How do you evaluate risk taking? The GM IPO is the news headlines of the week. I don’t begrudge the White House its victory dance that the GM wager looks like it has paid, 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 measurements.
It is the individual nature to judge the quality of risk taking by looking at the results of the chance taking. Success is thus vindication and failure is calamity. In the event that you follow this to its logical ends, if you succeed, you are a good risk taker and if you fail, you aren’t.
- An economy which is functioning at the full employment level desires to maintain
- The Committee will continue to work to the next time schedule
- The regular monthly investment is accumulated and spent at one time at the end of the yr
- Being clear of Friday night to Sunday morning isn’t a genuine weekend off
- The maternal “love hormone” also impacts fathers
This is the theme that is being tapped into by both Warren Buffet when he wrote his many thanks note to the government for the tarp and by the White House for its GM investment. 4. Future risk taking behavior: It should not be surprising that how exactly we take and compensate/punish risk taking in the present to make a difference how people take risks in the future. If risk taking of a certain type is rewarded consistently, you will see more of it in the future.
If in contrast, risk taking of a different type leads to punishment/deficits, you will see less of it in the near future. If markets are considered “too easy” on risk takers, there will be more risk taking in the future in the future. When can it make sense to judge risk dealing with outcome alone?
Returning to the GM investment, the wisdom on whether it was successful becomes more nuanced whenever we consider the other factors, even if the government’s original investment makes money. Did the Federal government investment in GM make sense at the time of the investment, given what was known then? Tough to tell, since we have no idea what the Federal government understood during the involvement. Given what the rest of us knew at that time, it could have been difficult to justify the billions invested in the ongoing company. However, it is possible that the authorities had information about GM’s assets and liabilities that we did not.
So, I will give the benefit of the doubt to the government on this point. What were the side costs and benefits of the government investment? In the plus side, GM’s salvation prevented thousands of layoffs at the company and budgetary chaos at at least one state (Michigan). Around the minus side, the government’s involvement on GM’s behalf has cost other carmakers to be able to make inroads in this market. To the extent that the other car manufacturers are foreign (Toyota or Honda), this may seem like a good thing, but the belief in free markets cannot stop at the edges.
It is also conceivable that GM’s salvation may have cost Ford a chance to make inroads into the market and secure its position for the long term. What exactly are the long-term lessons for risk taking behavior? It really is undeniable that GM made some really bad tactical and management decisions in the last three years.
In the face of default, the government stepped in, upended bankruptcy and tax laws (which conveniently were written and interpreted by government officials), and saved the company. Other companies that took more prudent decisions in the real face of risk were put at a disadvantage. It would appear to me that the lessons learned on risk taking out of this experience will be the wrong ones: invest the risks, make sure that you are a large firm with the right connections. Bottom line. Being a taxpayer, I am happy that the GM investment appears like it’ll break even or better.As a trader, I am less happy about the long term consequences of this success. I am afraid that it sends the wrong signals on risk taking to the market and investors.