by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
I have lost the reference, but somewhere I was reading about Train Wreck Equilibrium Theory (TWET). In a nutshell this is the theory that over a business cycle all businesses (no matter how well prepared) will experience an equivalent amount of train wrecks (scaled to the size of the organization).
There are a couple of points to make about this. First off if all companies experience the same amount of train wrecks, why practice risk management? The first answer is to avoid the preventable car wrecks. The second reason is to be in position to capture the positive effects of good train wrecks (that is unexpected good things happening).
A third – and perhaps the most important reason is to be in position to respond to a train wreck. Risk happens. It is how you respond to it that counts (and profits).
By the way, this is not to imply that companies should have rigid risk response procedures. Far from it. Each train wreck is unique. Each train wreck is unique and unexpected (one hopes – or else it should have been prevented or at least mitigated). Train wreck response teams need good principles and practices, but it is critical that they also possess flexibility, creativity, decision making skill, communication expertise all mixed together with wisdom.
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