The Paradox of Risk

4 03 2009

At the Economist’s conference on innovation last week,the organisers revealed the results of research on innovation amongst business leaders they had consulted worldwide. In the opinion of those surveyed in the UK,the top three factors inhibiting innovation here are: red tape,taxation (presumably excessive rather than not enough) and risk aversion. In the rest of the world,taxation was seen as less of a problem and risk aversion was at number 2 (everybody in business  seems to hate red tape most).

Risk aversion has become endemic in the UK and other, particularly western, societies over the past 20 years or so. Risk aversion now influences all aspects of our lives,from child rearing to bank regulation. The response to any problem often takes the form of a clamour for regulation to avoid or reduce risk. In the field of science risk aversion is represented by the notion of the precautionary principle and in economics by the idea of sustainibility.

The Paradox of Risk is a bit like Keynes’s paradox of thrift in that good intentions can lead to bad outcomes. It may feel safer, for example, for your own children not to walk to school on their own,but if all children are not allowed out alone then their ability to socialise and learn to cope with the world decrease, adults forget how to deal with other people’s children and society as a whole suffers. Risk aversion may make narrow sense for individuals but for society as a whole it can be crippling.

In the UK our economy faces a grim future and some fairly big gambles and bold actions have to be taken if we are to turn things around. But the overall climate of risk aversion makes such leaps forward far less likely. Visitors to dynamic economies like China and India often make the point that, although these countries still suffer from poverty and other social problems, there is a tangible desire for change and progress, a sense that any problem can be fixed.How do we generate such an optimistic and ‘can do’ atmosphere in our country?  I think we begin by having an open and frank public discussion about what the problems are. There are many people now in our society worried about the future who are open to a debate about what needs to change.

The political sphere is where this debate has to start,unlikely I know given the low repute in which our politicians are held. But politics is where we can all debate and act as citizens whoever we are and whatever we do.  The conference on May 16 will be a good place to begin that debate.

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