Titan: Taking Risks

I’ve been reading and watching the news about the submersible drama that ended badly. With all of the bad news, the heat, and such and now the poor ending to the undersea drama, I’m a little depressed and don’t want to do anything.

But that drama did bring up the topic of risk taking, and it does tie into finance. I would say finance people in regular corporations, especially large, mid-sized and public corporations are extremely risk adverse because of fiduciary duties to make sure the corporation remains a going concern. I know that I try to adhere strictly to the GAAP.

Finance personnel in smaller companies or startups are a little different because they are working for a riskier company and have to weigh risk much more. They are in a sense exhibiting riskier traits to be working for a smaller company.

The problem with being too risk adverse is that you could cut off innovation: you become so careful that you don’t do anything new and then someone else passes you by. Finance has to weigh the risks and benefits of pursuing innovation. And each person is going to have a different level of risk tolerance.

There are good reasons for engaging in exploratory adventures: I believe Christopher Columbus’ discovery of the Americas was the outcome of an exploration of a new route to the East Indies. There are the space flight attempts that may eventually lead us to the stars. Then there are medical discoveries, sometimes from doctor’s attempt to test medicine on themselves.

There are actually more examples from Mental Floss so if you click on the Mental Floss link, you will access the interesting stories of 10 scientists. There’s an example of one who injected 50 hookworms under his skin (ugh) and one who strapped himself to a rocket sled to be propelled forward at a speed close to the speed of light with no protection. He did suffer some broken bones and other injuries. And then there is this:

At the turn of the 20th century, August Bier developed a method for spinal anesthesia. It involved injecting cocaine into the cerebrospinal fluid. To test its effectiveness, Bier enlisted himself. During the experiment, a mix-up left Bier with a hole in his spine leaking cerebrospinal fluid. Bier’s assistant stepped in to take his place in the study. Once the assistant was properly numb, Bier kicked his shins, bludgeoned and burned him, plucked out his pubic hairs, and mashed his genitals. The assistant felt nothing—a success the two celebrated by drinking excessively that evening.

Mental Floss, “10 Scientists Who Experimented on Themselves”, Laura Turner Garrison, November 12, 2011

I just had to add that one in.

Anyway, back to my topic of risk taking, you can see that throughout history, people have taken risks to propel society forward. The CEO of OceanGate, the builder of the new type of submersible, using experimental materials and possibly experimental structure, was hoping to join those illustrious adventurers.

But he might have taken too much risk.

Now I don’t want to go into arguing that he took too much risk, although I’ll probably end up saying that, because that is not what this post is about, and I don’t really want to poke or speak ill of one who tried and died.

Finance does not deal with life and death situations, other than the life and death of a corporation. It seems to me that when finance plays hanky panky with the numbers and shareholders find out, the company tends to go into near death experience, if not outright bankruptcy. So, finance have to be really careful and strictly adhere to the rules to remain a going concern.

The founder of OceanGate…that was his own firm so theoretically, he could experiment and flail all he wanted. When we get into life and death situations though, the “shoulds” become murkier. It’s possible that if the submersible carried only scientists well versed in exploration and the risks of such exploration, the outcry might not be so great because those scientists would understand and accept the risks of going down in an experimental submersible. We have storm chasers chasing tornadoes and four died during the El Reno tornado of May 2013 and no blaming going around. And if only the CEO had gone down, it’s likely we wouldn’t have heard of the disaster.

The CEO was pretty adamant that the rules and regulations were too restrictive and were impeding innovations, which was why there had not been any innovations for decades. A friend of his brought up that quote about critics and being in the arena:

 “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”

Theodore Roosevelt

And he closed with the statement that the critics were men living quiet lives of desperation.

So, there are differing viewpoints about when the risks are too risky. It’s do we explore or do we be careful? Innovation or status quo?

But there are the elements that make such explorations riskier and thus more unacceptable. Here’s a couple that might be giving fuel to the outcry:

• This type of exploration was billed as extreme tourism.
• It had two paying tourists who were not scientists and thus conceivably did not fully understand the risks.
• The CEO refused to allow the submersible to undergo testing or to get certification.
• There is an impression that the scientific reasons were kind of an add-on to give it an aura of scientific exploration.

The refusal to undergo testing kind of strikes me that the CEO knew the submersible really was not safe because it couldn’t pass the inspection.

For finance and accountants, we have to follow the GAAP rules very stringently. There is no naysaying that. But beyond that, we have to weigh the risks against the potential game changing outcome. If we don’t do those explorations, someone else could pass us by but if we don’t do it in a very considered way, we may risk too much.

That’s why some do small tests rather than do the “bet it all” type of tests. Some try to come up with mitigations to reduce the possibility of some form of failure. And then some set boundaries that indicate when one should get out instead of continuing on.

This sad event is a reminder that we should periodically review risks in our business to see what needs addressing or changing. Environments can change rapidly and dramatically (take a look at what’s going on in Russia with a brewing civil war), so we need some scenarios planning in our toolkits to prep us and get us ready to respond. Today it’s AI; tomorrow it could be some other Black Swan events (although I hope we have heard of the end of the pandemic).

Now, hopefully, having written this, my mood will now get better, and I will start doing what I need to do.