plane crashes are invariably errors of teamwork and communication. One pilot knows something important and somehow doesn’t tell the other pilot. One pilot does something wrong, and the other pilot doesn’t catch the error. A tricky situation needs to be resolved through a complex series of steps – and somehow the pilots fail to coordinate and miss one of them.”
It’s easy to see how this scenario could play out at a modern financial firm in a similar way. Markets are volatile, people are under stress and money, careers and reputations are at stake – conditions that make communication and teamwork even more important. But instead, people don’t speak up, ask questions, or raise objections when they suspect something is wrong.
While we don’t yet know all the facts surrounding MF Global’s collapse or the trading losses at UBS, there is evidence that warning signs were missed or ignored at both firms.
Perhaps Gladwell’s book should be required reading for senior finance executives.