Jeff Roorda continues the story he began with Motorways and Steam Engines (Mar 27)
In part 1 we introduced the difference between physical life and economic life.
Part 2 talks about certainty bias, that is, we pretend to be certain about the future even though this is an irrational and emotional response. The feature photo shows the I-35W Mississippi River bridge collapse (officially known as Bridge 9340). An eight-lane, steel truss arch bridge that carried Interstate 35W across the Saint Anthony Falls of the Mississippi River in Minneapolis, Minnesota, USA collapsed in 2007, killing 13 people and injuring 145. The bridge had been reported structurally deficient on 3 occasions before the failure and ultimately failed because it was structurally deficient. The design in the 1960’s had not anticipated the progressively higher loads compounded by the heavy resurfacing equipment on the bridge at the time of failure. There was no scenario I could find that explained clearly enough for any reasonable non-technical person to understand, the likelihood and consequence of failure and the uncertainty of the safety of the bridge. After the failure, the courts found joint liability between the initial 1960’s designers and subsequent parties involved in managing the assets. The allocation of blame and acceptance of wrongdoing was highly uncertain, but lawsuits were settled in excess of US $61M. The strength and life of the bridge was uncertain and this was reported in technical reports but every person that drove over the bridge and every decision maker with the power to close the bridge had the illusion of certainty that the bridge was safe and would not fail.
As asset managers, our estimates of asset life have critical consequences but are uncertain. We estimate and report how long an asset will last before it fails, is renewed, upgraded or abandoned. This then determines public safety, depreciation, life cycle cost and our future allocation of resources. Whether we decide to use physical or economic life, we still are making a prediction of the future, something we should be uncomfortable about when we really think about it. None of us knows what will happen tomorrow, much less in 10 or more years. We prefer the illusion of certainty, or expressed another way, we have uncertainty avoidance. Uncertainty avoidance comes from our intolerance for uncertainty and ambiguity. Robert Burton, the former chief of neurology at the University of California at San Francisco-Mt. Zion hospital wrote a book in 2008, “On Being Certain”, in which he explored the neuroscience behind the feeling of certainty, or why we are so convinced we’re right even when we’re wrong. There is a growing body of research confirming this phenomenon. So then, what do we do about asset life? We prefer the comfortable feeling of certainty because of the discomfort of ambiguity and uncertainty.
Some of the excellent observations and comments to part 1 are already on the right track and noted that how we determine asset life depends on several factors such as:
- organizational maturity – making the best decision we can with the information we have and that the evidence we use changes over time with organizational maturity. (Douglas Bartlett, Luke Matthews, Andrew Wilson)
- how we manage the difference between physical and economic life by applying impairment or accelerated depreciation if our economic life is shorter than physical life (Hein Aucamp and Stephen Agius, Neil North). Impairment is usually used when the asset fails before the estimated physical life due to an unexpected event.
The common conclusion is that when deciding how long an asset lasts, we are predicting the future and we must clearly disclose our evidence and level of uncertainty so decision makers are able to understand and accept the corresponding risks. Could the I-35W collapse have been avoided? In hindsight the answer seems obvious. The bridge should have been replaced as soon as structural deficiency was noticed rather than wait for certainty, in this case, failure. Greater uncertainty for high criticality assets should result in greater precautionary action by decision makers and clearer communication to all involved in the management and use of the asset. Ultimately the responsibility must rest with those with the power to make a change, our political leaders. The responsibility of asset managers is to clearly communicate what we know, what we don’t know and the consequences of inevitable and unavoidable uncertainty.
In part 3 we are going to look at providing alternative scenarios that demonstrate alternate futures as a communication strategy. We can use alternate futures scenarios to communicate that that any estimate of asset life contains uncertainty and risk. This uncertainty and risk must be understood in the context of available evidence and levels of confidence when making decisions and providing reports.