The beginning of 2021 could make you nostalgic for 2020. First an insurrection at the US Capitol. Then millions of Americans lost power and water as arctic temperatures blanketed the country. All the while, Covid-19 smoldered in the background. Happy New Year.

Everything is Normal

Charles Perrow, Yale sociologist and expert on complex organizations, wouldn’t be surprised. He knew that in complex systems, accidents are a feature, not a bug.

It’s a Relationships Business

Perrow’s risk assessment framework is a quadrant divided by interactions, linear versus complex, and coupling, loose versus tight. Assembly lines are linear systems. The production sequence is expected and familiar: A then B then C. Components only interact with the things immediately before or after them. Links are few and sequential. Feedback loops are minimal. Parts not in a direct production sequence are spread out. Errors are easy to spot because upstream units pile up or defects appear downstream. Lastly, interdependencies are visible and well understood.

Source: Bloomberg, A Giant Flaw in Texas Blackouts: It Cut Power to Gas Supplies, February 20, 2021.
Source: Perrow, Charles. Normal Accidents: Living with High Risk Technologies — Updated Edition. Princeton, New Jersey: Princeton University Press, 1999.

Crawfish Boils

I used to live above a restaurant in the East Village. They had great fried chicken and occasionally threw crawfish boils. It was the sort of place where neighborhood waiters and bartenders hung out after hours. They enjoyed listening to music. Occasionally, loudly. Auditorily, my bedroom was tightly coupled with the restaurant below (pro tip: earplugs). My upstairs neighbors weren’t. With tight coupling there’s no slack or buffer between two items. What happens to one affects the other.

Source: Perrow, Charles. Normal Accidents: Living with High Risk Technologies — Updated Edition. Princeton, New Jersey: Princeton University Press, 1999.

Lollapalooza Effects

Perrow’s framework is shown below. Danger lies in the top right quadrant. Complex interactions and tight coupling create the conditions for catastrophes, which he called normal accidents.

Source: Perrow, Charles. Normal Accidents: Living with High Risk Technologies — Updated Edition. Princeton, New Jersey: Princeton University Press, 1999.

Finance at Indeed. Previously finance at Etsy and internet equity research at Deutsche Bank. Find me @kjlabuz.

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