Malcolm Gladwell’s New Book Shows Why People Fail to Identify Risk

By: | October 4, 2019

John (Jack) Hampton is a Professor of Business at St. Peter’s University, a core faculty member at the International School of Management (Paris), and a Risk Insider at Risk and Insurance magazine where he was named a 2018 All Star. He was Executive Director of the Risk and Insurance Management Society (RIMS), dean of the schools of business at Seton Hall and Connecticut State universities, and provost of the College of Insurance and SUNY Maritime College in New York City.

In 1938, British Prime Minister Neville Chamberlain returned from Germany after meeting with Adolf Hitler. He told his fellow Englishmen he signed an agreement that guaranteed “peace in our times.” One year later, Germany invaded Poland, starting World War II.

In 1960, Bernie Madoff started a Wall Street investment banking firm. The business grew as investors consistently received annual returns of 10% on their money. Until 2008, that is, when Madoff was arrested and charged with fraud in the largest Ponzi scheme in investment history. Some 5,000 clients suffered losses of $65 billion.

In 2009, Amanda Knox, a 22-year old writer and student, was convicted of a murder in Perugia, Italy. After she spent six years in prison, the Italian Supreme Court definitively acquitted her and ordered prosecutors to pay her $20,000 compensation for mishandling her case.

Diverse as the details may be, Malcolm Gladwell links them in a new book about the risk of “Talking to Strangers: What We Should Know about the People We Don’t Know.” He points out people’s inability to identify risk when they’re dealing with a confident liar (Hitler or Madoff) or a nervous truth teller (Knox).

Everybody knew Hitler was doing horrible things. Madoff had been investigated for years by the U.S. Securities and Exchange Commission and Financial Industry Regulatory Authority. Prosecutors had indisputable evidence that Knox was not a party to the murder.

What happened?

Gladwell makes a keen point: We lock down on first impressions if they’re followed by consistent similar behavior. We change beliefs only when we finally encounter massive contradictory evidence. This is the situation for much of our risk management.

Consider the three areas where I’m currently writing.

  • Enterprise Risk. We ignore risk as long as it only involves strangers. Opioids, used regularly by 2.5 million Americans, kill 70,000 of them every year. Families build houses in areas that flood regularly or are prone to massive wildfires. Unstable people walk into stores and purchase assault rifles.
  • Higher Education Risk. Professors, administrators, parents, students and politicians hold conflicting views about risk and markedly-different proposed solutions. Each group is firm in its beliefs and highly resistant to changing them.
  • Cyber Risk. People are exposed in their daily lives and organizations are threatened financially tens of thousands of times each day. Facebook, Instagram, Twitter and hackers produce exposures where individuals are bullied, shamed or scammed, and hospitals, private businesses and government agencies are subject to ransom demands, data loss and unfair competition.

The individuals charged with risk management are strangers to each other.

  • Doctors don’t talk enough to patients about addiction. Mortgage bankers don’t warn of unreimbursed losses when building homes in dangerous areas. Politicians and vendors ignore sensible restrictions on the availability of firearms.
  • Professors decline to make sensible changes in classroom practices. College administrators are slow to respond to weakening financial conditions. Politicians, parents and students advocate narrow agendas that mitigate some risks while accelerating the chance of loss from others.
  • Social media sites don’t do enough to warn individuals of Internet dangers. Managers don’t train their people to identify suspicious activity on their computer systems. Organizations are slow to redesign their processes and systems to thwart misbehavior by employees and outsiders.

Enterprise, higher education and cyber risk management efforts often take place at a distance. Shareholders want profits while employees want decent salaries. Professors want to advance ideas while parents and students want debt relief. Teenagers want to engage electronically with 600 of their closest friends while Amazon wants to sell them everything they need to live.

Strangers are engaging with other strangers without learning much about them.

This kind of reminds us of Gladwell’s overarching encouragement, “If I can convince you of one thing in this book, let it be this: Strangers are not easy.”

My own encouragement is stronger.

“Stranger danger is real. Be cordial with strangers but be alert for inconsistencies. No matter how friendly, do not accept a stranger’s offer to walk your child home from school.” &

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The R&I Editorial Team can be reached at [email protected]