Columbus’s Bet

Posted by Marc Hodak on October 14, 2013 under Governance, History | Read the First Comment

Consider that you are on the board of a company of adventurers, and one of your captains, Chris Columbus, comes to you with a project.

“The learned people all think that the world is flat. Our R&D indicates that the world is round. If you fund our voyage, we will be able to obtain the wealth of the Indies spice trade via a shorter route from the west instead of from the east.”

One director chimes in, “But Chris, all the experts say that the world is flat, and that the western route is terra incognito. Why don’t you think you won’t simply fall off the edge of the world?”

Chris replies: “The experts are wrong. Here is my data. Fund me, and glory will be ours.”

According to the story we were taught in school, Columbus was not able to get money from the usual channels that might fund a sea voyage, and it was the bold bet by Queen Isabella that launched him toward America and legend. In this story, Isabella was the perspicacious investor behind a brilliant, if misunderstood, CEO. Her good bet paid off in the bounty of a New World, and all those investors who wouldn’t back Columbus were fools who lost out.

What really happened looked like this.

Chris Columbus tells the board: “The learned people say that the world is a very large sphere, about 20,000 to 30,000 miles around. Our R&D indicates that the world is only about a third of that size around, meaning we can more easily obtain the wealth of the Indies spice trade via a shorter route from the west instead of from the east.”

One director chimes in, “But Chris, if the experts are just a little more correct than you are, you will simply run out of supplies on your voyage, and die.”

Chris replies: “The experts are wrong. Here is my data. Fund me, and glory will be ours.”

The real Columbus was not able to convince anyone with any learning that a western route to the Indies was shorter than the eastern route that was already established. He was able to convince a Queen with more wealth than knowledge. She enabled him to set out on what, by all rights, would have been a voyage to oblivion. Just as his supplies were running out, he stumbled upon the New World.

Boards of directors have basically one job—to make good bets and avoid bad ones with their shareholders’ funds. This is a difficult job under the best of circumstances, which necessarily includes incomplete information and a limited range of capabilities, including the normal biases and dynamics of even well functioning groups. On top of that, they must deal with the bane of businessmen everywhere—luck.

In the mythical Columbus story, the adventurer and the Queen made a good bet, and won. In the real story, they made a bad bet and won. The problem for directors is that the world only sees results; it cannot see the quality of the bets that led to them. Columbus’s bad bet was redeemed by an accident of incredible fortune. The Queen appeared to disprove the adage about a fool and her money, and the investors that wisely turned down Columbus’s bet were ridiculed for a missed opportunity.

Obviously, each of us would prefer a board that makes winning bets rather than losing ones on our behalf. But no one can dictate the outcomes of our bets. The only thing we control is the quality of our bets. By definition, good bets are more likely to pay out than bad ones. A board that effectively distinguishes these things should be more effective. But they can still lose. The world isn’t fair.

I have seen well-meaning boards make reasonable bets and end up lambasted on the front page of the Wall Street Journal for looking foolish. I have seen boards that were in over their heads nonetheless feted when the wind found their backs. The business world looks very different to those of us who are on the inside versus those reading the stories. We know that the world is not fair, and deal accordingly.

My Columbus Day message is this: We should always strive to be good, and hope we are also lucky. In life, if not always in business, we are generally blessed with many chances to succeed or fail. Over time, good luck and bad will tend to even out, and the quality of our decisions should show through. Even then, though, luck has a say.