We model investment behavior based on risk and return. Return is the expected mean or average return and risk is the variance of possible returns. Most models assume that people like higher returns (duh!) and lower risk. We use the term risk aversion to describe the latter.
Kevin D. Williamson, writing in the current version of The National Review, describes how Americans tend to be less risk averse than other countries. He nails it right from the start:
In the United States, the road to economic success is open because the road to economic failure is open.
That’s the basic American proposition: We have an unregimented business culture, easy credit, a forgiving bankruptcy regime, and a “hold my beer” model of entrepreneurship.
He recognizes that success and failure are both risks. It is true that individuals often have different reactions to downside risk and upside risks. We see them buy insurance and lottery tickets.
Of course you should read everything that Kevin writes. Have you signed up for his Tuesday newsletter?
We would like to discuss professors, because they come up in Kevin’s article, and two exceptions to Kevin’s thesis. Professors will take awhile so we will use a second post to complete that discussion.
We agree with Kevin that America helps make Americans less risk averse than other developed countries. We see two exceptions: sports and public safety. In almost every other country sports use a relegation and promotion system. America has sports monopolies. Even if you are as poor a leader as Bob Quinn, the Red Sox still stayed in the American League and he probably made money on the deal. In England, France, or Spain a team like that would have fallen to the third tier and have little value.
Before COVID-19 we traveled a fair amount. Comparing the Ciffs of Moher, the Castles of Scotland and other international destination to American destination like our National Parks it is clear to us that America is more risk averse in terms of public safety. Perhaps you milage will vary but we see America has more restraints and more warning signs than any other developed country.
Perhaps, the American litigation system explains our attitude towards public safety while the nature of American capitalism, as Kevin explains, accounts for the dynamic of American capitalism.