Production and Risk

[emacknight]

@msmith537

I understand what you mean, but perhaps I can lend some clarity. technically, it is not the risk that entitles the owner to the profits. It is that right of ownership that the capital provides.

And perhaps my problem is that I equate ownership with risk. If you don’t want risk, you rent or work wage labour.

@msmith537

In fact, risk can be deferred elsewhere (through insurance or other hedge).

Right, so then risk isn’t about ownership. Buying insurance necessarily means lower profits in the end. Your risk goes down on both sides of the equation: you pay upfront to mitigate the effects of a loss, but have to give up some of the potential profits in the form of premiums.

The insurance company now has risk (as defined by the 3rd dictionary definition), but what ownership do they have? In fact, it’s all downside potential. You give them $2000 and they give you a new house if it burns down.

[emacknight]

@Frylock

Of course, to be clear, I was using the word “desert” in the sense of “desert[sup]2[/sup]” from this link.

I still don’t get it.

@Frylock

But if humans are bad at this, doesn’t this suggest that we are not psychologically driven to match risk to reward?

We’re terrible at it, but that’s where the fun is–casinos are set up on that principle. The insurance industry is driven by it.

@Frylock

Moreover, suppose we are psychologically driven to match risk to reward. What should we take away from this fact?

We need people to take risks. A million years ago a bunch of guys stood around a dark hole and wondered what was inside. The guy that risked death to go inside won the right to call that his home. The guy that risked death eating strange berries lost. Without rewarding risk we wouldn’t have advances.

[Ruminator]

@Frylock

Of course, to be clear, I was using the word “desert” in the sense of “desert[sup]2[/sup]” from this link.

Ah ok! But that’s confusing because the only time I see “desert” used that way is within the phrase “just deserts” as if there was an invisible hyphen “just-deserts”. All right, your clarification is noted.

Moreover, suppose we are psychologically driven to match risk to reward. What should we take away from this fact? Why does it matter? Evolution doesn’t optimize–it only comes up with solutions that are good enough. Moreover, it’d take some doing to argue that evolution selected human psychology for its economic effectiveness. So even if we’re psychologically driven to match risk to reward, that doesn’t imply that matching risk to reward is what we should be doing. Following our instincts here might be the very thing holding us back just as following our food-consumption instincts tends to lead to obesity and heart troubles.

Your counterpoint would have more weight if the workers making a stance for “share of the profits” to override an evolutionary fault also volunteered to “share the losses” to override the same supposed evolutionary failings for suffering losses.

There are thousands and thousands of failing businesses out there right now where the owners would love to have workers come off the street and volunteer to empty out their savings accounts to help pare down the losses. I suppose no worker will volunteer to lose money along with the owner will they? They just want to sit back and let the “winners” in business emerge from all that chaotic uncertain mess – is that right? And once such winners are clearly identified, then they want a piece of those profits – is that also right? Well, I guess they have the free will choice to avoid all that unpleasantness of bankrupt businesses. Ok, if they want to stay out of all that scary stuff, explain to me again why owners should listen to their profit-sharing ideas?

Today, a company like facebook.com is profitable. I’m sure all the workers there from the programmers down to the janitor would like a bigger chunk of facebook’s profits (beyond their salaries.) But there are thousands of other companies like foursquare.com that’s losing money right now. Maybe they’ll eventually be profitable; maybe not. However, none of workers are volunteering to lose money along with the owners of foursquare if it dies and declares bankruptcy. Ok, that’s understandable. But workers asking for profits WHILE AT THE SAME TIME rejecting the losses is asking for the unreasonable. It’s an inconsistent intellectual argument.