4 ms·

> Those who kept a well managed admin and saved for the worst should be rewarded, not those who failed. There's an interesting issue there, though. Given: 1 -

by jbert 18y ago

> Those who kept a well managed admin and saved for the worst should be rewarded, not those who failed. There's an interesting issue there, though. Given: 1 - in general, higher risk => higher reward (if the risk comes off ok) 2 - fast growing competitors can dominate a market, wage a price war or buy slower-growing companies Isn't there a potential problem that companies which are sensibly prudent can be simply out-competed by those which don't hedge against low-probability devastating events? i.e. the natural state of the current economic system could be said to favour companies which grow more quickly by accepting risks which mean they cannot survive in the long term?

gaius 18y ago
Economists call this the Dotcom Fallacy.
- jbert 18y ago
  What's the fallacy? Why is it an incorrect strategy? If your competitors are following it and you don't, aren't you at risk of being bought/losing a price war/losing market dominance?
lutorm 18y ago
I think so too, like I said in my other post: check out "fooled by randomness" and the stories of investors who blow up.
modoc 18y ago
Is there a reason to bail those companies out of bankruptcy with tax payer dollars? If you're simply pointing out the potential advantage that a large number of higher risk competitors may hold, remember that advantage is tempered by lacking the pole position and the resources that the large company typically enjoys. My startup is competing against some very large companies, and while we are faster, cheaper, better service, etc... They have existing marketshare, long term contracts, huge advertising/sales budgets, long track records, massive good-ol-boy networks, etc... We're doing great (we only want/need a few customers, not the whole market), but I doubt we'll ever "out-compete" the big fish to the point that they fail or we lead the market space. Being the big fish has a ton of advantages, even if they are slow moving.
- Goladus 18y ago
  > Is there a reason to bail those companies out of bankruptcy with tax payer dollars? If it's a company that would be almost certainly successful and profitable but is caught in a bind because of the freeze in capital, then it can be a good idea. The resulting economic slowdown can cost taxpayers significantly.
  - byrneseyeview 18y ago
    If it's a company that would be almost certainly successful and profitable but is caught in a bind because of the freeze in capital... Then Warren Buffett will buy it out. If it's a company that is a bad, high-risk investment, its managers will skip asking big outside investors (there are plenty of hedge funds and private equity shops with spare cash on hand) and go straight to the government.
    - Goladus 18y ago
      Do you have evidence that supports this assertion? Warren Buffet is not all-knowing or infinitely wealthy.
fauigerzigerk 18y ago
Yes I think that's true in the short run and it's a legitimate strategy. But bailing them out means to make the taxpayer pay for making it true in the long run as well, and that's a mistake.
nradov 18y ago
GM was not ruined by a low-probability devastating event. They made bad management decisions over and over again for decades. This was a train wreck that everyone could see coming from miles away.
- MikeCapone 18y ago
  If anything, GM is a casualty of the huge asset bubble caused by 4-5 years of 1-1.75% interest rates (Greenspan). That bubble had to burst, and when it did, it was obvious that companies in bad shapes would be hit the most. The fact that GM was in bad shape was its own doing, though.
steveplace 18y ago
1 - in general, higher risk => higher reward (if the risk comes off ok) That's why we look at risk-adjusted returns.
- jbert 18y ago
  But if the risk pays off, the returns are there right? And give the risk-taking company an advantage over it's competitors? It seems companies can't affored to account for low-probability, high-impact risks. If they do, they'll be out-competed by those who don't (unless/until such an event occurs).

by jbert 18y ago

gaius 18y ago

Economists call this the Dotcom Fallacy.

jbert 18y ago
What's the fallacy? Why is it an incorrect strategy? If your competitors are following it and you don't, aren't you at risk of being bought/losing a price war/losing market dominance?

lutorm 18y ago

I think so too, like I said in my other post: check out "fooled by randomness" and the stories of investors who blow up.

modoc 18y ago

Is there a reason to bail those companies out of bankruptcy with tax payer dollars? If you're simply pointing out the potential advantage that a large number of higher risk competitors may hold, remember that advantage is tempered by lacking the pole position and the resources that the large company typically enjoys. My startup is competing against some very large companies, and while we are faster, cheaper, better service, etc... They have existing marketshare, long term contracts, huge advertising/sales budgets, long track records, massive good-ol-boy networks, etc... We're doing great (we only want/need a few customers, not the whole market), but I doubt we'll ever "out-compete" the big fish to the point that they fail or we lead the market space. Being the big fish has a ton of advantages, even if they are slow moving.

Goladus 18y ago
> Is there a reason to bail those companies out of bankruptcy with tax payer dollars? If it's a company that would be almost certainly successful and profitable but is caught in a bind because of the freeze in capital, then it can be a good idea. The resulting economic slowdown can cost taxpayers significantly.
- byrneseyeview 18y ago
  If it's a company that would be almost certainly successful and profitable but is caught in a bind because of the freeze in capital... Then Warren Buffett will buy it out. If it's a company that is a bad, high-risk investment, its managers will skip asking big outside investors (there are plenty of hedge funds and private equity shops with spare cash on hand) and go straight to the government.
  - Goladus 18y ago
    Do you have evidence that supports this assertion? Warren Buffet is not all-knowing or infinitely wealthy.

fauigerzigerk 18y ago

Yes I think that's true in the short run and it's a legitimate strategy. But bailing them out means to make the taxpayer pay for making it true in the long run as well, and that's a mistake.

nradov 18y ago

GM was not ruined by a low-probability devastating event. They made bad management decisions over and over again for decades. This was a train wreck that everyone could see coming from miles away.

MikeCapone 18y ago
If anything, GM is a casualty of the huge asset bubble caused by 4-5 years of 1-1.75% interest rates (Greenspan). That bubble had to burst, and when it did, it was obvious that companies in bad shapes would be hit the most. The fact that GM was in bad shape was its own doing, though.

steveplace 18y ago

1 - in general, higher risk => higher reward (if the risk comes off ok) That's why we look at risk-adjusted returns.

jbert 18y ago
But if the risk pays off, the returns are there right? And give the risk-taking company an advantage over it's competitors? It seems companies can't affored to account for low-probability, high-impact risks. If they do, they'll be out-competed by those who don't (unless/until such an event occurs).