June 22 (Bloomberg) -- Complacency is baked into our
species. We can’t resist thinking that recent experience defines
the future. Give us a run of good luck, and we are apt to turn
that into an implicit expectation that our luck will continue --
even that we are entitled to it.
This kind of thinking was instrumental in the run-up to the
financial crash of 2008. Too many private and public
institutions assumed that an extraordinary run in prosperity,
particularly in the real estate market, was just normal. It
didn’t occur to them that things could go so wrong. Even when
token stress testing or risk assessment was done, it largely
excluded the possibility of a bad shock or a protracted slump.
Risk wasn’t systematically measured; it was ignored.
