First published in the Financial Times on 4th November 2014.
Pioneers such as Sir Richard Branson can never calculate precise odds for their ventures
The tragedy of Sir Richard Branson’s exploding spaceship is an example of entrepreneur overconfidence. The price of failure in this case was very high indeed. But for good or ill, if entrepreneurs such as the Virgin founder did not take such big gambles, society as a whole would be worse off. Usually commercial ventures do not endanger lives, but they always involve uncertain outcomes.
In the long run, taking calculated risks is necessary for progress. As President Reagan said after the Challenger space shuttle disaster in 1986, when seven astronauts died: “Sometimes painful things like this happen. It’s all part of the process of exploration and discovery. It’s all part of taking a chance and expanding man’s horizons. The future doesn’t belong to the fainthearted; it belongs to the brave.”
Animal spirits is the phrase John Maynard Keynes used to describe the urge for action that overwhelms entrepreneurs, and compels them to seize opportunities that others would avoid. As he said: “If the animal spirits are dimmed and the spontaneous optimism falters, leaving us to depend on nothing but a mathematical expectation, enterprise will fade and die.”
Pioneers can never calculate precise odds for their ventures: it is neither possible, nor indeed is it in their nature.
I suspect virtually all giant business successes and technological breakthroughs depend on overconfidence. I have frequently sat through pitches from start-up teams with wild dreams; often they strike me as crazy. Normally they fall badly short of their vast ambitions.
But sometimes their enthusiasm and almost irrational determination are proved right, and my cynicism is wrong. These bold experiments lead to new inventions, new jobs, fresh choices for consumers and overall a more prosperous world. Progress happens by trial and error – now and then these errors are painful and expensive, as with Virgin Galactic.
Sir Richard has generally aimed high. From his magazine Student, published when he was 16, to his several airline launches, he has always been a chancer. Long odds have rarely put him off. We all rely on airlines to fly us anywhere; yet no sane individual would ever start one. Since inception, the airline industry has generated at best profit margins of only 1 or 2 per cent, with cumulative losses over the past 30 years of at least $60bn. It is very competitive, highly regulated, involves massive fixed costs, and largely commoditised. Despite the terrible economics, between 2007 and 2010 somewhere in the world an entrepreneur founded an airline roughly every week.
Of course, all this creative destruction leads to misallocation of capital – and human victims too. At the opening of the Liverpool and Manchester Railway in 1830, the world’s first modern train line, William Huskisson was killed by George Stephenson’s legendary Rocket locomotive.
Similarly, one of the greatest feats of engineering ever undertaken was the Panama Canal: it is estimated that more than 27,000 workers died from disease or accidents during its construction. But the hardships, perils and sacrifices they suffered have hugely benefited each generation since.
The investors who lose money are not the heroes, nor are the entrepreneurs who stake their careers on such speculations. When Ted Turner complained about the Time Warner-AOL merger, saying, “I lost 80 per cent of my worth and subsequently lost my job . . . I lost about $8bn”, we might feel sorry for him, but it’s hard to take him seriously when he said: “It’s one of the biggest disasters that have occurred to our country.”
The really noble figures are the men and women at the front line of new projects, trialling medicines or testing new means of transport. However, each participant – from capitalist to pilot – plays a role in bringing new schemes to market, sparking innovation and material advancement.
We should not expect entrepreneurs to be humble, nor even apologetic when their grand designs come crashing down. By necessity they tend towards overweening self-belief. But such pride and arrogance are required if the status quo is to be challenged with radical new ideas; after all, weak characters give up too soon – harried by regulators, safety obsessives and the overcautious.
Change is never easy, but it must be embraced unless we want a life of stagnation and retreat.