Transportation

Imprudent Risk Taking at Santa Anita Racetrack and Boeing Dreamliner Plant


Two important investigations are underway, one at the Santa Anita Racetrack in California and the other at the Boeing plant that manufactures 787 Dreamliner planes in Charleston, Southern Carolina. In both cases, there is good reason to believe that a common psychological phenomenon induced imprudent risk taking at these locations.

Arcadia, California/United States – December 29, 2017: Santa Anita horse race track starting gate

Getty

According to the New York Times, at Santa Anita, an unusually high number of racehorses –thirty– died in the racing season that went from last December through last week. The Times also reports that at the Boeing plant, completed 787 planes have been shipped to customers with unusually large amounts of debris that should have been removed because of threats to safety.

The psychological phenomenon is aspiration-based risk taking, which leads to imprudent risk taking when people establish especially high goals and are strongly driven to achieve those goals. In 2018, my colleague Ye Cai and I published a study in the Journal of the European Financial Management entitled “Focal points and firm risk,” documenting the pervasive nature of aspiration-based risk taking in corporate decision making.

The study by Cai and me found that firms whose recent performance has been below average tend to take higher risks than those with above average performance, with the magnitude of those risks increasing with the degree of subpar performance. Our paper attracted a lot of attention, and this past week the journal announced that the journal’s readership had voted our paper as best paper award in 2018.

The New York Times coverage of events at Santa Anita and Boeing’s Dreamliner plant provides vivid examples of the way in which the combination of high aspirations and a fierce desire to succeed create a culture of imprudent risk taking.

The situation at Santa Anita appears to feature a classic clash in risk appetites pertaining to an organization’s chief executive and its chief risk officer.  In my book Behavioral Risk Management, I identify a series of such cases with situations at Freddie Mac and MF Global serving as prominent examples.

At Santa Anita, the chief executive is Belinda Stronach whose family, through the entity The Stronach Group, owns the racetrack. Until last December, the track superintendent who effectively held the key risk management position was Dennis Moore.

Racetracks generate revenue by running races: the more races, the greater the revenue. When bad weather prevents races from being run, Moore was known for his conservative approach when it came to closing tracks during bad weather. He did so in order to promote horse safety. According to New York Times coverage, part of the reason that Moore retired from Santa Anita was a concern that the Stronach Group sought to relax the safety standards he set for the track.

A parallel issue at Santa Anita was pressure on horse owners and trainers, by the track’s chief operating officer, to increase the number of races in which they ran their horses, thereby increasing revenues for the track. Increasing the number of races raises the risk of injury and death to horses, especially when horses have not had sufficient rest, or are not in the proper condition.

If aspirations at Santa Anita’s executives were excessively high, and the need to succeed especially strong, then aspiration-based risk-taking may well have led to imprudent risk management there.

A similar dynamic appears to have applied at Boeing’s Charleston plant. Until this past April, the executive in charge of that plant was David Carbon. The New York Times reports that Carbon cultivated a culture at the plant in which speed was frequently more important than safety.  As a result, in their rush to finish tasks, employees failed to remove items such as a loose a bolt inside an engine of a plane that was being taken on a test flight, metal shavings beneath floorboards close to a critical electrical system, and a ladder inside of a plane’s tail.

Front of a white 787 dreamliner aircraft in a hangar

Getty

Notably, the problems at the plant appeared to be significant enough for employees at the plant to have submitted three safety complaints to the Federal Aviation Administration.

Recent events at the Santa Anita racetrack and Boeing’s plant at Charleston offer important general lessons. There is nothing wrong with having high aspirations and a desire to succeed. However, when high becomes excessive and desire becomes compulsion, then risk taking tends to become imprudent.



READ NEWS SOURCE

This website uses cookies. By continuing to use this site, you accept our use of cookies.