A statistics lecturer in the very first lecture in a MBA class went to the front of the class pulled out R1 000 and put it on the lectern. He then called for a volunteer to flip a coin 10 ‘heads’ or 10 ‘tails’ in a row and you could have the R1 000. The lecturer chose and an eager man. As the man was about to start the lecture stopped him and said, ‘Sorry, I forgot an important thing. It costs R10 to try. You can either pay me R10 or sit down and let someone else come up and try. R10 compare to R1 000 is not much.’ Two other men shouted that if he sits down they would try. With that, the first man put his hand in his pocket, pulled out R10, chose ‘tails’ to great cheers from his class mates and proceeded. He didn’t succeed. The lecturer picked up the R1 010, placed it in his pocket and then started his lecture as follows, ‘Statistics is one of the greatest subjects in the world. If understood, it will make you a fortune. If ignore or misunderstood, it will cost you a fortune. Make sure you understand statistics. The odds of flipping 10 heads or 10 tails in a row are 1024:1. By offering you R1 000 for R10, I gave 102, 4:1 odds. It was a stupid, stupid, stupid bet. You justified it by thinking it was only R10. You made an emotional decision without considering the statistical consequences. You are not alone. Everybody falls into this trap, even me. Anybody who has bought a Lotto ticket has paid an intelligence tax for being stupid. Every day people go out of business or make a fortune because of statistics.’
One of the oldest gambling strategies is the martingale. It is played on an even chance bet and consists of doubling a losing bet. In roulette, you wait for five red numbers in a row, and then you bet black. If red comes up again you double the bet on black. Black then comes up and you win. What are the chances of 10 red numbers in a row? To an un-informed person it seems like a no-brainer to make money. The problem is it is statistically floored. The so called ‘bad run’ occurs far more frequently than one thinks, and you will run out of money before the casino. Casinos make a fortune from people making this mistake. Are these so-called slight miscalculations that end up costing fortunes avoidable or predictable? The strange thing about the martingale is that people are betting on ‘change’, yet in business people ‘bet’ on ‘no change’. In both cases the assumptions are irrational.
Recently writers such as Malcolm Gladwell (David and Goliath; Blink), Dan Ariely (Predictably Irrational) and Hassim Nicolas Taleb (Black Swan; Anti-fragile) have spent a huge amount of time trying to predict success and failure. The common theme is that human beings are not rational. Decisions are made for emotional reasons and then there is an attempt to justify them after the event.
Gladwell goes to great pains to explain that a many failures occur because of a false assumption that appears to be true. ‘Authority is legitimate’, has cost countless lives by people doing what is right, enforcing the law. (David and Goliath). Taleb believes that a business should constantly be tested with small ‘shocks’ so that it can become resilient or ‘anti-fragile’. Like the martingale strategy, Taleb suggests that senior management is blissfully unaware of how many incidents actually occur on a regular basis. Management is lulled into a false statistical assumption, that since they have been around for 5, 10 or 15 years that they are infallible and they can withstand a severe disruption.
Business Continuity Management addresses many of these statistical false assumptions head on through doing an actual test. A common error is that all our staff can work from home. This is an assumption that can destroy a company if it is incorrect. In most cases it is an untested incorrect assumption. In 2001 9/11 there were 430 companies in the World Trade Centre from 28 different countries. Approximately 50 000 people worked there and 140 000 visited daily. 2 606 people died in the buildings (excluding passengers) (Statisticsbrain.com). ‘In New York City, approximately 430,000 jobs were lost and there were $2.8 billion in lost wages over the three months following the 9/11 attacks.’ ‘Approximately 18,000 small businesses were destroyed or displaced after the attacks.’ (Wikipedia). Physical infrastructure is statistically far more important than people realise. ‘The In 2007 The Department of Trade & Industry survey on disaster recovery, found that of the 60% of UK firms that had a disaster recovery plan, less than 50% had conducted live tests involving staff in the past year. The danger, say experts, is that many companies base their plans on misconceptions and false assumptions.’ (IT security: Disaster Planning and Business Continuity after 9/11. September 2007)
In the words of the lecturer, ‘To not consider a Business Continuity Plan is a statistical error that could cost you a fortune.’