Risk aversion and the law of unintended consequences

The news that the UK Credit card company EGG is about to withdraw 161,000 credit cards from customers who are considered to be 'higher risk' is an interesting case study in risk aversion.
On one level their actions make a lot of sense for the company. If they are actually targeting individuals who propose a higher risk (and there is a question about how they have made this decision) in times of economic slowdown then restricting their ability to get into debit does reduce this companies exposure to risk later on - but only if other companies don't do the same thing.

In times of tougher money and in particular credit supply reducing peoples flexibility to move (and access) money around is very likely hasten the levels of bankruptcy. If you are in a tight spot and your emergency supply (the credit card) dries up and there is no way to get more money meaning you can't pay your debts then you will go bankrupt and then default on everything. This means that if every credit company, as is widely expected, follows suit, then this is quite likely to accelerate the numbers of payment defaults which is they very thing the strategy is trying to prevent.

This is a typical mode one (from the book the Ambiguity Advantage more of which later) risk averse reaction. When things look difficult more controls are put into place. Logically this appears to be the right thing to do. 'Things are going to be tight so we will reduce spending (or in this case the ability to spend) across the board'. That makes sense for the individual credit company. However if everyone does the same thing, the more they all control the money supply the less there is to spend, the less there is to spend the less people buy, the less people buy the less profit there is, the less profit there is... you get the picture.

So a risk reduction strategy that works for one company for a limited time, when copied and used widely is likely to actually bring about the very conditions they are trying to prevent.

This is also true within companies. Many companies that we have seen, cause themselves problems when things get tough by reducing spending / effort on the wrong things. So at the very moment when things need to change and employees need to think differently, get creative and find new ways of doing things you find that activities like better training and development, coaching etc, are usually slashed thereby exacerbating the situation.

Risk aversion often brings about the very thing we are trying to prevent.