Checks and Balances

Checks and Balances: The optimism of investors and the optimality of Congress, by Mark Chussil

An updated version of this essay is available at True-Due Diligence. This version is retained for historical reasons.

We’re going to talk about investors. First, though, we’ll set the stage with a few relevant words about the United States Congress. No, not those words.

The United States government was designed with a system of checks and balances. They work very well. So exquisitely is Congress balanced that it has become immobile. Which, incidentally, an economist might call an “optimal” position. That’s because motion in any direction would apparently produce an outcome so awful that Congress will not allow it. If no other position is preferable, then the current position must therefore, by definition, be optimal. Which must mean something is wrong with economists, but at least they have a sense of humor.

Anyway. If Congress suffers from a surplus of balances, then it seems to me that investors suffer from a surplus of checks. I don’t mean checks in the sense of here, let me write you a check. I mean checks in the sense of due diligence, verification, and oversight. Not that there’s anything wrong with that, except for when they are all along the lines of making sure you don’t overpay for your berth on the Titanic.

Some time ago I attended a meeting of investors, of whom I was not one. They filled a large room and listened to pitches from passionate entrepreneurs, of whom I was also not one. The entrepreneurs all sounded highly competent, knowledgeable, and professional. They knew their markets, their products, and their prospects.

I listened to the thirty or so questions asked by the investors following the entrepreneurs’ presentations. The questions dealt with checks as in due diligence, verification, and oversight. That’s fine: if I’d chosen to invest, I’d have wanted to be sure everything was legitimate too. But that’s what every question was about. Every question was a request for a reason to believe that giving you a great deal of my money would be a wise move. Not a single question dealt with what could go wrong. What if, for example, a company already in a market wanted to squash the entrepreneurial intruder? What if an applied-for patent is denied?

We humans are basically optimistic and energetic. We imagine things, we want things, we make things happen. I’m that way too; one doesn’t start one’s own business otherwise. But being an optimist doesn’t mean looking only for reasons to believe. An optimist is not the person who leaps off a 50-story building and says, after plummeting 49 stories, “so far, so good.”

Strategy development often combines reasons to believe with ambition; that is, the laudable desire to do well and get ahead. In combination — reasons to believe and ambition — we get advocacy. I’m right, this is why I’m right, and this is why we should do things my way. That’s how we get ahead. That’s how we inspire action. That’s how we make progress.

We don’t want to become check-happy, like the investors, nor do we want to become balance-happy, like Congress. At least I hope not. So, let’s hearken back to the olden days of yore when we took tests and had to answer questions like these:

Checks are to balances as advocacy is to:
A. Optimism
B. Optimal
C. Optical
D. Optional
E. Stress tests

Yes, stress tests: business war games, strategy simulations, what-if analysis, sparring-partner equivalents, corporate contrarians, etc. Techniques advocated by conditional optimists who know something can go wrong. After all, if an unexpected threat (or opportunity) can come out of left field, it is good to look in that direction before committing to a new strategy or investment, or even to the status quo.

One last point. If stress-testing a strategy (or a government policy) demonstrates that it will produce really nasty results, that’s not a good enough reason to reject it. First, we must compare the results of the stress test to the outcomes we’d get under the status quo. If we get better results with the new strategy (or policy) than we’d get without it, then, really nasty as it is, we should switch to it. Even better, look for an even-better strategy (or policy).

Share This Comment