Red-Blooded Risk: The Secret History of Wall Street

Unspeakable Truth Number One: Risk Managers Should Make Sure Firms Fail

Success requires innovation, and innovation implies frequent failure. Failure isn't the problem. Slow and expensive failure is. Fail often, fail fast, and fail cheap is the formula for success. And cheap is not measured by initial outlay. You must plan for success to have much chance of both succeeding and exploiting the success to an adequate degree to justify the risk. That means you commit the resources and energy to do things right. But you pull the plug quickly on a failure; you don't bleed money trying to prove you were right all along. Throughout all the wars in human history, fewer soldiers have died in battle than have been massacred while fleeing battles that were fought too long, fought after any hope of victory was gone, and fought too long to maintain an orderly retreat. Other soldiers' lives have been wasted in fights to which not enough resources were committed. If you're going to fight, fight hard and give up quickly when you lose.

This applies on all levels. Healthy firms are taking all kinds of risks all the time, wasting lots of time and money. What makes them healthy is they apply ruthless selection pressure to projects and weed out the unfit quickly. That observation is disruptive and often honored in the breach more than the observance, but it's not unspeakable. What cannot even be whispered is that it applies to the firm itself. Firms should fail. Firms are created to make people happy, ...