My husband, my friend Bala, and I have edited two books on Enron. We edited the first one as a way of figuring out what had happened at Enron so that people could avoid making those mistakes again. We did the second book after realizing that no one seemed to have learned from Enron, and we wanted to figure out why smart people don't learn from their mistakes. (I'm talking with the publisher soon about a third edition, meant for both law schools and business schools.)
Two different articles this week made me realize that the willingness to learn from mistakes is a rare quality. The first one, in the Wall Street Journal, involved a CEO who allegedly wanted his subordinates to lie about the company's financials (shades of, among other things, WorldCom). The second one (here) has to do with Fannie and Freddie being willing to finance mortgages that have very low downpayments. A three percent downpayment leaves the buyer with very little skin in the game.
So why don't we learn from others' experiences? There's a whole slew of possible explanations, but the one that appeals most to me is the idea that humans will find a number of ways to fool themselves--maybe not consciously, but subconsciously. After all, "we're" not manipulating financials; we're "adjusting" them to comport with the predictions that "must" be correct. "We're" not encouraging people to lower their emotional and financial connections to their homes; we're "enabling people who wouldn't otherwise be able to afford a home to get one." It's a frustrating business, this refusal to extrapolate from past financial disasters. But it's a stubborn problem.
