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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