Mohnish Pabrai: Well, John, it’s a pleasure to be here and it’s also a pleasure to have Guy with me in Irvine. It’s wonderful and, of course, the topic of checklists is something that I don’t need too much cajoling to talk about. It’s something that’s near and dear to my heart. Just to give you a little bit of a history and backdrop, the pioneers of the usage of checklists is really the aviation industry. If you look at aviation today, it is ultra-cheap and ultra-safe and those two attributes are directly a result of usage for checklists. The modus operandi I followed in trying to create an investing checklist was to really look at the FAA (The Federal Aviation Administration) and the way it deals with airline safety and such. I used that in the approach towards building a checklist.
Just before I go to the FAA, if you go back a little bit further, Boeing had produced this bomber, which they wanted a large contract at that time from the Army Air Force in the United States. They were pretty much a shoe-in to get the contract and they had arranged for all the Army top brass to come and see a demo flight. When this B38 took off, it promptly leaned on one side when it got a few hundred feet off the ground and then crashed with causalities and so on. That was the end of Boeing getting that contract and Boeing had invested a huge amount in that airplane. They went back and analyzed what went wrong and this was a very complex airplane. They came to the initial conclusion that this was too much plane for a person to fly. In a sense, it was too complicated, but then Boeing really drilled down in the problem and they came up with what was the first aviation checklist.
They basically, to assist the pilot, said, “Okay, before takeoff, here’s some things you can do and while you’re in flight, here are the next things you need to do for landing and so on.” They convinced the Air Force to give them another try and, of course, the plane flew flawlessly. Subsequently, in fact, they had virtually no crashes which were unrelated to being shot at during World War II, so that plane performed magnificently. It was called the Flying Fortress and from then on, checklists became very fundamental in aviation, but the way the FAA goes about looking at airline safety and flight safety is on a steady state basis the FAA really does nothing. They really get going when there’s a plane crash anywhere in the world of any significance and when there is a plane crash, they send their experts, the NPSP gets involved and so on. The main thing they’re focused on is to find out exactly what caused the crash and they spend ungodly resources to get to that answer.
They also have an approach, which is very pragmatic. The FAA has a certain price for a human life and that goes up every year to index for inflation. Last time I checked a few years back it was about $3.5 million per person. If there’s a plane crash, like for example, you can look at that crash on the Hudson where all those flying geese hit that flight. They’re able to model what the probabilities of something like that happening are and, in fact, in the early 1960s, there was another airplane that crashed and what happened with that plane was actually it got hit by a bird or a few birds in one engine and then shrapnel flew out from that engine and actually destroyed the second engine, even the fuselage.
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