Public companies are structurally risk-averse because accountability pushes downside avoidance ahead of upside opportunity, killing innovation and marketing.
Sutherland recounts Richard Thaler asking eight division heads if they'd take a bet with a 50% chance of 50% profit increase and 20% chance of 30% loss — six said no because they'd lose their jobs. The CEO wanted them all to take it for aggregate gain. Sutherland argues this structural risk aversion makes large companies conservative, and since innovation and marketing are 'fat-tailed' activities where 10% of efforts produce most value, eliminating the discovery layer in pursuit of efficiency proves fatal. ✦ AI generated
Rory Sutherland · My First Million · 2026-07-27 · original ↗
starts at this moment · 24:24
Richard Thaylor the Nobel prizewinning economist and behavioral economist the author of Nudge. He once spoke to a board of about 10 people very large company. And he goes to the eight heads of the largest divisions of this company and he asks them all simultaneously a question. Would you take a decision if it had a 50% chance of increasing your profits next year by 50% and a 20% chance of reducing your profits by 30%. And six out of the eight of them said no. And Thaylor goes back and says well you know you're all good enough mathematicians I assume to realize these are highly favorable odds. to a gambling man, you know, this is a very very good bet and yet you declined to take part. Why is that? And they reply six out of the eight of them uh because uh 20% of the time or 30% of time I'd lose my job. And then the interesting thing happens which is the chief executive is sitting at the end of the table and looks a gasast at the eight people and goes but I want all of you to take those odds because net net in aggregate we'd almost certainly end up massively better off. Yes, two divisions, one division might have a slightly disappointing year but four of them would perform spectacularly. And you realize that the way that businesses are structured, as you push responsibility and accountability further and further down the organization, they become more and more risk averse and they become more and more uncertainty adverse. So they would prefer a definite 5 to 10% to a probabilistic a 50% chance of 50%. And what happens then is that you fundamentally you become highly conservative. You're more worried about downside avoidance than you are upside opportunity. And as a result, obviously both innovation and marketing, I would argue, are fat tailed activities where 10% of what you do is probably more valuable than everything else. You know, you can't tell in advance which 10% it's going to be. They are processes of exploration and discovery. And what you do is you get rid of the discovery layer in the pursuit of efficiency. And in the short term it looks like a great idea but in the longer term it it proves fatal I think because you've lost the capacity to adapt to reinvent to reposition in pursuit of the occasional um the occasional breakthrough.
verbatim transcript · starts at 24:24
24:22and it's reductionist. It's about optimizing the parts rather than optimizing the whole and at some level I think uh that model becomes unhelpful. But also what happens I think is that you become more and more uncomfortable with uncertainty. And this is where it gets quite interesting. There's a wonderful story I always tell which is Richard Thaylor the Nobel prizewinning economist and behavioral economist the author of Nudge. He once spoke to a
24:55board of about 10 people very large company. And he goes to the eight heads of the largest divisions of this company and he asks them all simultaneously a question. Would you take a decision if it had a 50% chance of increasing your profits next year by 50% and a 20% chance of reducing your profits by 30%. And six out of the eight of them said no. And Thaylor goes back and says well
25:20you know you're all good enough mathematicians I assume to realize these are highly favorable odds. to a gambling man, you know, this is a very very good bet and yet you declined to take part. Why is that? And they reply six out of the eight of them uh because uh 20% of the time or 30% of time I'd lose my job. And then the interesting thing happens
25:42which is the chief executive is sitting at the end of the table and looks a gasast at the eight people and goes but I want all of you to take those odds because net net in aggregate we'd almost certainly end up massively better off. Yes, two divisions, one division might have a slightly disappointing year but four of them would perform spectacularly. And you realize that the way that
26:08businesses are structured, as you push responsibility and accountability further and further down the organization, they become more and more risk averse and they become more and more uncertainty adverse. So they would prefer a definite 5 to 10% to a probabilistic a 50% chance of 50%. And what happens then is that you fundamentally you become highly conservative. You're more worried about downside avoidance than you are upside opportunity.
26:39And as a result, obviously both innovation and marketing, I would argue, are fat tailed activities where 10% of what you do is probably more valuable than everything else. You know, you can't tell in advance which 10% it's going to be. They are processes of exploration and discovery. And what you do is you get rid of the discovery layer in the pursuit of efficiency. And in the short term it
27:06looks like a great idea but in the longer term it's it it proves fatal I think because you've lost the capacity to adapt to reinvent to reposition in pursuit of the occasional um the occasional breakthrough. >> We we have um a very startup oriented uh audience of which a lot of people are founderled businesses or or they want to be. So, we could talk about like how big
27:30companies turned around, but what's an example of a startup or small company that you look at and you're like, "Oh, they nailed it and here's why they nailed it." Even though if if this was pitched at a big company, this would never have worked, but here it is kicking ass. >> I mean, the example that I always feature in my book is Red Bull, which is an example of a business that makes no