Stress to Failure

It is clear and obvious that BP and the US government regulators were not at all prepared for failure of a deep water oil rig in the Gulf.

What would have helped them is a procedure that I have heard Dave Sandberg describe many times that is used at his employer, Allianz.

Stress to Failure.

  1. Whenever something new is proposed, they require that a demonstration is prepared that shows the type of stress that will cause complete failure. That test provides them with several pieces of very valuable information: It helps to put a boundry around the situations under which it will NOT fail. This is the green (and yellow) zone for the new project. They can then evaluate the expected return and volatility of return in those scenarios.
  2. It allows an estimate of the likelihood of success vs. failure of the project.  This can be seen by looking at the type of situation that causes failure and the likelihood of that situation.  However, caution should be applied to not put too much weight on this likelihood estimate if the failure type of even has never before happened.  Human nature may well be biased towards underestimating adversity. 
  3. It allows for planning for the failure event.  This is where the BP folks and Transocean as well as the Minerals Management Service failed.  They clearly had no plan for the failure event.  It sounds like they were able to convince themselves that any failure event was so remote in likelihood that there was no need to plan for one. 
  4. Understanding the true weaknesses of the system.  If you do not know how to break it, then perhaps you do not understand the system. 

This is an idea our of engineering and probably we could learn much by studying how they have used the idea.

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Explore posts in the same categories: Black Swan, Emerging Risks, Execution Risk, Uncertainty, Unknown Risks

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