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Calculated Risk

Strategy #5
Be willing to sail into the storm.

Danger lurks everywhere. At least that's a common perception, according to a Wall Street Journal article that describes how a fixation on risk—fed by labs, law, and media—haunts the United States, a comparatively very safe society.¹ But it's impossible to read the newspaper or listen to a news broadcast without sensing danger.

The threats are described in vivid detail. One headline, for example, reads “Furniture Tip-over Kills Two-Year-Old.”² The article goes on to describe how a young child was crushed by a dresser when it fell over and punctured his heart. He had been trying to reach a drink when the accident happened. Each year about a dozen children die and almost 15,000 are treated for injuries caused by tipping furniture and televisions. (The problem can be prevented with a tip restraint that can be purchased at a hardware store.)

For those who don't have small children, there are other things to worry about. A New York Times article about a bizarre and tragic elevator accident got my attention. An executive at one of Manhattan's most prominent advertising firms stepped into an elevator. It suddenly lurched up with its doors still open, killing the trapped executive.

The article mentioned that there were about 60,000 elevators in New York City and fifty-three elevator accidents. The piece went on to say that only three of the accidents were fatal.

The article was on my mind as I stepped into an elevator in New York City during a client visit. The office building was modern, and the elevators were well maintained. At least I assumed they were well maintained. But the phrase three of them were fatal kept running through my mind. Somewhere between the first and thirty-eighth floor, the elevator abruptly stopped, bounced for about a minute, then hung motionless.

Everyone in the elevator looked around and laughed nervously. As I stood there surveying the situation, I remained calm and made some humorous comment. But I was relieved when the doors finally opened. Some people got out, deciding to take another elevator. Others opted to continue their upward journey on the elevator that had just stopped. I was in the first group, figuring that there was no downside to avoiding an elevator that had just engaged in questionable behavior.

I knew that the elevators in this building were newer than the creaky ones that had killed the advertising executive. But those older elevators had passed safety inspections, and there were no violations relating to the tragic accident. How did it happen? And what about the other two fatalities? Were they in more modern elevators, like the one that had just stopped unexpectedly with me in it?

I've had a fair amount of exposure to risk and danger. I have survived automatic weapons, snipers, recoilless rifles, IEDs, a lightning strike, leopard seals in Antarctica, sharks, barracuda, poisonous cone shells, and the Sydney to Hobart Race. But when I read a Time magazine article that says, “It would be a lot easier to enjoy your life if there weren't so many things trying to kill you every day,”³ I nod my head. There's a lot of scary stuff out there.

The reality is that life is filled with threats of various kinds. There are serious, life-threatening risks. And there are hazards that may not be life-threatening but are still significant: running out of money, having a password hacked, or having your reputation damaged. As long as people are alive and engaged in deliberate goal-directed efforts—such as running a business or a race—there will be danger. The challenge is to understand what to worry about, how to mitigate risk, and which risks are worth taking.

Tactics for Teamwork at The Edge

Know what you are getting yourself into

There were six fatalities in the 1998 Sydney to Hobart Race, bringing the total number of people who died in the history of the race to eight. The Hobart is one of the most challenging ocean races in the world—the Mount Everest of sailing. It is a tough, brutal event. But thousands of sailors have raced for over half a century, and the overwhelming majority have made it safely to Hobart.

On Mount Everest itself, more than 200 people have died since the first recorded fatalities in 1922. In 1996—the most deadly year, chronicled by Jon Krakauer's Into Thin Air—nineteen people died. For every successful summit attempt, about four people die, and the odds of not coming back alive are about 1 in 20.⁴

Each sport has some inherent risk, but some are more dangerous than others. There are also differences in the potential consequences when things go wrong, and choices to be made about safety precautions. If you're going to do the Sydney to Hobart Race, do you wear a life jacket? Do you tether yourself to the boat? And if you're climbing Everest, will you do it with or without supplemental oxygen? These are all choices that change the odds.

The financial meltdown that began in 2008 is a prime illustration of the risks associated with different businesses. The inherent dangers encountered by teams dealing with the subprime mortgage market were significantly greater than for the traditional real estate mortgage industry. And teams aggressively trading credit-default swap positions were doing more than climbing Everest without oxygen. They were the wing-suit flyers of the financial world—soaring past cliffs in Batman suits. Wing-suit flying may provide an adrenaline rush, but it is one of the most dangerous of extreme sports.

Beyond legal prohibitions, there are no rules governing what people are allowed to do in the world of business and in the world of some sports. But it is important to understand what you're getting yourself into and to decide what measures—if any—you will take to mitigate the inherent risks.

Be realistic about the capabilities of your team

Each boat caught in the ‘98 Sydney to Hobart storm had a choice to make. Some, like Sayonara and the other maxis, were fast enough to make it across the Bass Strait before the worst of the storm. They still hit big waves, and some people were injured. But because of their speed, the danger of sailing to Hobart was diminished—the option of turning back was much less attractive.

Other boats, like John Walker's Impeccable, were behind the AFR Midnight Rambler and closer to the Australian mainland. The crew of Impeccable had no appetite for continuing into the Bass Strait, and all agreed that the right choice was to turn around and sail for safety. Their decision was relatively straightforward.

The real problem arose for boats of moderate speed like Sword of Orion, AFR Midnight Rambler, Midnight Special, and VC Offshore Stand Aside. These boats had a tough decision to make, and the choice wasn't easy.

There were a number of factors that gave the Ramblers a wide range of real options. They had trained hard and, though the boat was new to them, the crew had worked together for years. The team was cohesive.

They had prepared thoroughly for all conditions, including the most difficult task of sailing at night. They had a superb helmsman, Ed Psaltis, and others who could also steer and give him some relief. Finally, they had a rugged boat that could take punishment, and they had tested the limits of the boat in their lightning-fast sail down the coast.

On the other side of the balance sheet, they had an injured crewman, Chris Rockell. But Chris appeared to be stabilized, and in order to get him medical help they needed to keep AFR Midnight Rambler afloat. That meant that the decision that was best for the Ramblers who weren't injured was also the best decision for Chris. Whatever their choice, it needed to be made with safety for all in mind.

Each crew had a different profile of capabilities and choices. The wording of this strategy is deliberate: Be willing to sail into the storm. Not every boat should sail into every storm. But boats that have the capability to deal with big waves should be willing to sail into the storm when the time is right.

To borrow a term from statistics, the Ramblers had more degrees of freedom than boats that were less well prepared, where the team was less cohesive, or where the boat itself was not as capable. Teams need to fully understand their true capabilities—both strengths and limitations—to be able to make the right decision when they are caught in a storm.

Test your limits before the storm hits

The Ramblers knew what they, as a team, were capable of. They had sailed together for years, and they were fully prepared for the race. But they needed to know how their new boat would perform as well.

The Ramblers deliberately pushed their limits well before the storm hit. As they were smoking down the coast of Australia on the first day, it was knife-edge sailing. They could have played it safe and slowed down with a smaller sail. Instead, they pushed hard until the Rambler broached as it was knocked over by the powerful wind.

They broached twice, and each time the team recovered seamlessly. They were traveling at high speeds, over 20 knots, but the sea was relatively flat. So their sail down the coast acted as a safe testing ground. And because they had taken relatively small risks early on, they knew what their boat could do and were prepared when the worst of the storm came.

Many organizations are surprisingly unwilling to undertake even small risks that might take on the appearance of failure. I once worked with a company that manufactured jet engines for military and commercial aircraft. As part of the testing process, engineers were expected to put the engines through a “stall test.” Although this was a normal part of the testing process, as strange as it may seem, one engineer could not bring himself to actually watch the engine stall. It felt like a failure.

Teams need to test themselves incrementally in controlled conditions—the metaphorical equivalent of flat water or a laboratory. Only by taking small risks will teams be able to assess their ability to take on big ones—and to sail into the storm when they need to.

Be aware of what's happening around you

Situational awareness is a term originally used by the military as a way of understanding the critical success factors involved in air combat.⁵ In a dogfight, pilots need to be aware of everything around them. They need to understand where enemy planes are located and anticipate what their next moves will be. They also need to be aware of everything that's happening inside the cockpit—for example, monitoring instruments that measure altitude and airspeed and listening to message traffic from ground stations and other aircraft.

The use of the term situational awareness has since been expanded to encompass not only military applications but other complex tasks. In health care, for example, situational awareness can improve patient safety and emergency management.

Situational awareness is more than simply gathering information. It involves collecting just the right amount of information (avoiding data overload), analyzing data to understand its implications, and then acting on the analysis.⁶

At first glance, situational awareness appears to be exactly the opposite of the tunnel vision required to focus on a winning scenario. Probing deeper, however, the tactics are complementary and can work together.

A team needs to take everything that's happening in the environment into account before committing to a course of action. But the team needs to demonstrate situational awareness even after a choice is made. Tunnel vision is useful, but everything related to the success of the mission needs to be brought into the tunnel. Distracting thoughts, or information not directly connected to the goal, should be left out of the tunnel.

The Ramblers demonstrated extremely high situational awareness. They were acutely conscious of everything that was happening around them, including the height and direction of the waves, the velocity of the wind, and the plight of other boats. They watched boats that had turned around and were surfing out of control, with the waves coming from behind. They gathered whatever information they could from radio transmissions, and they used whatever navigational instruments were working to guide their decisions.

When the Ramblers decided to sail into the storm, they were completely focused on the goal of sailing through the Bass Strait. They applied tunnel vision, but they continued to demonstrate situational awareness in spite of fatigue, physical discomfort, and fear.

When faced with adversity, individuals need to identify, process, and comprehend everything related to the team mission. They need to be aware of everything associated with their individual roles and also with the needs of other team members. Developing and maintaining a high level of situational awareness is a critical requirement for team success at The Edge.

Separate psychological risk from statistical risk

In recounting the story of the Midnight Rambler to one team, I described the Ramblers’ decision to sail into the storm as taking “a big risk.” One thoughtful person asked why I had characterized this decision as a big risk. The greater risk, he observed, would have been in turning around and running for safety.

In the case of the Ramblers, his observation was absolutely correct. When everything was taken into account, the safest course was, in fact, to sail into the storm. But for most people in a 35-foot boat facing waves twice that size and hurricane force winds, sailing hundreds of miles into a storm would have felt like an enormous risk.

The Ramblers were able to weigh the odds and—in spite of the perceived danger—choose the option with the lowest risk. The issue is that there can be a tremendous difference between the psychological risk— what feels like the greatest threat—and the statistical risk based on a rational calculation of probabilities.

After the terrorist attacks of 9/11, there was a significant increase in the number of fatal car crashes when compared with the previous year. It seems clear, and completely understandable, why more people would take to the highway because of their fear of terrorists. Air passenger miles fell, and vehicle miles rose.

A plausible explanation for this change in behavior is that people were responding to dread risks: low-probability but high-consequence events.⁷ Though it's hard to know the precise impact of this response to dread risk, estimates are that hundreds of people died on the highway because of their fear of another terrorist attack. This dread factor creates anxiety. And the more anxious we get, the less likely we are to correctly assess the odds.

Although a great deal has been done to manage risk, whether sailing or investing, we are still influenced by emotions that are instinctive and automatic. We fear catastrophic, low-probability events. Unfamiliar threats scare us more than familiar ones. And we feel good when we have the illusion of control, even if our decision leads to a more dangerous path.

In his best-selling book Blink: The Power of Thinking without Thinking, Malcolm Gladwell explores the topic of rapid cognition, arguing that decisions made very quickly can be every bit as good as decisions made cautiously and deliberately. He also explores moments when our initial instincts can go wrong and suggests that these errors arise when our feelings of intuition are thwarted.

Our internal computers, Gladwell argues, can become distracted or disabled. But this happens for very specific reasons that can be identified and understood. He believes that snap judgments and first impressions can be educated and controlled.⁸

Others are less convinced that rapid cognition can be improved and cultivated. Nobel Laureate Daniel Kahneman, for example, argues that intuitive solutions fail when we're faced with difficult problems. He explores the distinction between fast and slow thinking, calling them System 1 and System 2—or, perhaps, Blinking and Thinking⁹

System 1 is automatic and generates ideas and feelings quickly. System 2 undertakes the difficult tasks of comparing, choosing, and reasoning. In Kahneman's framework, System 1 is the “secret author” of many choices and judgments. It's more influential than we realize.

We rely on System 1 for most of our decisions and impressions, and it generally works. But System 1 also gives us a lot of incorrect information and causes us to make mistakes. It doesn't always have the right answer, but it's always quick to respond—and it's never at a loss for words.

Kahneman is much less confident than Gladwell about the potential to eliminate the biases and errors inherent in System 1 ideas. He argues that intuitive thinking will always be prone to overconfidence, but he does believe it's possible to recognize situations in which errors are likely. When we enter these cognitive minefields, we can slow down and ask for reinforcement from System 2—the voice of reason.

When teams are faced with decisions at The Edge, there is no need to choose between System 1, Blinking, and System 2, Thinking. Our intuitive System 1 will always be shouting out ideas and recommendations. It is harder to engage in the more difficult task of activating System 2—especially when we are faced with the stress of major decisions with potentially dire consequences.

In Surviving and Thriving in Uncertainty: Creating the Risk Intelligent Enterprise, Frederick Funston and Stephen Wagner explore the concept of risk intelligence.¹⁰ And they provide a blueprint for moving beyond conventional risk management by creating a Risk Intelligent Enterprise. They argue persuasively that a risk intelligent organization will thrive and make better decisions under conditions of uncertainty and turbulence.

What's true for a larger enterprise is also true for a smaller team dealing with decision making under adversity. What teams can do better than individuals is counteract the tendency to react to the emotions of the moment and make hasty, bad decisions. Every member of the team will Blink and generate ideas. But together, the team can collectively weigh the options and Think, drawing on the power of team risk intelligence.

Get everyone on board and commit fully to your decision

The process of decision making doesn't have to be protracted. In the case of the AFR Midnight Rambler sailors, their decision had to be made quickly—though it wasn't an easy decision to make. Ed Psaltis was concerned about Chris’ injury, and he was worried about endangering the crew.

Recalling the moment of decision, Chris Rockell remembers that:

We didn't have time for a sit around, show of hands team meeting or that kind of thing. But Ed did go around the crew over a relatively short time and say, “Look, what do you think? What should we do? Should we go back to Eden, or should we carry on?”¹¹

By the time the final decision was made, the rationale for sailing into the storm was clear. Arthur Psaltis recalls that the choice “was rationally discussed and there was clear logic in the thought process. That logic was articulated to each member of the crew. There was a buy-in, because it made sense and it was explained.”

The decision of the Ramblers was reminiscent of the process used by Shackleton and the Endurance Expedition. When the crew was stranded on Elephant Island, Shackleton realized that their only hope was for a small party to take the one seaworthy boat and sail 800 nautical miles so that they all might be rescued. The alternative was for everyone in the crew to remain on the island and slowly starve to death. But this choice would mean splitting the expedition and leaving a large group of “castaways” behind.

By the time Shackleton and five others sailed for rescue, the options had been so thoroughly discussed that the choice was clear to everyone.

There was complete consensus about a decision that involved risk for both those who would leave and those who would stay behind.

The crew of the Endurance had more than a week to contemplate their options and make a decision. The crew of AFR Midnight Rambler had only a matter of hours. But in both cases, each member of the team was fully aligned behind the decision, committed fully to making their choice successful.

Sail 60 degrees when the waves get high

Sail 60 degrees was the phrase that Ed Psaltis kept repeating when steering through the huge waves in the Bass Strait. Ed would direct the boat 60 degrees relative to the oncoming waves. Sailing zero degrees would be heading directly into the waves, and sailing 90 degrees would mean having the side of the boat parallel to the oncoming waves.

The danger of sailing directly into the waves is that the boat could be pitchpoled, and thrown backward—catapulted end over end into the trough of the wave. The danger of sailing 90 degrees—or beam-on—was that the boat could be easily rolled 360 degrees. This had happened to the Ramblers before, and Ed was intent on avoiding another catastrophic roll.

When I apply this 60 degree metaphor to teams, I think about tasks that are so daunting that they need to be approached indirectly—but with clear forward motion. This might translate into taking on easier parts of the assignment first to gain traction. It also might mean changing timelines so there is less stress on the team.

Sailing a team into a challenging assignment is not exactly like sailing a boat into rogue waves. But I find the concept helpful when thinking about ways to take on the most difficult tasks. Introducing the metaphor of sailing 60 degrees in a team discussion can stimulate new ways of thinking about solving tough problems.

Navigation Points

1.  Do you understand the inherent challenges and risks of the game you are playing—the business or sport you are competing in?

2.  Have you made a realistic assessment of the capabilities of your team? Do you know how individual members will respond to challenge and risk?

3.  Do members of your team demonstrate situational awareness? Is your team able to track, comprehend, and act on the important events in your internal and external environments?

4.  Do you have a systematic process for discussing potentially risky decisions?

5.  Is your team able to separate the emotional perception of risk from a rational assessment of danger? Can the team blink and think at the same time?

6.  Is your team aligned and committed to decisions involving risk?

7.  Is your team able to take on big challenges in ways that don't break the boat? Are you able to sail 60 degrees into the really big waves your team will encounter?