What advice might Taleb give the CDN Target and Tim Hortons franchisees who are thinking of “lawyering up”?

February 4, 2015

Someone once called me franchising’s black swan.

Taleb Kahneman

In science, you need to understand the world; in business you need others to misunderstand it.

What does Nassim Nicholas Taleb define as a “sucker”:

The sucker’s trap is when you focus on what you know and what others don’t know, rather than the reverse.

Suckers think you cure greed with money, addiction with substances, expert problems with experts, banking with bankers. economics with economists, and debt crises with debt spending.

We favor the visible, the embedded, the personal, the narrated, and the tangible; we scorn the abstract. What they call “risk” I call opportunity; but what they call “low risk” opportunity I call a sucker problem.

I have no pecuniary interest in these schmozzles, only a few friends and their staff that I care about.

You are rich if and only if money you refuse tastes better than money you accept.

Rank beliefs not according to their plausibility but by the harm they may cause.

August 5, 2010

The greatest misrepresentation is: “franchises are less risky than independent businesses”.

  1. It is Große Lüge
  2. The Big Lie
  3. A propaganda technique.

Much of Nassim Nicholas Taleb‘s work is about risk.

Humans are extremely limited in their ability to determine financial risk accurately.

It is now the scientific consensus that our risk-avoidance mechanism is not mediated by the cognitive modules of our brain, but rather by the emotional ones. This may have made us fit for the Pleistocene era.

Our risk machinery is designed to run away from tigers; it is not designed for the information-laden modern world.

Mom-and-pops who are 1st and only “one-off” small business owners face an impossible task in assessing franchise risks.

Nassim Taleb on those that trade in other peoples’ money

December 19, 2008

nassimtalebauthorroseFranchising is a form of investment.

The greatest 100% unavoidable risk is often glossed over by the industry apologists:

  • one party decides how the assets are allocated (franchisor) while the another party owns the assets (franchisees).

This is a very precarious situation to be in and has an analogy with what the investment houses were doing with the stock market in the last 15 years.

Nassim Taleb explains about this disconnect (ownership and control) and how it has lead to the current worldwide economic meltdown:

Q: They were gambling with other people’s money.

A: That’s the point, with society’s money. Banks are gambling with society’s money, funds are gambling with investors’ money — it’s one layer better. So we should have more risks taken by funds and less risk taken by banks, because banks have a severe agency problem. … When I trade I don’t have an agency problem; I have my neck on the line. When a bank or banker trades, it’s not his neck on the line. He has an agency problem, and like [former Merrill Lynch CEO] Stanley O’Neal, if you follow the strategy you’re going to make $160 million, and keep it, even if you blow up. And you’ll do it again.

Click here for the full TIME magazine, October 24, 2008 article.

If you do not understand this Principal-agent problem (imbalance of economic and information), you are disqualified from buying or renewing a franchisee.

  • You are flying an airplane while blindfolded.
  • Like obeying the law, ignorance of this fact is no defense.

Watch everything that Mr. Taleb says about investing and the stock market (his weblog, Dec 3rd Charlie Rose interview) or you will be in the passenger seat of those that have piloted the world’s economy into a mountain side.

Franchising has such softer sounding “agency dilemmas” in almost all of the critical relationships. You’re in the middle of a spider’s web, really.

Note that the business risk is compounded because these are not only agency relationships but also credence good service exchanges (the franchisee cannot tell if he is being cheated even after the exchange happens.

The agency/credence good vulnerabilities are:

  1. investor to franchise salesperson,
  2. investor :: franchisor,
  3. investor :: franchise banker (more an industry team player than lending officer with a statutory duty of care to the investor),
  4. investor :: supplier,
  5. investor :: landlord,
  6. investor :: general lawyer (before) and especially franchise bar (after),
  7. investor :: politician,
  8. investor :: regulator,
  9. investor :: media,
  10. investor :: bankruptcy trustee.

Taleb is angry (6:40 video) at the banks. And I think he is fully justified.

  • Any individual that isn’t angry as this relates to franchising is either incompetent or profiting from the status quo.
  • The sophistic [eg. rhetorical prostitutes, wordsmith mercenaries employing confusing or illogical arguments designed to deceive] unholy trinity on Blue MauMau are fully competent.

That I can guarantee you. You just haven’t spent as much time in the sewer, that’s all.

Every normal man must be tempted at times to spit upon his hands, hoist the black flag, and begin slitting throats.

Nature abhors a moron.

Every decent man is ashamed of the government he lives under.

H.L. Mencken

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