Edinburgh - On an inquiry into the nature and causes of explosions

Last week I visited Edinburgh. It brought back memories of 30 years ago, when I would stay in the old Scandic Crown on the Royal Mile, drink far too many pints of heavy[i] in the Grassmarket and regret it the following morning as the taxi rumbled over the cobbles on the way out to the Royal Bank of Scotland in the Gyle. ?

For some reason that recollection has triggered suppressed images of unexpected explosions.

On Wednesday afternoon I gave a presentation on the use of behavioural science in banking[ii], taking a detour into space shuttle disasters.

Reprising a favourite theme, I reminded the? audience that operational resilience cannot be guaranteed by technical solutions alone when people are involved. Even well funded organizations full of he brightest and the best fall foul, sometimes twice. It’s not rocket science, although in NASA’s case it was.

The timeline from Challenger[iii] exploding on the way up, and Columbia[iv] disintegrating on the way down, was 17 years. Long enough for institutional memory to forget the lessons learned.

And if you think the root causes were leaky O-ring seals and foam strikes respectively, then you may need to dig into the difference between proximate and ultimate causation.

The proximate cause for throwing up in a taxi may be the signals passing between the stomach and the brain, the stimulation of the chemoreceptor trigger zone and the parasympathetic nervous system, the relaxation of the pyloric sphincter and the contraction of abdominal muscles[v].

The ultimate cause may be 8 pints of beer.

Luckily banks are far more informed than NASA on such things, and given that the GFC was only 17 years ago, will have learned the lessons, with most financial weapons of mass destruction safely stored in their missile silos and a focus on human behaviour.

There was a wobble early in 2023, but SVB[vi] was not managing it’s interest rate risk, and Credit Suisse[vii] suffered losses through Archegos and Greensill Capital, so there are sufficient proximate causes through total return swaps, margin calls and supply chain finance to distract attention.

From ultimate organizational blind spots and stupidity.

Showing that even if history does not repeat itself it certainly rhymes, on Tuesday night I visited the Library of Mistakes[viii]. Tucked away in a mews house in the West End it is an Edinburgh based organization dedicated to the study of financial history to help avoid the lapses of the past.

As luck would have it that night was the 10 year anniversary, with a talk from the Keeper of the Library, my fellow CLSA Hong Kong alumnus Russell Napier ?

It covered 21 Lessons from Financial History for The Way We Live Now[ix], with a key message of the need to learn from historians, psychologists and philosophers, not just the economists.

Lesson number 21 was that “extrapolation is the opiate of the people”, and the requirement to embrace the messy real world and it’s range of possible outcomes, rather than the comforting balm of (seemingly) probable solutions. ?

Back to Wednesday afternoon, and the view from the venue was a spectacular panorama of Edinburgh Castle atop it’s rock; the 350 million year old plug of an ancient volcano[x].

Long since extinct there is no danger of an imminent explosion, but should you find yourself living next to a volcano that is erupting the most frequent proximate causes of mortality are ash asphyxiation, thermal injuries from pyroclastic flow, and trauma[xi].

The ultimate cause is that you are living next to a volcano.

Fifteen years after I left the Royal Bank of Scotland it suffered it’s own volcanic meltdown during the GFC, by which stage it had a balance sheet larger than the GDP of the UK. The proximate causes may have been a collapse in the real estate backed markets and overpaying for the banks it acquired.

The ultimate causes were mismanagement, hubris and megalomaniacal leadership, where Fred the Shred[xii] was busy ensuring the corporate limousines were exactly the right share of blue, and that filing cabinets were designed so that paper could not be stacked on top of them.

On Thursday I took a walk down the Royal Mile to Holyrood Palace, the official residence of the British monarch in Scotland. To be more precise my destination was Holyrood Abbey, a ruin tucked around the back of the palace, to pay respects to my 16 times great grandfather King James II of Scotland[xiii].

James was born, crowned, married and buried there, but on this day I couldn’t get too close given renovation works to the crumbling stonework. He may have been somewhere behind the green wheelbarrow and the diesel generator, or he may have been elsewhere, given the destruction of the Royal tombs by the English Army in 1544.

James was an enthusiast for modern artillery and was killed in 1460 by an exploding canon during a siege of Roxburgh Castle. The proximate cause of death was a piece of metal that sliced through his leg, breaking his thigh in two.

The ultimate cause was standing next to a gunpowder packed cannon that was set off to honour the arrival of his wife.

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Post Script 1

I concluded my Wednesday talk with a call to arms for those who work in Scottish financial services. Spiritual home to economists, philosophers and bankers and the Scottish enlightenment.

Surely there is no better place to become a centre of excellence for behaviourally informed banking.

As I walked back up the Royal Mile on Thursday I passed the statues of Adam Smith and David Hume, both of whom understood the centrality of human psychology in economics[xiv] [xv].

A lesson forgotten by those who were running the great Scottish Banks in 2008 and those who cheered them on, focusing on proximate P&L, not ultimate risk.

Bang.

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Post Script 2

I acknowledge that in emphasising the need to refrain from simplistic solutions and to embrace messy reality I may have fallen into my own trap, by suggesting there are clear ultimate causes behind explosive disasters.

But hey, it’s tricky when you are stretching a metaphor.

The truth is complex, and there is a need to look beyond the obvious. Mis-attribution can go both ways. For operational resilience there is often a preference to see only technical causes and solutions and to ignore the human. For other errors and issues there is often a tendency to seek a person to blame, ignoring the central influence of environment and context.

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#behaviouralscience #behavioralscience #behaviouralrisk #behavioralrisk #riskculture #operationalresilience #explosions #adamsmith #enlightenment

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References

[i] Why is Scottish beer called heavy? (coalitionbrewing.com)

[ii] Scottish Financial Enterprise and Capco - Beyond the Irrational: Better Decisions & Outcomes with Behavioural Science. 25th September 2024

[iii] Challenger STS-51L Accident - NASA

[iv] Columbia Accident Investigation Board Report - NASA Technical Reports Server (NTRS)

[v] Vomiting Mechanism (news-medical.net)

[vi] What Happened to Silicon Valley Bank? (investopedia.com)

[vii] What Happened at Credit Suisse, and Why Did It Collapse? (investopedia.com)

[viii] The Library of Mistakes - 33A Melville Street Lane Edinburgh EH3 7QB - https://www.libraryofmistakes.com/

[ix] https://www.libraryofmistakes.com/lectures/professor-russell-napier-twenty-one-lessons-from-financial-history-for-the-way-we-live-now/

[x] Castle Rock - Edinburgh Geological Society (edinburghgeolsoc.org)

[xi] Volcano | Impact (fema.gov)

[xii] https://www.independent.co.uk/news/business/news/fiddling-while-rbs-burned-new-book-reveals-fred-the-shred-goodwin-s-fatal-obsessions-8795202.html

[xiii] BBC - Scotland's History - James II, King of Scots

[xiv] Ashraf, N., Camerer, C. F., & Loewenstein, G. (2005). Adam Smith, behavioral economist.?Journal of economic perspectives,?19(3), 131-145.

[xv] Sugden, R. (2021). Hume's experimental psychology and the idea of erroneous preferences.?Journal of Economic Behavior & Organization,?183, 836-848.