Risk

 

Life is a risky proposition. No one knows what the future holds. People who never take any real risks tend, in my opinion, to lead breathtakingly boring lives. If you never go anywhere, do not meet new people or are not open to new ideas and experiences you are not only cheating yourself but not living up to your potential.

 

Over the years in both business and life, I have had to take risks both large and small. Perhaps I weighed them more carefully than many, less than others.

 

Here is my take on risk:

 

Business folklore is full of stories about wild entrepreneurs who were very lucky. H.L. Hunt, the early billionaire oil baron, was said to have won his first few petroleum leases in a poker game. Others were said to have put charges on their credit card to the max, a few days before a major order came through. One well known player a few years back, allegedly won a bundle at a casino and dragged his fledgling company out of imminent bankruptcy. These make for great stories but, I would wager, are likely half-truths at best.

 

I learned VERY early in the media business that selecting the proper allocation of advertising vehicles was not so simple. Clients and colleagues would tell me that “you cannot go wrong with television.” They did not seem to understand that, at the time, some 72% of primetime programs were cancelled in the first season. To succeed, you needed to pick a mix of established programs and only take a flyer on a few new programs. I hit a 500-foot home run with “Murphy Brown” in the 1990’s but was way off by avoiding “The Big Bang Theory” early in this century.

 

When digital took off some years back, simply saying the word Facebook insured client commitment. It did not work out for many along with a host of online alternatives. Big Data let the major players follow customers and reach them effectively and well. Marketing risk declined as implementing big brother options accelerated.

 

Most movies lose money—big time. I almost laugh out loud when I see the number of Executive Producers listed in the credits for Netflix, Amazon Prime, or Apple TV films and programs. I also see a similar thing at the actual movie theaters. These “Executive Producers” are largely not big-time players in Tinseltown. They are often hedge fund types or money managers who have cash to burn and have “gone Hollywood.” It will end badly for some as they realize that the Wall Street casino has better odds than the motion picture industry.

 

Most businesses fail, as I have often written, and restaurants have the highest mortality rate of all categories. Yet, each year many thousands take the plunge and bet the ranch on their concept.

 

Over time, I have observed a similarity between successful gamblers (usually poker players) and investors. Both know when to quit. Some of the shrewdest investors whom I have ever encountered cut their losses quickly. If a stock they buy drops 20%, they get out immediately. Yes, it may and sometimes does bounce back, but they “take their medicine” and absorb the small loss and move on to something else.

 

The best gamblers usually have a similar discipline. They have a pre-set limit to their losses. The sharpies do not double down when behind. They realize that each deal is an independent event, and a hot streak is not a real thing. As Kenny Rogers once sung, they “know when to walk away and know when to run.”

 

The media does a poor job of profiling entrepreneurs in my mind. Sir Richard Branson is always portrayed as a swashbuckling risk-taker who loses a lot but is also very lucky. If you follow him at all closely, you find that his philosophy is and I quote, “It is only by being bold that you get anywhere. If you are a risk-taker, then the art is to protect the downside.” When he started as a teenager, he took some huge chances. Now, his risks are far more calculated.

 

Successful people take risks, but they also hedge their bets. Hedging is, in financial terms, is more than keeping one’s options open. It is lessening risk. One gives up potential gains if you are right but cutting losses if things go awry. So, it increases your chances of getting your goal of getting what you want but lowers the chances of getting more. Some people do this via options (puts and calls) in securities markets or via insurance in other venues.

 

To me, President Eisenhower put it well when he was a World War II general. He wrote, “Plans are worthless, but planning is everything.” Ike understood risk better than most of us. You need to plan and hedge your bets and have downside protection.

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com

 

 

 

 

Economic Man and Advertising

 

In 1836, the brilliant political theorist and sort of economist John Stuart Mill introduced a character to the world of thought known as Homo Economicus or Economic Man.

 

There were, in my view, three basic tenets to the idea:

 

1)  Many people are ideal decision makers who make perfectly rational economic decisions.

2)  Consumers have perfect access to information.

3)  People, especially in business, pursue their goals consistently and are largely self-interested.

 

 

When I was first introduced to this as an economics major, I had to shake my head in wonder. It seemed as everyone whom I knew (and including myself) often made irrational purchases. Another joke to me was the idea of perfect access to information. Today, we have the internet, consumer reviews of all kinds and can engage in a comparative analysis of competing brands. Back then, you talked to a few people but often were flying blind. I remember terrible angst trying to buy a used car as a 20-year-old. And, of course, often you knew you were spending more than you should to impress someone (invariably a young woman). 

 

The third leg of the stool, being self-absorbed and focused on profit to the exclusion of all else in business was certainly true (sadly) for some people.

 

After a few weeks of struggle with my thinking, I approached one of my economic professors and great mentors and gingerly made the case for Homo Economicus being absurd.

 

The great man broke into a soft smile and said he agreed with much of what I was saying. However, he said that the seemingly unrealistic assumptions regarding Homo Economicus seemed to work more often than not when putting together forecasting models.

 

I went to graduate school and Economic Man never came up nor did it for my first 10 years in advertising. Just before my time, Rosser Reeves of Ted Bates had succeeded with very factual or even a bit dry creative executions most famously for Anacin (The tagline was “Anacin means fast pain relief”).

 

A creative revolution emerged in the 1960’s led by Doyle Dane Bernbach where humor and cleverness came front and center along with selling dreams.

 

In 1979, Daniel Kahneman and Amos Tversky essentially founded a new field, Behaviorial Economics. They challenged the long-held views of Economic Man and focused on risk aversion and demonstrated that human beings do not always act rationally. The concepts snowballed and were joined by others especially in the field of Consumer Behavior and Psychology.

 

In 2001, Kahnemann was awarded the Nobel Memorial Prize in Economics.** This caused more than a little stir as Kahnemann was a research psychologist who freely admitted that he had never taken an economics course!

 

Clearly, consumers do not have perfect knowledge and they do not behave rationally all the time. One area that has grown exponentially given wealth inequality around the world is that of luxury products, often referred to as Veblen goods (Thorsten Veblen was a fiery late 19^th-early 20^th century economist who attacked the noveau-riche with an acid wit best exemplified in his book, THE THEORY OF THE LEISURE CLASS).

 

Veblen goods are those that seem to defy the law of supply and demand. Rolex watches, Rolls Royces, Louis Vuitton luggage, and designer clothes seem to see sales growth as their prices rise. Bernard Arnault, the chairman of luxury conglomerate LVMH, has been the wealthiest man in the world at times during last few years. People often buy these products for status or to highlight their wealth.  Some cannot reasonably afford them but purchase them to send a message to others. Veblen goods do not stop there. A hot hair stylist or caterer in a locality also fall into that category.

 

So, we seem to be entering a new era. As Amazon reviews and other sources allow us to comparison shop far easier than ever and with conventional advertising facing a slow but steady extinction, selling dreams may fade a great deal. Social media and viral efforts will break through, but the world is changing. So, even though our knowledge is increasing, or at least available, irrational behavior still lives.

 

Homo Economicus (Economic Man) was suspicious to me over 50 years ago and is even more so now. Long live Behaviorial Economics!

 

**A note of clarification so I do not get angry e-mails from some purists out there. Technically, there is no Nobel Prize in Economics. In 1968, The Sveriges Riksbank (Bank of Sweden) approached the Nobel committee and asked if they could give a prize in Economics made in memory of Alfred Nobel. They agreed and were gracious enough to allow the economic prize winner(s) to receive the award at the same time as those in the sciences and be addressed as Nobel Laureates. It is the only social science in the Nobel stable.

 

 

If you would like to contact Don Cole directly, you may reach him at doncolemedia@gmail.com or leave a message on the blog.