Innovation is only possible if our failures are survivable.

Picture a slice of Swiss cheese. Imagine that this slice of cheese represents one layer of safety in a system, and that its holes are points of vulnerability. By stacking many of these slices on top of each other, any clear path through the cheese would be blocked, right?

Though it might seem logical, this is not a surefire way to eliminate accidents. In fact, certain safety measures actually create new ways for failures to propagate through a complicated system.

Take financial instruments such as Credit Default Swaps (CDS). These were created to allow banks to offload the risk of their loans not being repaid.

For example, the European Bank for Reconstruction and Development (EBRD) would repay JP Morgan for any losses it incurred from its loan to Exxon. This freed the bank to take on more risky business, meaning that networks of previously unconnected companies and institutions became entwined in the same complex deals. The effect of this is “tight coupling,” which can lead to a rapid, domino-like collapse of the system. Therefore, when one company collapses, it pulls others down with it – as happened with Lehman Brothers, whose disintegration ultimately led to the financial crisis in 2007/2008.

So, how can we improve our ability to survive such failures? Improved survivability requires simplified systems, loosened interactions and contingency plans.

Let’s look at the financial system again. One way to increase its safety would be to establish solid contingency plans in the event of bankruptcies. Regulators could mandate that banks with complex operations have to retain a large amount of capital as a “cushion.”

Another method is for large banks to split into two – one part with utility functions like ATM cash and savings accounts, and another exclusively for speculative banking, such as trading derivatives. This, however, overlooks the complexity of finance, as some of the speculative side – for instance, venture capital – is responsible for funding a lot of innovation, like start-ups.

As this shows, a complex world will produce many errors that we can’t eliminate, so a balance must be struck between risk and innovation.