One of the things that America does better than us Europeans is its inclination to give (at least in business) another chance to those who at first don't succeed. Whilst bankruptcy is seen in Europe as evidence that someone is not to be trusted with money, in America it is far less of an obstacle to raising money for another venture.
But not all failures are noble. A good test of whether someone who has failed deserves another shot is their attitude to the failure. An acknowledgement of mistakes made, and an understanding of the lessons learned and how to avoid repeating them, should be viewed as a mark of strength. Conversely, blaming others for the previous failure should be viewed as a warning of intellectual and moral weakness and the likelihood of repeat offending.
This came to mind when reading an interview in the Financial Times with Professor Robert Merton, Nobel-prize-winning economist at Harvard University. Prof. Merton was a partner in the Long Term Capital Management (LTCM) hedge fund, which imploded in 1998. I am sure that Prof. Merton is a clever and honourable man, but his explanation for that failure, as reported in the FT, suggests that one should be very wary of utilising the services of the consultancies (IFL and Trinsum) in which he is now engaged (notice that he is no longer risking people's money directly, but charging to advise other people how to risk their money). Many see the collapse of LTCM as symbolising "the perils of excessive speculation", but:
"The causes of the hedge fund's collapse, though, are widely misunderstood, says Robert Merton. While some observers blamed events on the faith that the fund placed in financial models - founded on a belief in rational markets - Prof Merton says the real problem was the way that LTCM's counterparties behaved. When the fund started to suffer losses, the counterparties did not behave as proponents of finance science - or rational markets - predicted. Instead, they sold assets in a seemingly indiscriminate panic, triggering market swings more violent than anything Prof Merton expected."
This displays not only a staggering ignorance of economic history - has the bursting of a bubble ever been accompanied by anything other than "indiscriminate panic"? - but an equally staggering level of hubris. It is not the models that were at fault for failing to reflect actual behaviour, it was the people who were at fault for failing to behave as the models said they should have done. This is a man who sets altogether too much faith in models. That is a warning not to set too much faith in him.
As any psychologist can tell you, denial can manifest itself outwardly in destructive ways. I recently attended a workshop where a member of the British Government's Renewables Advisory Board (RAB) introduced himself as a serial founder of renewable-energy businesses. His explanation for why he had had to start again after his previous adventure in biomass-fired power-generation: the Government had failed to take account of the fact that his technology was more expensive than some, when it had created a competitive market in renewable electricity. Well, isn't that always the problem when businesses struggle - that the Government has failed to compensate for their lack of competitiveness?
