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By Root 1027 0

diverse congressional districts, NASA sites are spread throughout the country. Even if any individual site takes care of its piece of equipment, there is less institutional investment in the connections. This then becomes true for the larger organization as well. Information can easily get lost in reporting between different sublayers. In an email to me from the NASA and aerospace industry risk-analyst Joe Fragola, who ran the study, “My experience indicates that risk analyses performed without the joint activity between the subject matter experts, the system integration team and the risk analysis team are doomed to be inadequate. In particular, so called ‘turn-key’ risk analyses become so much actuarial exercise and are only of academic interest.” Too often there is a trade-off between breadth and detail, but both are essential in the long term.

One dramatic consequence of such a failure (among others) was the BP incident in the Gulf of Mexico. In a talk at Harvard in February 2011, Cherry Murray, a Harvard dean and member of the National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling, cited management failure as one major contributor to the BP incident. Richard Sears, the commission’s senior science and engineering adviser and former vice president for Deepwater Services at Shell Oil Co., described how BP management addressed one problem at a time, without ever formulating the big picture in what he called “hyper-linear thinking.”

Although particle physics is a specialized and difficult enterprise, its goal is to isolate its simple underlying elements and make clear predictions based on our hypotheses. The challenge is to access small distances and high energies, not to address complicated interconnections. Even though we don’t necessarily know which underlying model is correct, we can predict—given a particular model—what sorts of events should occur when, for instance, protons collide with each other at the LHC. When small scales get absorbed into larger ones, effective theories appropriate to the larger scales tell us exactly how the smaller scales enter, as well as the errors we can make by ignoring small-scale details.

In most situations, however, this neat separation by scale that we introduced in Chapter 1 doesn’t readily apply. Despite the sometimes shared methods, in the words of more than one New York banker, “Finance is not a branch of physics.” In climate or banking, knowledge of small-scale interactions can often be essential to determining large-scale results.

This lack of scale separation can have disastrous consequences. Take as an example the collapse of Barings Bank. Before its failure in that year, Barings, founded in 1762, was Britain’s oldest merchant bank. It had financed the Napoleonic wars, the Louisiana Purchase, and the Erie Canal. Yet in 1995, the bad bets made by a sole rogue trader at a small office in Singapore brought it nearly to financial ruin.

More recently, the machinations of Joseph Cassano at AIG led to its near destruction and the threat of major financial collapse for the world as a whole. Cassano headed a relatively small (400-person) unit within the company called AIG Financial Products, or AIGFP. AIG had made reasonably stable bets until Cassano started employing credit-default swaps (a complex investment vehicle promoted by various banks) to hedge the bets made on collateralized debt obligations.

In what seems in retrospect to be a pyramid scheme of hedging, his group ratcheted up $500 billion in credit-default swaps, more than $60 billion of which were tied to subprime mortgages.41 If subunits had been absorbed into larger systems as they are in physics, the smaller piece would have yielded information or activity at a higher level in a controlled manner that a midlevel supervisor could readily handle. But in an unfortunate and unnecessarily excessive violation of separation of scales, Cassano’s machinations went virtually unsupervised and infiltrated the entire operation. His activities weren‘t regulated as securities, they weren’t regulated as