Tigerhawk has a post bemoaning the increasingly risk-averse character of our society and extolling the virtues of risk. As TH sees it the values of taking risks include:
- It’s fun.
- It’s the means by which wealth is created.
- The devices for mitigating risk create “diffuse unhappiness”.
- We may need to take risks to surmount serious problems.
Quite a few years ago I had a client for whom some little part of their business was in testing electronic gambling machines for radio, magnetic, and electronic emissions and, since I’m naturally an inquisitive sort of person, in the course of dealing with them I learned quite a bit about these machines.
They’re constructed to take a small, fixed percent of what’s put into them and return the rest. The percent can, in fact, be set. There’s no risk at all involved for the house.
The gambling industry in the United States is a $50 billion one and, basically, there’s no risk at all for the house—the runner of the game. That’s why it’s a successful industry.
Gambling is only the most ironic industry in which a successful business strategy is based on mitigating risk. All of the following are methods for mitigating or eliminating risk:
- professional licensing
- malpractice laws
- going to name schools
- going into professions in which there are barriers to entry
While it may be true that fortunes can be made by assuming risk, fortunes can be lost that way as well. Great investors like T. Boone Pickens or Warren Buffett don’t get that way by taking risks they do it by avoiding risks. They know what there is to know about the companies they take over or invest in and how businesses and money works. That’s what Warren Buffett means when he says he doesn’t invest in the stock market he invests in companies.
And I won’t go into it in detail in this post but an enormous amount of what passes for entrepeneurialism these days is just rent-seeking. It’s easier to lobby Congressmen than it is to invent something new.
When you’re storming the castle, you must take risks. When you own the castle, the secret of increasing your wealth is in avoiding them.
I think there’s a serious question lurking in here somewhere: are devices for mitigating risk like social insurance, hazard insurance, and so on of net benefit to society by allowing people to select where and how they take their risks? There’s a serious debate and serious study in the question. I don’t know that the answer is obvious.
Now Tigerhawk may well be right that our society needs more risk-taking to rise to the challenges that face us. But, as we see the rich getting richer (rent-seeking and otherwise mitigating their risks to beat the band) I think it’s pretty likely we’ll get increasingly risk averse.