January 23, 2019

Risk loving … or risk avoiding Australians?

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One of the nice things about blogging is that it is interactive and quite often collaborative. It also gives you the license to raise important and interesting questions and puzzles without being in any way obligated or expected to give answers – being able to say, “heck, I don’t know” is a nice break from having to provide answers to the questions we put out in classes and exams.  And the exchanges can often finish up in a completely different place from where you started. All of these features can be seen in a great blog site  run by two colleagues I work with (and often blog with) and who are based at the University of Queensland in Australia, Tim Kastelle and John Steen.

They blog about innovation, often from an economics perspective and Tim (he’s the one on the left) had a very nice puzzle blog recently “The Risk Averse, or …?” in turn based on a piece in an  Economist blog.

Who are the biggest gamblers in the world? Well, the answer may be unexpected.  By one measure at least it is the Australians, who in 2010 made an average loss of about $1,300 per resident adult from gambling.

At one level this is not so surprising when you visit the country and find the Australian version of slot machines – what the Australians’ call “pokies” – just about everywhere.

Slot Machine

Image by Jeff Kubina via Flickr

But what really interested Tim was that he often heard from managers and others in Australia that the reason that their organisation isn’t very innovative is that they are risk averse. He asked the simple question; why is it that Australians embrace risk in gambling, but avoid it in innovation? And of course the question is a fundamental one with major implications for economic growth and development, not just in Australia but just about everywhere.

There is not a complete answer to Tim’s question, it depends on individuals, cultures and circumstances. But I think some hints are out there already.  Economists have made some headway by looking at the role of utility in risky behaviour that may help here. For example, individuals may derive positive utility (fun / thrills) from bets with risk of small losses (while bearing in mind the myopia of the compulsive gambler), and negative utility (anxiety / fear) from bets with risks of large losses. It is why the same individual can have a fun day out on the race course but worry about loss of life or property. It is why we take out life and property insurance against the risk of these losses. And innovation can involve risk of very BIG losses.

But that just invites another question. If innovation (and especially R&D) raises the risk of big losses, why not insure against that loss just as with life and property insurance?

Again economists have looked at this. The answer probably lies in the uninsurability of R&D risks due to information and incentive issues, these are heterogeneous events where risk is difficult or impossible to measure and there would also be the moral hazard problem. And if you don’t think moral hazard is important, well in the view of many other economists it lies at the heart of how we got into the current financial crisis.

So where does that get us? I think it gets some way to help frame Tim’s question as to why Australians are not as keen on some kinds of risky behaviour as others. But on the specific issue of why Australian industry might not be as innovative as those in some other countries?

Heck, I don’t know.