The Crime of Risk-Taking

Franz Oppenheimer (from Wikipedia)

Dan Pallotta writes about a social aspect of risk on the HBR Blog Network. His point is well taken: taking risks is not unethical or immoral. In fact, risk-taking is a natural part of life and as such is not an ethical concept at all. It is something we always have to do; it is a necessary part of acting. (However, Frank Knight would probably be more than a little upset with Pallotta’s column, since it does not distinguish between risk and uncertainty – and actually confuses uncertainty for risk…)

Yet entrepreneurs and innovators are often portrayed or treated as crooks when they fail in their undertakings. Undoubtedly, there is a loss of money and perhaps jobs as a business goes bankrupt. But this does not mean those jobs would exist were it not for this (failing) entrepreneur. Could the shunning of innovators simply be a result of public reasoning falling victim to the broken window fallacy? We simply cannot see what would have been had there not been entrepreneurs and innovators willing to risk their time, money, and lives in the pursuit of profit.

But there is another dimension to the morality of risk-taking that potentially taints people’s perception. It has nothing to do with risk-taking in the market, but has everything to do with risk-taking in government. As it is, risk-taking in the market place is fundamentally voluntary; nobody is forced to take losses on behalf of the entrepreneur when innovative ventures fail. If you invest your money, time, or skills in a venture (whether as owner or employee, both being risky endeavors), then you should know it may fail. In this sense, Pallotta is right: there is no moral or ethical dimension to the economic means (to use Oppenheimer’s term) since they are simply the practical extensions of voluntarism, itself an ethical concept.

However, one must take care to specify under what conditions this holds true. The economic means are possible only in a context of voluntarism and private ownership; in any other setting, failed risk-taking implies the distribution of losses unto (presumably “innocent”) others. Risk-taking therefore becomes immoral and unethical since it entails suffering (financial or otherwise) involuntarily. In any zero-sum setting losses are necessarily unethical since they afflict those who chose not to take risks. Hence the need to be strictly conservative in such settings and refrain from both risk and innovation; zero-sum is at best static and unchanging. With the Oppenheimerian “political” means, less is more – and no action is best, since it preserves the little wealth there is.

Perhaps the shunning of failing entrepreneurs is based on a deeper misconception than not seeing what is not there; perhaps it is a result of confusing the nature of economic and political means – and their respective implications.

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One Response to The Crime of Risk-Taking

  1. SkepticProf says:

    The link between the ephemeral jobs provided by entrepreneurs who eventually fail and Bastiat’s “unseen” is an intriguing one. The correct base case is indeed not, as you point out, that these jobs would have an uninterrupted existence “except for those meddling kids and that dog of theirs.”

    Prospect theory may also offer an explanation; people mentally reset the status quo from “entrepreneur doesn’t exist, thus jobs don’t exist” to “entrepreneur is succeeding, thus jobs exist”, creating a new reference point; they then feel a loss when the jobs go away even though this simply returns them to the status quo ante. Since they are risk-loving in losses, however, they are much more willing to invest effort (or take risks) to try to preserve those jobs with which they’re endowed (starting from their adjusted reference point of “0” and moving to a negative level once the startup fails) than they were to invest to create new jobs in the first place (starting from a reference point of 0 jobs and potentially moving to a positive level.)

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