A Paean to Risk

A former colleague of mine once said something wonderful:

“If you are not making any mistakes, it’s because you’re not making any decisions.”

When I consider the single characteristic that is most vital to the success of an individual, an organization or a society, I conclude that it is a willingness to innovate. Whenever we try to freeze time, and lock in the benefits of now, we consign ourselves to a future failure that will be far more painful for our efforts to avoid the change that is inevitable.

What is this innovation, then, that is so important at every level of society? It is, quite simply, the product of risks that have been taken. Note that I do not assert that it is the result of risks taken successfully, because it is also the end product of all the risks that were taken unsuccessfully. The latter, after all, taught us what didn’t work. Failure is integral to success – a willingness to chance it, and the lessons learned from it.

Most people like innovation – but few like risk, because risk involves the possibility of failure. Indeed, at a certain level, it would be madness to like risk – by definition, the greater the risk, the higher the likelihood of failure. The reality is, though, that innovation and risk are inseparable – two sides of the same coin. The brilliant business person is the one who learns how to weigh the coin.

Think, for a moment, of an old-fashioned banker. If he is unwilling to take any risk at all, he cannot make a living because there is risk in every loan. If he takes foolish risks, he also cannot make a living because he will lose his job when the loans he has made go bad. It is his job, fundamentally, to assess which risks to take, and how to price them. He will be good at his job if he learns the lessons of yesterday’s mistakes, and properly evaluates tomorrow’s probabilities.

Even an investment with a high risk of failure can be sensible if the possible rewards are sufficiently enormous. Would you take a one-in-a-hundred shot at something with a thousand-to-one payoff? Yes, but only in amounts that you were able to lose. The venture capital business was built on that very math, and successful venture capitalists do pretty well – while providing capital to some of our most important startups – and lots of failures.

Failure is the best teacher. When you do something you have done before, or that involves no risk, you learn nothing from the anticipated result. You are just following in your own or others’ footsteps. Nothing wrong with that in many circumstances, of course; but it won’t take you any place new. In contrast, when you fail you cannot help but think about the implications of the disaster, and learn from them.

I have made some spectacular mistakes in my career, and I believe I am much the wiser for them. The first of these was when I ruined what had been a promising career path and a ten year track record with my first employer by making a very poor judgment. I then compounded that mistake by fleeing it – I switched employers, only to learn that the culture of the second firm I worked for was not what I had thought it was. Three years later, I left my second employer to co-found a business – this was quite a risk for a fellow who was married with four children and a mortgage. For eighteen months our new company lost money – eating through nearly every single dollar that I had saved in the first thirteen years of my career.

Our little business turned around just in the nick of time; and that near catastrophe became by far the most important learning experience of my carreer.  I’ve made plenty of mistakes, large and small, in the twenty years since then, too; but it was these early ones that made me who I am by teaching me harsh – but supremely valuable – lessons.

Success comes from failures. One must be willing to take risks – and to brook the possibility of failure – if one is to achieve anything of value. One hopes the possibilities are carefully assessed, of course, and that successes will come easily; but when mistakes are made, as they inevitably are, we have to learn the appropriate lessons, pick ourselves up, and just keep going. We iterate until we find the right roads.

So if anybody ever says to me that he or she has never failed, I think to myself: what a loser. This is a person who has never taken a risk, and never experienced what was so poetically described in The Wide World of Sports as “The Thrill of Victory and The Agony of Defeat”. This is not one who has truly lived, and learned – an over-protected child. Doomed.

The beauty of capitalism is that it harnesses the power of innovation through a process that has been aptly described as creative destruction. The engine of innovation in a capitalist system is that it quite rigorously rewards successes and punishes failures. The operative phrase is: “Innovate, or Die”. It is impossible, for even the wealthiest and most powerful, to stand still without letting the world pass you by. A big company that looks like it has an impregnable market position today can be rendered obsolete by a kid in a garage; we all know the stories.

Glance over the list of the Nifty Fifty, the most prominent stocks of my youth, (http://en.wikipedia.org/wiki/Nifty_Fifty) and consider how many of these once-leading companies have disappeared – replaced, in some cases, by companies that would be founded by people who hadn’t even been born in the 70s. General Motors failed. Big Blue – IBM – very nearly failed, and survived only because it reinvented itself. Now it thrives once more.

The United States of America looks altogether too much like Big Blue did when desktop computers (now themselves fading from the scene) supplanted the mainframes around which the company had been built. It must have been a lot of fun being at IBM when it more or less owned the mainframe market – it looked like they would own the technology market forever.

In the same way, there was a time, in the fifties and sixties, when our beloved country’s industrial preeminence looked unchallengeable. We had emerged from World War II victorious, in sole possession of an undamaged industrial infrastructure and the secrets of the atom. For a while.

But our unchallenged pre-eminence wasn’t to last, either economically or militarily. There were – and are – too many smart, hard-working people in the world who were highly motivated to find ways to compete with us.

Based on the illusion of our apparently unchallengeable economic and military pre-eminence, our government – we, and people working for us – made a lot of policy decisions that have proven to be the mistakes of hubris. We sought – and still seek – to provide cradle-to-grave security to everybody, thereby creating enormous disincentives to work. This is the conceptual antithesis of the approach that made America the world’s most innovative society.

Our government is wildly over-extended and our economy – and society – are over-taxed, over-regulated, over-indebted and over-committed overseas. The growth of our population and our economy  – our fabled dynamism – are seeping slowly away under the weight of the many policy mistakes we have made in recent decades, and are doubling down on today.

It is our job to to learn from our mistakes, fix them, and move on.


M.H. Johnston

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