The General Motors (GM) IPO was the news of the week last week. The fact that GM has been able to go public and that the government may not only get its money back on its investment but may even make a profit has led to some celebration in the White House.
I don't begrudge the White House for its victory dance, for the fact that the GM bet looks like it has paid off, but it is an auspicious moment to examine how we judge risk taking, in general. As I see it, risk taking can be judged on four dimensions:
(1) Outcome: The nature of risk taking is that you win some of the time and lost some.... It is human nature to judge the quality of risk taking by looking at the outcome of the risk taking. Success is thus vindication and failure is calamity. If you follow this to its logical ends, if you succeed, you are a good risk taker and if you fail, you are not. This is the theme that is being tapped into by both Warren Buffet when he wrote his thank you note to the government for TARP and by the White House for its GM investment. "Things worked out well in the end... So, it must have been a sensible decision up front"...
(2) Process: A more complicated way of judging risk taking is to look at whether the risk taking made sense at the time that the risk was taken, with the information available at the time, rather than with the benefit of hindsight. At least in theory, it is possible that even the best-deliberated risky decisions can have bad outcomes, if fate does not cooperate, and that terrible choices when faced with risk can have "good" outcomes. Playing devil's advocate, however, it is much more difficult and more work to evaluate process than outcome.
(3) Side costs and benefits: When risk taking creates costs and benefits for others, judging risk taking by its outcome for just the risk taker may not be fair, since it is conceivable for risk takers to make money while creating costs for society. It is also possible for risk taking activity to create losses for the risk takers while generating benefits for society. A fair assessment of risk taking will require us to consider these side costs and benefits into account.
(4) Future risk taking behavior: It should not be surprising that how we take and reward/punish risk taking in the present can affect how people take risks in the future. If risk taking of a certain type consistently is rewarded, you will see more of it in the future. If in contrast, risk taking of a different type leads to punishment/losses, you will see less of it in the future. If markets are viewed as "too easy" on risk takers, there will be more risk taking in the future in the future.
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