December 11, 2013

Mr. Kay. It is necessary to place bets that risk bankruptcy so as to have a chance to avoid bankruptcy.

Sir I refer to John Kay’s “Is it better to play it safe or to place bets that risk bankruptcy?” December 11.

In it Kay asks “Did mothers warn their daughters that marriage to brave hunters might end in widowhood, or urge them to seek husbands who would enable them to breed well-fed grandchildren?” That would in any case all be a matter of individual decisions. But, if there was a council of mothers which decided they had all to be extraordinarily nice to the sons in laws who stayed safely home and pester badly those who dared go hunting that society would definitely not prosper.

As cannot prosper an economy or a society where banks are given the incentive by their regulators to obtain much much higher risk adjusted returns on equity on assets perceived as “absolutely safe” than on assets perceived as “risky”.

And so the answer to Kay’s title question is that it is necessary to place bets that risk bankruptcy so as to have a chance to avoid bankruptcy.