Gambling, Risks, and Bail Outs

Whenever I get together with my in-laws the guys wind up playing poker. It's strictly a fun game with no money involved. We divide up the chips, and if someone runs low someone who has more will give him some. At the end of the game the chips all go back into the box, and we really can't tell who did well and who did poorly. I find that in these games I am much more likely to stay in a hand I shouldn't, or I'll ride a hand much longer than I should just in case something good happens. I'm not above chasing an inside straight. Every once in a while I pull a hand out of the trash, but mostly I end up donating my chips to one of my in-laws. It's all in fun, I've got nothing to lose.


On the few occasions I've played poker for money I play very differently. I'm much quicker to fold a bad hand, or even a fair hand if people are raising. There have been times I've folded hands I would have won had I stayed in, but for the most part if I stay in the hand I either win or come close to doing so (the most expensive poker hand is always the second-best one). In short, when I play for no stakes I don't do well, but when I have a stake in the game I generally come away at the end of the evening with more money than I started with.


Businesses work the same way, they make decisions based upon risk and reward. A poor decision can end up costing a company lots of money and may even cause the company to go out of business, therefore companies spend a lot of time and effort in analyzing risks and weighing them against potential rewards. Successful companies do this well, less successful ones are the ones for whom stock certificates are now collectables instead of having value as a share in the now non-existant company. This system mostly works.


The balance gets thrown off when a company is deemed "too big to fail". Those companies are just playing for chips, if they win they reap the rewards, if they fail they get bailed out at taxpayer expense, so they'll take much bigger risks than they otherwise might. If there's no consequence for failure there's no sense expending the effort to analyze the risks, just try it and see what happens.


The funny things is, just as in my poker example above, paying more attention to the risk/reward balance leads to more success, not less. If a company is truly too big to be allowed to fail it's also too big to be permitted to risk such failure, and the only way to ensure they don't fail is to maintain failure as a possibility. I know, that seems counter-intuitive, but removing potential failure from the possible outcomes makes ultimate failure that much more likely.


So let's stop bailing out companies. Let's let them go bankrupt, they (or whoever buys up their assets) will come back stronger and better afterward. The alternative is a nation full of unsuccessful companies supported by taxpayer money.