Michael J. Mazarr

Outcome Assessment of the Emerging US National Security Strategy

This chapter will offer an example of the sort of outcome-based risk assessment highlighted in the previous section by examining the emerging US grand strategic approach, which could be called “selective engagement.” It first describes this strategic posture, and then informs its analysis with two previous case studies of similar strategies: the gradual British recognition of a need to wind down their empire, and the Nixon Doctrine. The discussion then undertakes a brief risk assessment of the emerging US approach along the lines suggested in the previous chapter.

Approaches to Risk in National Security

The use of risk as a concept in defense planning, and the use of procedural risk frameworks, have proliferated in the national security field over the last decade. These approaches tend to cluster naturally into a few basic categories—program, force management and operational risk being three common ones. The question, in the context of the experience with risk in the financial crisis, is whether these approaches are likely to improve strategy—or pose a danger to it.

What You Don’t Know Can Destroy You: Ignorance and Correlated Risk

The story of many of the firms that fell prey to the financial crisis reads very similarly in many respects. Institutions that experienced risk disasters were misguided by wishful thinking, overconfidence, groupthink, the skewing effect of personality, and much more. The case studies of these companies have at least one more important thing in common: Senior leadership lost touch with what was going on in one or more of their business units. Senior officials who ought to have been responsible for risk—whether unit heads, CEOs, or board members—simply did not pay enough consistent attention, or educate themselves sufficiently about the nature of the risks being taken, to exercise proper oversight. Once that happened, it was often just a matter of time before disaster struck.

The Role of Risk in Strategy

The previous chapters have examined the ways in which risk management can go wrong, often under the influence of human factors that overwhelm procedural approaches to risk. What remains is to discuss potential solutions—ways of approaching risk that offer better opportunities to deal with the potential dangers.

Risk, Incentives, and Culture

Risk management procedures exist in part to create objective, abstract answers without bias. This is an important objective, but as we have seen it runs up against a number of powerful realities of human organizations, from personalities to cognitive biases. Behavior is a function of many variables; avoiding risk is one, but there are many others that can be equally powerful. In many ways the essential story of the financial crisis can be boiled down to economic agents acting according to perverse incentives. In particular, judgments do not take place in a vacuum; the human factors that influence the perception of risk take root in a social and institutional context. Peoples’ perception of risk is also a function of these broader environmental factors. A critical lesson of the crisis is that different environments can generate different levels of incentive to take risk.

Risk Becomes Personalized

Relatively early in the life of the Enron Corporation, the firm established a trading operation for oil under the direction of a man named Louis Borget. “Within Enron, he was a shadowy figure who divulged as little as possible about the details of his operation,” Bethany McLean and Peter Elkind report in their masterful history of the firm’s rise and fall. Borget’s operation began to generate substantial profits, and his confidence in his methods grew along with the profits. He sent a 1986 memo to the board in which he argued that highly trained “professionals” were using “sophisticated tools” to “generate substantial earnings with virtually no fixed investment and relatively low risk.”1

Risk, Judgment, and Uncertainty

In October 2008, under the fearsome shadow of the most serious economic crisis since the 1930s, a man who had unwittingly done much to bring it about—former Federal Reserve Chairman Alan Greenspan—testified before Congress. Facing a barrage of heated questions, Greenspan made a remarkable confession. He admitted that his worldview had been wrong.

Indifferent to Consequences

In March 1965, Lyndon Johnson agonized over a request for Marine battalions to defend US missile and aircraft sites in Vietnam. In a March 6 telephone call with Secretary of Defense Robert McNamara, captured on the White House recording system, Johnson worried that the Marines would end up “fighting with the Vietcong and really starting a land war.” He summed up the discussion with what must be one of the most tragic remarks ever uttered by an American president: “My answer is yes,” he told McNamara. “But my judgment is no.”1

The Swans to Worry About Are Gray

For almost a decade now, since the publication of Nassim Nicholas Taleb’s brilliant, discursive rumination The Black Swan, conventional wisdom has been that strategy—in national security as well as areas like finance—has most to fear from the sudden and the unexpected. A black swan is, at its core, a shock, a surprise. It is an “outlier,” Taleb writes, “as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility.”1 He goes on to claim that such events are the engines of history. “A small number of Black Swans explain almost everything in our world,” he argues. Social life “is the cumulative effect of a handful of significant shocks.”2

Principles of Effective Risk Management

Chapter 11 argued for an approach that placed risk management in service of a specific goal in the development of strategy: outcome assessment. This recommendation stems from two of the dominant lessons of the financial crisis: that the concept of risk had become fragmented and incoherent; and that many of the most common cognitive and framing errors push decision-makers toward urgent, nonconsequentialist thinking. Developing a single coherent approach to risk, and focusing risk analysis on outcomes, are the first steps toward the effective employment of risk as a component of a larger strategy process.