Laws exist to serve their citizens’ imperfections

October 28, 2010

When a franchise crashes, it can devastate some families for decades.

Citizens own their own laws, don’t they? Not the experts.

Humans constantly evaluate risks in their environment. Very high evolutionary weight is given to this skill but in complex post-industrial financial decisions, more and more people are understanding just how irrational human decision making is. Our laws should take into account human factors.

People (and this is empirically proven) compensate for perceived risks:

  1. drivers with anti-lock brakes/air bags are more reckless (speed, distance, reaction time) than others,
  2. car drivers follow helmeted cyclists closer than non-helmeted cyclists,
  3. the greater the  safety improvements in skydiving, the divers take on more risk,
  4. football players have much more serious injuries than rugby players…

Franchise disclosure laws simply shift (not reduce) net risks for a population while giving a dangerous false sense of authority to a decaying industry. The judges know this in all jurisdictions because they have had their own franchisee clients by the time they get appointed to the bench. Lawmakers have a much more difficult time resisting policy tsunamis.

Related post, on-line book by Gerald J. S. Wilde, Queen’s U.

Why do more franchise laws leads to => investment failure rate?

December 10, 2009

Simply put: Risk compensation.

People adjust their behaviour when they feel they are in a “safer” environment. They take more chances.

Over time and when studied as groups, the “accident” rate stays constant, if not increases.

This concept has been proven with anti-lock brakes, bicycle and downhill ski helmets, seat belts and sky diving. Source

Winter Driving: Strap on those winter tires, put the flares and blankets in the trunk and clean the windows at the 1st snowfall. Congratulations: You will unintentionally drive just as fast, follow just as closely and brake just as late  (when compared to good road conditions) than if you were “unprepared”.

Paradoxically, the more and better pre-sale due diligence you do, this increases your risk of financial failure.

Blaming individuals doesn’t work. This is a very complex field of psychology and risk compensation is just one factor. Mercifully, these human factors are getting much more understood, proven and manageable.

The challenge in the future will be to design an investment evaluation regime that “nudges” people into legitimate franchised business opportunity “vehicles”.

Without this innovation, the carnage will continue at the same rate.

Or get worse.

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