U.S. Central had a deep-seated cultural belief that the institution was filled with good, smart people, working hard each day to do the right thing. (I continue to believe that this was true.) The institution's track record bolstered this belief, with 95% of investments rated AAA at the time of purchase and no negative reporting period in 35 years. U.S. Central's directors, senior executives, investment professionals, and risk analysts thus shared the conviction that the institution took very little risk and therefore was very unlikely to experience catastrophic losses.

In hindsight, it's evident that U.S. Central's beliefs about its investment activities were shaped by at least a few cognitive biases, thinking traps that its officials did not sufficiently recognize, avoid, or counteract, including: anchoring (relying too heavily on a past reference; bandwagon effect (believing things because many other people believe the same): illusion of control (overestimating one's degree of influence over other external events);  optimism bias (being overly optimistic); black swan effect (underestimating the possibility of improbable events).

Effective governance is one key to reducing the effects of cognitive biases. Boards and CEOs should recognize that judgments, decisions and recommendations of even experienced and competent managers can be flawed. With healthy and constructive skepticism, robust discussion and analysis, and a culture of candor and openness, organizational leaders can improve decision-making by asking questions that seek to check the inevitable flaws in managers' thought processes.

Organizational leaders should have a checklist of questions intended to examine whether and to what extent managers are knowingly or unknowingly motivated or affected by cognitive traps. Formulating the questions in advance of a meeting will help ensure that the leaders are not swept up in the process or tempted to go with the flow.

Questions that boards should ask of CEOs, and CEOs should ask of managers, should include at least the following:

• Is self-interest motivating a decision?
• Is group think at play?
• Are there reasonable dissenting opinions within the team?
• Are the numbers upon which a decision is to be based independently derived or at least independently verifiable? 
• Is a recommendation getting undue weight because of prior successes of the person making the recommendation?

Some boardrooms and C-suites are already blessed with supportive contrarians, directors and executives who are both respectful and respected in the way they challenge the status quo without disrupting effective collaboration. Even in those organizations, planning ahead with probing questions can be an effective countermeasure against cognitive bias.

It's impossible to say whether these and similar questions would have prevented U.S. Central's failure. The financial crisis that began in 2008 left many casualties in its wake, including some companies with executives, managers and workers at least as talented and dedicated as those at U.S. Central. External forces far beyond U.S. Central's control may well have made its eventual outcome inevitable.

But there is a lesson to be learned from the events at U.S. Central. Unpredictable catastrophic events that blindside even the most careful managers can never be prevented, but we can take practical steps to reduce our vulnerability to them. 

François Henriquez was general counsel and senior vice president of U.S. Central from 1993 to 2009. In 2009, after U.S. Central was placed in regulatory conservatorship, he was named president/CEO. 

François Henriquez was general counsel and senior vice president of U.S. Central from 1993 to 2009. In 2009, after U.S. Central was placed in regulatory conservatorship, he was named president/CEO.