Making Risk-Taking Riskier Will Hurt Startups – Bloomberg
Research in behavioral economics shows that when people consider risky propositions, they are especially concerned about the downside. Roughly speaking, people weigh losses about twice as heavily as gains, a phenomenon called “loss aversion.”
So if we really want to encourage risk takers and job creators, we should concentrate on what will happen to them in the all-too-likely event that their brilliant idea doesn’t pan out and the new venture flops.
One might think that Romney, an expert on new businesses, would be particularly insightful on this topic. But it turns out that the most sensible thoughts I have heard on this issue were not from him, another business executive, or an economist for that matter. They were from Jon Stewart on “The Daily Show.” Here is a portion of what Stewart said (profanity deleted) in a recent interview with my University of Chicago colleague Austan Goolsbee:
“What we need to do in this country is make it a softer cushion for failure. Because what they say is the job creators need more tax cuts and they need a bigger payoff on the risk that they take. … But what about the risk of, you’re afraid to leave your job and be an entrepreneur because that’s where your health insurance is? … Why aren’t we able to sell this idea that you don’t have to amplify the payoff of risk to gain success in this country, you need to soften the damage of risk?”
This is exactly right. Someone who leaves a big company to start her own business is bearing not only the risk of losing all of her investment, but also her health insurance. One benefit of health-care reform is that people will still be able to get insurance while they are starting their new business, or after it fails, even if they have a pre-existing condition.
The essence of Stewart’s idea goes to the heart of why our economy is largely organized around limited-liability public corporations. When successful entrepreneurs decide to take their businesses public, they are selling some of the upside to other shareholders in return for making sure that they can’t lose all their wealth if something at the company goes wrong.