More than 1,800 people died when Hurricane Katrina devastated the U.S. Gulf Coast in August 2005. Property damage from the hurricane was estimated at a staggering $81 billion. Many thousands of people were displaced, and the culture and diversity of the city of New Orleans was permanently altered. U.S. ports were disrupted, Houston coped with a surge of people fleeing from New Orleans, and U.S. taxpayers faced a tremendous burden.
Michael Watkins and I had published our book Predictable Surprises in 2004. So when Katrina hit, members of the media called to ask, “Was this a predictable surprise?” At the time, I didn’t know enough to be confident of the answer. Now I do: Hurricane Katrina was indeed a predictable surprise. Federal, state, and local governments failed to notice and act on commonly available information, and many people lost their lives as a result.
One skill of successful leaders is that they prevent predictable surprises. Here is just some of the evidence such a leader would have noticed in the years leading up to Hurricane Katrina.
In 2001, four years before Katrina struck, Eric Berger foretold the disaster in the Houston Chronicle with chilling accuracy:
New Orleans is sinking. And its main buffer from a hurricane, the protective Mississippi River delta, is quickly eroding away, leaving the historic city perilously close to disaster. So vulnerable, in fact, that earlier this year the Federal Emergency Management Agency ranked the potential damage to New Orleans as among the three likeliest, most catastrophic disasters facing this country. The other two? A massive earthquake in San Francisco, and, almost prophetically, a terrorist attack on New York City. The New Orleans hurricane scenario may be the deadliest of all. In the face of an approaching storm, scientists say, the city’s less-than-adequate evacuation routes would strand 250,000 people or more, and probably kill one of 10 left behind as the city drowned under 20 feet of water. Thousands of refugees could land in Houston. Economically, the toll would be shattering.1
Similarly, in 2002 a reporter for the New Orleans Times-Picayune wrote:
Higher levees, a massive coastal-restoration program and even a huge wall across New Orleans are all being proposed. Without extraordinary measures, key ports, oil and gas production, one of the nation’s most important fisheries, the unique bayou culture, the historic French Quarter and more are at risk of being swept away in a catastrophic hurricane or worn down by smaller ones.2
Other clear warnings and recommendations came from Joel Bourne, a senior writer for National Geographic magazine, who wrote in 2004 about the inevitability of a major disaster in New Orleans.3 And believe it or not, it could have been worse: the eye of the storm actually passed a few dozen miles to the west of New Orleans.
Despite these ominous predictions in the media, Louisiana governor Kathleen Blanco later told Congress, “No one expected, or predicted, that the levees would fail in the manner that occurred after Hurricane Katrina.”4 Yet in a detailed report, sociologist Larry Irons provides extensive evidence that “the U.S. Army Corps of Engineers knew about the threat of breaches [of the levees] . . . since the early 1980s.”5 Irons presents further evidence that local, state, and federal officials all knew about the vulnerability of New Orleans to a major hurricane. Similarly in 2008 researchers from Impact Assessment, Inc., a public health and research firm, concluded in the journal American Anthropologist, “The devastation was predicted, and absent massive and immediate action, the next major storm will inevitably produce additional disastrous outcomes.”6
Before Katrina hit, the Federal Emergency Management Agency (FEMA) considered a hurricane hitting New Orleans to be one of the three top potential catastrophes facing the country. A 2004 FEMA simulation highlighted the government’s lack of preparation for such an event, yet follow-up work to address clear weaknesses never took place. Not surprisingly, FEMA failed miserably in its response to the hurricane.
Based on just these few examples, it is obvious that, far from being a surprise, a hurricane on the level of Katrina was not only predicted but expected. The evidence that such a disaster would strike the region was in clear view of leaders at almost every level of the relevant local, state, and federal departments. Yet that evidence went unnoticed.
Hurricane Katrina makes a stark case for the critical need for leaders to notice because, even now, New Orleans remains at risk. Many experts believe the Gulf Coast is no better prepared for another significant hurricane than it was before Katrina. In 2008 the team from Impact Assessment wrote:
Unfortunately, taken in their entirety at the federal, state, and local levels, the recovery efforts now underway and planned in the Gulf will yield a single certain outcome: the replication of conditions prevailing at the time Hurricane Katrina struck on August 29, 2005. If existing trends continue, inconsequential improvements will have been made to strengthen the existing levee system. Local building codes would merely require homes on three-foot pillars to protect against ten-foot flood levels. Federal insurance programs, for buildings located below sea level, will be restored, guaranteeing that U.S. taxpayers will bear the costs of subsequent hurricane destruction. Protective coastal habitats might be “restored” but not enlarged; furthermore, even assuming no intervening hurricanes, they would not reassume their protective status before 2050. The principal underlying problem is that there is actually no plan under consideration that could ensure the safety of the city of New Orleans, Louisiana delta communities, and coastal Mississippi and Alabama against the inevitable Category 4 or 5 hurricane.7
Clearly this type of looming disaster is no longer definable by the term surprise. Some other type of failure is at work, one that entails noticing and the leadership to take action.
Fortunately there are also many examples of individuals and organizations noticing the threat of a predictable surprise and acting in time to stop it or mitigate its effects. From them we can glean lessons on how to better identify the crises brewing around us. Turning to an environmental disaster that parallels Hurricane Katrina, our leaders prepared much more effectively for Hurricane Sandy, which devastated the Atlantic Coast in late October 2012. This time leaders recognized the threat much earlier, prioritized, and mobilized action. The second-costliest hurricane in U.S. history, behind Katrina, Sandy became the largest Atlantic hurricane on record (as measured by diameter, with winds spanning 1,100 miles). On October 28, with the hurricane bearing down on American soil, President Obama signed emergency declarations for several states expected to be impacted, a status that allowed them to request federal aid and make additional preparations in advance of the storm. Flight cancellations and travel alerts were put in place on the East Coast. The National Guard and U.S. Air Force put tens of thousands of troops on the ground in seven states in preparation for disaster relief and aid.
From studying the preparations (or lack thereof) for Hurricane Katrina, 2011’s Hurricane Irene, and other weather-related disasters, several state governments on the East Coast observed the dangers of leaving highways open to traffic. To take one example they might have referenced, during a February 2011 blizzard in Chicago, hundreds of people were trapped on one of the city’s main thoroughfares, Lake Shore Drive, after traffic came to a standstill. Many abandoned their cars in the blinding snow, and the city was widely criticized for keeping the highway open to traffic. As Sandy approached, officials recognized that motorists stranded on flooding highways would face the threat of injury and death. Moreover they would need to be rescued at a time when emergency services were already stretched thin.
For these reasons, several state governments decided to close their highways to traffic. Delaware, for example, limited the use of roads to emergency and government personnel. In New York City, the Metropolitan Transit Authority shut down train service and planned to close bridges and tunnels on a case-by-case basis. Not only were officials aiming to protect motorists from danger, but they noticed that closing down highways could allow them to better allocate their limited resources by focusing relief efforts on smaller geographic areas. These decisions were effective at keeping many thousands who might otherwise have ventured out of their homes safe from harm and containing the scope of the relief efforts.
It is rare for leaders to get much credit for reducing the magnitude of harm suffered in tragic events. But, appropriately, Hurricane Sandy was an exception. Even President Obama’s political opponent, Governor Chris Christie of New Jersey, said of Obama’s response to the disaster, “I think he’s done a good job.” The many local and state leaders who also recognized, prioritized, and mobilized action in preparation for Hurricane Sandy deserve similar credit.
When invited to address leaders in private, public, and nonprofit organizations, I often ask them three straightforward questions:
• Does your organization have serious problems that won’t solve themselves?
• Will these problems get worse over time?
• Will they develop into a damaging crisis that will take most people in your organization by surprise?
Their answers are almost invariably yes, yes, and yes. The problems exist, are likely to get worse, and will turn into major crises for their organizations. In short, when a crisis occurs, it will have been entirely predictable. This is what my coauthor Michael Watkins and I call a predictable surprise.8
A predictable surprise arises when organizational leaders have all the data they need to recognize the potential for a crisis, and even its inevitability, but fail to respond with effective preventative action. I would now give that definition a slightly different emphasis: predictable surprises are a unique and significant consequence of the failure to notice important information and the failure to lead based on what you notice.
A predictable surprise occurs when many key individuals are aware of a looming disaster and understand that the risk is getting worse over time and that conditions are likely to eventually explode into a crisis, yet they fail to act in time to prevent the foreseeable damage. In some cases, the knowledge that is needed to notice a problem is spread across the organization, involves many people, and occurs in a political context. In most organizations, however, no matter how broad the fault, the one held responsible is the leader—whether at the level of a group or division or all the way up to the very top. The organization’s most senior leader may not notice the problem herself, or she may have received hints but ignored them. That is all too commonly the case. It is also rarely an acceptable excuse. Visionary leaders can avoid predictable surprises by anticipating and taking steps to mitigate threats.
As I explained in the introduction to this book, Michael Watkins and I developed the concept of predictable surprises in reaction to the September 11 attacks, and after years of additional research and insight the concept contributed to my decision to write The Power of Noticing. The facts that we laid out in our book Predictable Surprises make it clear that our leaders could have, and should have, taken actions that would have prevented the attacks on 9/11 from occurring. Excellent leaders notice predictable surprises and take action to avoid disasters.
Why do leaders typically fail to anticipate predictable surprises? The answer to this question is multifaceted: predictable surprises have cognitive, organizational, and political causes.9
A number of cognitive biases cause us and our leaders to downplay the importance of coping with a predictable surprise. First, we view the world in a more positive light than is warranted. We see ourselves, our environment, and the future in optimistic terms.10 On the plus side, positive illusions help us persist at difficult tasks and cope with adverse and uncontrollable events. Unfortunately, positive illusions also harm our ability to make wise and balanced decisions, leading us to undervalue dangerous risks and consequently fail to prevent predictable surprises.11
Second, we tend to overly discount the future. Would you prefer $5,000 today or $6,000 in a year? Many people would choose the former, despite the fact that 20 percent would be a very good return on your investment, particularly in the current economy. Most of us also fail to adequately insulate our homes and neglect to purchase slightly more expensive, energy-efficient appliances, even when the savings would be immediate and significant over time. These behaviors are examples of the common tendency to overvalue the present, devalue the future, and harm future generations in the process. On a planetary scale, we overharvest our oceans and forests, make purchasing and consumption decisions that contribute to global warming, and accumulate debt that we will leave to future generations. We too often choose to run the risk of incurring a large but small-probability loss in the future, perhaps beyond our own lifetime, rather than accepting a small, sure loss now, even when the investment is a good value.
Third, people, organizations, and nations tend to follow the rule of thumb “Do no harm.”12 Yes, in some contexts this advice makes sense. But too often it can become shorthand for doing nothing. When in the 1990s we failed to impose the harm of waiting fifteen minutes at airport security checks in order to reduce the risk of an in-flight terrorist hijacking, we made a tragic mistake. When today we resist making sacrifices, such as small increases in our taxes, logical reductions to our entitlements, or the cost of improving the levee system of New Orleans, we are creating problems for future generations.
After Katrina hit, leaders of the city of New Orleans, the state of Louisiana, and the U.S. government spent a great deal of time trying to explain why the inadequate hurricane preparation and response wasn’t their fault but the fault of leaders at other levels of government. The image of each pointing a finger at the other actually provides an answer as to who was responsible: leaders at every level of government—city, state, and federal—failed those affected by the storm.
Compounding their individual failures to notice and act, city and state and federal governments displayed a shocking inability to coordinate their response to Katrina. Chairman Tom Davis of the House Government Reform Committee stated:
I suspect we will find that government at all levels failed the people of Louisiana, Mississippi, and Alabama. I believe we will hear from [FEMA chief] Michael Brown, for example, that there simply was no unified command structure or clear lines of authority in Louisiana. That means we’re confronted with profound questions about not only what went wrong with FEMA, but what may be wrong with our government at all levels when it comes to disaster preparation and response. Are we lacking a culture of urgency? A culture of getting things done? Or is it that, even when we have the best possible planning and prediction available, we come face to face with the vast divide between policy creation and policy implementation?13
In addition to individuals’ failure to notice the urgency of a brewing problem, predictable surprises also result in part from flawed organizational structure, incentives, and data integration. For example, both Hurricane Katrina and the 9/11 tragedy make clear that a key culprit was a failure to integrate resources across divisions of the government; instead they operated as distinct “silos.” Operating in silos is both a consequence and a reinforcement of dysfunctional leadership. Accountability within silos, and certainly among them, is diffuse. Often no one seems to be clearly in charge and no one sets overarching and guiding goals. In such circumstances, incentives often encourage individuals to just do their job.14
Avoiding predictable surprises typically requires leaders to incur costs, both financial and political, in the near term to avoid disasters in the medium to longer term. For example, the cost of fixing the levees surrounding New Orleans would have been considerable. Politically the calculus could well be not just the odds of a hurricane on the scale of Katrina striking the city but the odds of that happening while the decision makers were still in office. Similarly, improving aviation security in the late 1990s would have cost $3 billion,15 a trivial sum in comparison to the potential cost of inaction but a large sum politically for the Clinton administration when few were even aware of the threats posed by lax security.
Many predictable surprises can also be attributed in part to a small number of individuals and organizations corrupting the system for their own benefit. Consider the failure of the United States to enact meaningful campaign finance reform, which has created an election environment that much of the world would consider to be legalized corruption. U.S. citizens, including myself, often look down on societies that tolerate widespread bribery, but when others question the ability of American lobbyists to buy favors from government officials we respond, “At least it’s legal.” That distinction is less meaningful, however, when you consider the fact that many of these same lobbyists devote considerable resources to making sure laws allowing them to influence officials pass and stay in effect.
Political causes of the failure to anticipate predictable surprises exist in for-profit organizations as well as in government. As I argued in chapter 6, Arthur Andersen played a critical role in a predictable surprise with its failure to notice the corrupt behavior at Enron. Why did Andersen partners fail to notice what was going on? If a partner or auditor had stood up and criticized what was happening, he would have risked incurring the wrath of the rest of the organization, which was benefiting from the $25 million in auditing fees that Enron was paying Andersen, as well as an additional $27 million in consulting fees. In auditing, the political rewards rarely encourage optimal noticing.
Anticipating and avoiding predictable surprises requires leaders to take three critical steps: recognize the threat, prioritize the threat, and mobilize the resources required to prevent the predictable surprise.16
1. Recognize the threat. Some disasters can’t be predicted, or their likelihood is so low that no one can be blamed for overlooking the threat. To take one example, few could have anticipated that the HIV virus would jump the species barrier to infect humans.17 Yet many of the most important predictable surprises in recent decades—including the September 11 attacks, Hurricane Katrina, the Bernard Madoff scandal, and the 2008 financial crisis—were widely enough known that they were commented on by observers. We often marvel at and applaud leaders who recognize and act; we should hold them responsible when they fail to do so. When leaders neglect to scan the environment for emerging threats and analyze key data, we should hold them culpable for failing to notice a brewing predictable surprise.
2. Prioritize the threat. Leaders are overwhelmed with competing demands. How do they think through which issues to address immediately and which to designate as lower priority? One tool that gifted leaders use to bring critical threats into view is cost-benefit analysis. This type of analysis can improve the odds of success in the face of uncertainty. Through careful cost-benefit analyses, leaders can prioritize those threats that are most likely and potentially most severe. If they do not do so, they should be held accountable for failing to adequately prioritize.
3. Mobilize action. Sometimes leaders recognize and prioritize events yet fail to act on them. The 9/11 attacks are exactly this kind of scenario. Despite the fact that Vice President Al Gore’s commission recognized and prioritized the need to dramatically improve airline security, the government failed to act. The FAA bureaucracy opposed the changes proposed by the commission, and the major U.S. airlines spent millions of dollars to keep the government from addressing security lapses, for fear of scaring their customers or incurring the costs of the baggage-matching systems that were being proposed at the time.18 The airlines were effective in their political behavior and played an important role in preventing the U.S. government from mobilizing action. Leaders must not be sidetracked by such political activity. If they fail to take action, they should be held accountable for any predictable surprises that occur.
Many leaders did recognize that a major hurricane threatened the future of New Orleans, although it is unclear whether local and state officials recognized the severity of the threat. The Army Corps of Engineers and FEMA certainly prioritized the importance of this threat; leaders at local, state, and federal levels did not. At the federal level, our leaders failed completely at mobilizing action. Hurricane Katrina was a predictable surprise, and our model highlights the failures of leadership that allowed the disaster to occur.
In chapter 8 I blamed a number of different parties for failing to notice the predictable surprise created by our financial industry in 2008 and the bizarre set of laws that opened up the opportunity for this calamity. I briefly mentioned that a few people did notice, acted on what they noticed, and got rich in the process. Perhaps one of the earliest to notice that the mortgage industry was too good to be true was Michael Burry. Burry described himself to journalist Michael Lewis as “a medical student with only one eye, an awkward social manner, and $145,000 in student loans.”19 During his off hours from being a medical resident, Burry started writing about stocks in an online forum. He quit medicine, started Scion Capital, a hedge fund, and attracted investors from his online forum.
Often all of the insiders in a firm or industry talk to the same people and develop a shared understanding, but Burry didn’t talk to anyone about his observations, as Lewis recounts in The Big Short. As part of his research, Burry read articles and financial filings on his own. Mortgage bonds come with complex, hundred-plus-page prospectuses. Few people read the fine print. But Burry spent many hours in 2004 and 2005 reading lots of prospectuses. Beginning in 2004 he saw that the mortgage market was in danger due to a decline in the standards used by lenders and that the market was ignoring this fact. “It was a clear sign that lenders had lost it, constantly degrading their own standards to grow loan volumes,” he wrote in one of his quarterly letters.20
Burry also recognized that he could make money by betting against them. In 2004 he began buying insurance on companies that were likely to be hurt when the real estate market crashed. By 2005 he was buying complex hedged investments (that is, credit default swaps) that had enormous potential if the mortgage market crashed far worse than the financial markets expected. Burry purchased insurance on about $2 billion in bonds on what he perceived to be lousy mortgages. He paid a small fraction of this amount to buy the bonds, which would pay off only if the market failed. His investors were nervous, but when the housing market started to collapse in 2007, people realized that Burry had noticed ahead of Wall Street and most of the rest of us that the market had gone mad. Burry and those who followed him made a great deal of money as the market collapsed.
Burry’s critical skill was his ability to notice. He noticed all of the deficiencies in the mortgage market that I described in chapter 8, and well before the market collapsed. Thinking through the decisions of borrowers, the originators of the mortgages, and the various investors in the system that I described in chapter 8, Burry noticed that the mortgage market was built on a house of cards and that, when a strong wind eventually came, the house would tumble down. This socially inept man had put himself in the shoes of others far more effectively than the experts on Wall Street had.
It was a Deutsche Bank employee named Greg Lippmann who went around selling Burry’s analysis, and those who listened to Lippmann became rich. John Paulson was one of those who listened, and he made an astounding personal profit of $4 billion. On a smaller but still very profitable scale, two guys named Jamie Mai and Charlie Ledley, who worked out of a shed behind a friend’s house in Berkeley, believed that “the best way to make money on Wall Street was to seek out whatever it was that Wall Street believed was least likely to happen, and bet on its happening.”21 In this case, their contrarian instincts told them, in Lewis’s words, that “the markets were predisposed to underestimating the likelihood of dramatic change.”22 They made bets very similar to Burry’s and also became wealthy in the process.
Obviously this is not a book about investing. Rather it concerns the vast benefits of leaders noticing and then acting on this information. Burry made a highly leveraged bet after noticing a predictable surprise. He was rewarded with profits. In other realms, noticing allows us to avoid predictable surprises, save lives, stay employed, avoid famines, protect the forests and oceans, and create admirable organizations and a better society. Noticing is a core aspect of leadership, and it is up to you.