The current financial crisis is a serious situation because it affects the foundation of the banking system: trust.

In most cartoons, the image of a bank is that of a safe behind bars, protected by security guards.  This concept represents the essence of a bank, a place you trust to keep your money.  Trust is so important that in a bank, all decisions are based on the impact that the decisions will have on the bank’s reputation.

Many years ago, banks realized that they could lend money in return for an interest rate.

Imagine a world of one small bank in a small village with total deposits of one dollar.  One day, that bank lends that money to one villager.  That villager will spend that money at some point.  That money will be deposited back in the bank.  The money deposited can be lent again.  This wheel is the economic engine. The faster and the bigger the wheel, the better the economy.

Banks can multiply the money lent ad infinitum, provided that there are no loan losses or rapid withdrawals of money.  In realty, there are loan losses and not all money can be recovered.

Let’s say that there is an economic crisis in the village where people could not pay back their loans anymore.  The village bank would be in real trouble because it lent the same deposit to others multiple times.  Sounds familiar, there will be a domino effect that could result in a catastrophe.

So there is a regulation that caps the bank lending power, limiting the amount of money that the bank can lend versus the capital in reserve.  This is called the capital ratio.

This capital ratio is defined in accordance with the loan losses probability.  It is determined by the credit default probability (PD) and the losses given in the event of default (LGD).  [That leverage power bank is used it to borrow from other banks].

The probability of default is knowledge that banks accumulate over time.  With this knowledge, risk managers analyse risk factors that could contribute to a default (for example, capacity to pay back, stability, employment.) 

The main cause of the credit crisis lies in the other part of the equation.  The perception of risk of losses in the event of default (LGD) has been removed by guaranty (derivative) from other banks or insurance companies.   That is what AIG was doing for mortgages.

Consequently, banks felt compelled to lend almost ad infinitum because their capital ratio requirements was alleviated by the reduction of the LGD to zero. They even overrode basic credit policies.

In a traditional credit crisis, the default is on the borrower side.  The problem here is twofold because both borrower and bank are in default.  To solve the problem, both aspects must be addressed: 1) the foreclosure must be prevented to stabilise the losses of values.  The mortgage must be allowed to be renegotiated by taking into account the capacity of payment and the real estimated value of the house. 2)  Trust between banks must be re-established by the government, by insuring banks that they will not fall apart.   Those actions will help resolve some aspects of the credit crisis but trust in the banking system will not come back soon.  In my view, the greed that stretched the system to the max should be made to pay.

Sounds familiar, you’re not alone. Almost all users of the classical stove design, as showed in figure 1, activate the wrong burner at one time or another.

Why? It is in the human nature to associate objects that are side by side. As showed in the figure 1, the controls of the back burners are closer to the front burners. We cannot tell witch control activates what. This layout is highly error prone. To ensure we activate the right burners, we need to pay attention and look at the instructions. See also Don Norman’s Design of Everyday Things.

Fig.1 Classical Stove Design

Fig 2. New Stove Layout

With the layout presented in figure 2, there is no confusion. Association of control with the burner is now easy because the layout of control is compatible with the layout of the burner.

This example demonstrates design can play an important role in preventing human errors. A design that respects human’s nature and limitations will reduce the likelihood of errors.

Human error in managing human error

After having done hundreds of interviews with managers, we observed when discussing employee’s errors, most managers:

1. Blame employees for lack of attention or for lack of training (practice).
2. Overlook the possibility of preventing errors by a redesign of workstation or processes.

In our highly advanced technological society, we are still at the Stone Ages in term of human errors management

The stove example is the tip of the iceberg. Human errors are everywhere; from day to day errors such as trying to pull a door that should have been pushed to high impact errors such as: being attentive on the wrong signals and crashing a plane killing hundreds of people, having the wrong information and making bad investments, forecasting the wrong economics figures, misjudging intelligence report and brining a nation to war, making the wrong medical diagnosis, underestimating a budget for a project and being insouciant of consequences of our action on the environment.

Most of those errors, boils down to a combination of human errors that are at the cognitive level. They are errors of detection, attention, planning, estimation calculation, judgment, decision, comprehension, discrimination and execution.

Although aircrafts are still crashing, the safety record of the aviation industry is impressive when compared to other industries. At the end of World’s War 2, the aviation industry realized, following the pioneer work of Alphonse Chapanis and Paul M. Fitts, that human errors were caused by subtle inherent human cognitive limitations. The Aviation industry stopped blaming pilots or maintenance personnel for human errors decades ago. They tried to understand the inner cause of human errors.

This demonstrates it is possible to move away from the stone ages in a few decades. Managers need to stop limiting explanation of human errors to the lack of attention, lack of training or poor personnel selection and expand their analysis of to the real nature of human errors.

As always, multiple factors are involved in this accident: bad design, shoddy construction, poor repairs and substandard construction materials. These factors are always boiled down to human errors: a design, planning, executions or maintenance errors.

The first most frightening errors are associated with the substandard preparation of the concrete.

The Canadian Standard stated in 1966 that for concrete, the ratio of water-cement should have been 0.47 or 0.54 depending on the type of usage. A higher ratio means a more fragile structure. It results in more porosity in the structure that may have more damaging consequence when submitted to rough weather over the years.

1) Engineers from Desjardins Sauriol either ignored those standards or were over confident with the security factors. They used 0.56 ratios, which is just over the superior limit.

2) Even more, the 1967 Canadian standards are seriously questioned by Jacques Marchand from the University of Laval, in a report requested by the Johnson Commission.

Human errors

Everybody knows humans make errors. But humans rarely make errors on purpose or with bad intent. Humans make errors because of subtle and invisible psychological mechanisms that are either at the:

• Skill level: for example a typo
• Rule level: application of the wrong rule
• Knowledge level: not having the right information or the right knowledge stored in long-term memory
• Meta cognition level: Humans develop strategies (wisdom) to circumvent their cognitive limitations in judgment, attention, and memory. For example a good inspector will wait to have all information on hand before making a judgment. He knows if he doesn’t, he might be anchored by his first impressions. Banks know that bankers are biased and could be influenced by the client. So decisions to accord loans are performed by a separate group of risk managers.

Not knowing the standard is a rule based on error. It can be explained by a lack of knowledge or information about the existing standards. By cognitive task analysis (analysis of the thought process), root cause can be identified and strategies can be devised to prevent those errors.

Being overconfident with the standard is a lack of wisdom or more formally a meta-cognition error. It is much more frightening error because if wrong, hundreds of bridges and structures could be affected.

History teaches us that regulatory agencies make errors and standards are updated with new knowledge. Even physics’ laws are updated over time with new discoveries. A bridge is an open system. Many things can go wrong during construction: poor soil analysis, poor material preparation and selection, construction workers not following the plan. Things can change during years of usage: weather, salt and abrasiveness, load on the bridge.

In the beginning of the 20th century, constructions (bridges, overpass, equipments) were solid and built to last while paradoxically engineering knowledge was limited. For this reason, security factors used were much greater.

In the 60, 70, engineers believed they could master nature and were overconfident with standards (lack of wisdom). While standards have been improved, they are maid by the same organisms with the same methods. Engineers still believe in those new standards today. Sadly, engineers today are trained in the universities to calculate and apply rules, not to question. Later, in their senior years, they are trained to ensure they will not be sued.

In reaction to the Johnson commission, we hear comment such as: “it will be costly to inspect all those bridges” or “I was not responsible of the maintenance, the city was responsible”. Wake up, we are not talking about money or who should be blamed, we are talking about security! What will be the cost if everybody is frightened that another bridge would fall? Those reactions are certainly not a manifestation of wisdom.

Solution one: standards should become guidelines. In case of an accident, engineers will always be accountable event if the guidelines are proven wrong. Consequently, engineers will ask more questions and might use higher security factors.

The second most frightening factor is the competency of authority.

There is conflict of interest at the MTQ (ministry of transport of Quebec) because, under the same ministerial budget, they are in charge of building, maintaining and inspecting. If the budget is low, they might be tempted to allocate more budgets on new stuff. This will result in neglecting existing work or worst, neglecting inspection tests because they are costly. Sounds familiar? That is exactly what happened for the la Concorde Bridge.

Solution 2: Separate jurisdictions for inspections. This independent jurisdiction should have full power to close a structure or a bridge. With this separation, hopefully, we should avoid conflict of interest and judgment errors such as the one in de la Concorde Overpass.