As Independence Day draws near,  I recall an election night  years ago.  My younger daughter and I were watching the national election returns. When things turned out in a way she didn’t expect, my daughter began to storm off in a huff.  I asked where she was going.  Her response was: “I am going to write an apology to the Queen of England.  Maybe she will take us back.”  

Yes, the Founders of this country got a lot wrong. The three-fifths compromise and the prohibition on stopping the slave trade until 1808 are just two examples.  However, they did get a lot right.  I have been pondering one that many people miss: the ability to fail.  

Daniel Kahneman in his phenomenal book Thinking, Fast and Slow writes optimism is the engine of capitalism. He claims optimists are the “ inventors, the entrepreneurs, the political and military leaders”.  Kahneman notes that small businesses have a 65% chance of failing within five years. Optimists have the confidence to begin the business knowing those odds and  persistence to outlast hard times.  At the same time, Kahneman notes optimism can be a mixed blessing.  Someone can have too much optimism, resulting in failed businesses. 

I want to stretch Kahneman’s thesis in two directions. First, the same general principles of optimism apply to the not-for-profit (NFP) sector as well. We all know even the most optimistic people do not go into the NFP world for a profit motive. They enter this arena for a different purpose: an eleemosynary one.  They often believe the world will rally around their good intentions and they can make a real difference in the world.  We are all thankful for their enthusiasm and optimism. They make the world a better place. Unfortunately, they may also believe they can actually run an organization better than or at least as well as other people.   

Secondly, NFP organizations can and do fail.  Those entering the NFP world often quickly realize the lack of financing and funding can often be crushing. And by crushing I mean not only to the continued existence of the organization, but to the very vision and mission of the organization.  I remember being Board Chair of a long-running NFP organization and worrying not only about  meeting the next payroll but also not having the funding to fulfill our mission. I often thought about what I would do with a spare $100,000 in funding.  The Executive Director was probably tired of me worrying and talking about money.  When I was the CFO of a Catholic Diocese I would often remind the other clergy that “it takes money to do God’s Work.”  I am pretty sure they didn’t appreciate that very much either. As a CPA I knew the consequences of running out of money.  And this doesn’t even take into account Black Swan events such as the recent pandemic that can be devastating to an organization.  

This is where the ability to fail comes into play.  Kahneman and Tversky were the fathers of prospect theory. This fundamental insight into behavioral economics  states individuals feel a loss more than twice as much as they feel an equivalent amount of gain. Consequently, the pain of failure is bad enough such that entrepreneurs or founders of NFP organizations can be dissuaded from their endeavors. How much more difficult would it be to start a business or an NFP organization and risk failure under the debtor prison regime that was in vogue at the time of the American Revolution? The U. S. Constitution provided for the humane way of dealing with organizational failure through its bankruptcy provisions.  Congress has the ability (and has) set up uniform bankruptcy provisions throughout the entire country.  This is an emotionally charged subject but I would propose that removing the fear of debtors’ prison has also primed the pump of capitalism–and of the NFP world as well.  I understand the equity issue many raise to bankruptcy but there is no question it is a humane policy and in the main has been beneficial to capitalism and the NFP world as well.  This is one (among many) the Founders were definitely right about.  

Have a happy Fourth of July!

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