Is BP an evil corporation, hellbent on purposely destroying the Gulf of Mexico and everything else it can get its capitalist paws on? Hardly. I don’t believe that for a second, and you shouldn’t either. But I do believe that there is a way that corporations, especially large ones, go about making decisions that this whole episodes spotlights. Corporations have a propensity to underestimate high-impact, low probability events. They pursue strategies that work 99.99% of the time. But when the other 0.01% comes around, watch out.

That’s exactly what we have seen these past months from Toyota. That company made decisions about the design and safety of their vehicles, decisions that will work just fine almost all the time. But not all the time. Same thing in the financial sector: the mortgage-backed derivatives fiasco is another case in point. As long as there is not a massive drop in real estate values, all is well. Until it happens. Enron, the same thing. Over and over and over.

There is a classic parable about gambling, supposedly a foolproof way to make money. Here is the scenario. Suppose you play a game with more or less 50% odds of winning each bet — blackjack, for example. Bet $5 on the first hand. If you lose, double your bet on the next hand — $10. Keep doubling until you win. Eventually, you’re going to win a hand, right? When you do — whether it’s on the very first hand, or the 100th — you will recoup all your cumulative losses, plus earn a profit equal to your original bet. So you can’t go wrong. Here’s the problem, though. Sooner or later you will encounter a string of losses sufficient to break your bank. Mathematically, it always happens, sooner or later. Eventually, there always is a Gulf Oil disaster, or a steep drop in real estate values, or a string of safety defects. Any model of governance that is premised on the risk being zero is folly. 

So, let’s not demonize BP. Let’s understand this as the inherent behavior of pretty much any large business enterprise. And therefore, let us further understand that, when the decisions of these enterprises have the capacity to wreak havoc far beyond the provincial borders of the corporate suites, it is incumbent on our government to impose intelligent regulatory boundaries on their behavior.

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