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Is Risk Necessary?

I teach a class at USC’s Marshall Graduate Business School, where we explore some pretty interesting discussions.  Last week I prodded the class to explore whether risk was valuable, or even necessary.  I mean, who really likes to lose?  If risk could somehow be removed from markets wouldn’t everyone be better off?

As the class pondered that thought my mind wandered to the effects of long-term guaranteed contracts on the performance of star athletes.  Perhaps most exemplary to me was the complete collapse of the skills and ability to perform of Venezuelan pitcher Johann Santana a few years back, once the New York Mets acquired him in free agency and gave him a massive long-term guaranteed contract.  Of course, his is not the only example, but perhaps because he hails from the same Venezuelan town in which my die-hard baseball fanatic father-in-law resides, his experience has stuck with me.

My class pointed out that risk inspires creativity and heightens awareness.  Risk inspires greater effort, and also stimulation that one can even characterize as fun – think of the fear that gives way to joy on a roller coaster or to having endeavored to try something physically challenging that was fearful at first but once done brought great joy.  A world without risk, we concluded, was a dull, and even dead world.

There are many in government who seem to be fundamentally opposed to risk and who think it is their jobs to de-risk our lives.  Our central bank, the Fed, fears that allowing rates to float freely, as the cost of money always should inasmuch as it should reflect the pricing of money as driven by supply and demand, would introduce too much risk to the world economy.  We see the opposition to risk seep into many other aspects of life, both large and small.  My kids’ school removed the swings from the lower school playground recently when a kid got hurt.  Continuing to squeeze risk out of our lives, while perhaps well intended, will create a dead society with less creativity or great accomplishments, and with very little productivity.  There are surely certain risks that would be prudent to limit or even strive to eliminate, but those are precious few and probably ought to be limited to the basic human needs such as food, water, energy, and education.  Risk and freedom are inextricably linked, as are risk and fulfillment.  We must be very careful not to lose sight of those connections.

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