Another day, another news coverage on the catastrophic oil spill in the gulf. I am sure that we (U.S. and the rest of the world) will have to endure the consequences of this event in many years to come. Today, the Sunday Times printed an article that discusses risk management, regulatory policies and how they influence for-profit organization's decision making. Here is the link to the article.
The bottom line is the BP oil spill falls under "the black swan event" that can be explained by the black swan theory". Two underlying characteristics of a black swan event are: (1) an event is rare, hard to predict, and has high (negative) impacts, and, as a result, it gets to one of our human flaws in thinking and acting on an event. In other words, we, individually and collectively, tend to brush this kind of events aside and underestimate its likelihood of happening. In this case, a regulatory policy of capping an oil company's liability at $75 million for a rig spill increases the potential damage. That is, it reinforces companies to play down risks and potential damages and encourages them to act in their own self-interest towards profit maximization.
Are we creating systems that are too complex for us to make sense of?
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