Reducing Uncertainty

THE ROLE: From banks and insurance companies to wholesalers, some companies earn a premium for bearing risk. By building diversified portfolios, they’re better able to weather volatility than their trading partners. The same principle holds true for nonobvious middlemen, from gallerists and venture capitalists to Internet platforms that deliver on-demand services: all are better able than their trading partners to bear risk. One key to being an admirable Risk Bearer: being able to discern internal from external risk, avoiding the former risk while embracing the latter.

Heads I Win, Tails You Lose?

Every business person deals with risk, but middlemen are in a unique position to profit from it. To play the Risk Bearer role well, they must understand the workings of risk.

When we put middlemen and profiting from risk in the same sentence, you may picture the sort of middleman who enjoys all the gains from taking risks without any of the losses—the sort of “heads I win, tails you lose” risk taker who, of course, isn’t taking any risk at all. An egregious example of this parasitic type is AIG, the insurance giant that, deemed “too big to fail,” got an $85 billion bailout from US taxpayers after the company’s financial products unit, which had sold highly risky credit-default swap contracts, lost billions of dollars when the subprime mortgages crumbled.1 The company proved unable to pay all the highly speculative securities that it had insured.2 (You might recall from the Introduction that a study of the warmth and competence of famous brands found AIG to be among the most contemptible, perceived as both incompetent and not having other people’s interests at heart.) Unfortunately, AIG is not an isolated example of the risk-shifting middleman. Much more routine are the many financial advisors with no skin in the game: people who happily collect a portfolio management fee even when your portfolio suffers large losses or who play fast and loose with other people’s money. Examples outside of finance abound, too, such as the spray-and-pray recruiters who see their work as just a numbers game: if you throw out enough resumes, something will stick. That’s not risk-bearing, that’s capitalizing on dumb luck.

You might also be thinking of predatory middlemen like the high-frequency traders Michael Lewis excoriates in Flash Boys— people who get an unfair edge against the very investors on whose behalf they’re supposed to be trading and who increase volatility rather than reducing it.3 The general phenomenon of powerful middlemen shifting risks to the little guys is more widespread than that. General contractors often shift risk to their subcontractors through pay-if-paid clauses.4 Insurance companies are notorious for taking policyholders’ premiums for years and later weaseling out of paying out claims in a capricious, highly unpredictable way.5 I call these “predators” because they use their power to push around the people they are supposed to serve, instead of harnessing this power for the little guys’ benefit.

I am focusing on the admirable type of Risk Bearer, the partner. Admirable Risk Bearers prosper only when their partners prosper— and suffer losses when their partners do—and while they harness the power of risk, they don’t rely on dumb luck but use their skill in discerning the type of risk they should embrace.

< Prev   CONTENTS   Source   Next >