So I wanted to give some examples, both from the past and from the things that I've talked about now. So, the first example I like is limited liability. I'm going to credit New York State with inventing the full dimension of this idea in 1811. However, it precedes the idea of limited liability, it precedes 1811 and I don't know what country can be given credit for discovering it. But here is the idea. Well, actually it goes back in a way to Bottomley which I talked about. The idea is that investors, in order to be encouraged to invest in businesses, should have protection against liability for what the managers of the business do. They should have limited liability. So the example we gave before, is if you're in ancient Rome and you are considering investing in a trade, a trip where they're going to send out a ship to trade goods, if the ship sinks, you are not liable. You don't have to pay the loan back. That's an example. But it was never enunciated as clearly as in 1811. So New York State passed a new law then, that said investors in stocks can never be pursued for the mistakes of the company invested in. So what we're going to do is allow it. Well, already they had shares. You could buy shares in businesses but you only are liable for what you put in initially, and no more worries. So - but before this law, there was doubt about that. Apparently the idea of going after shareholders for the sins of a company was rare, but people had to worry about so this is what could happen. Before 1811 in New York, you could buy shares in some company and then the company commits a crime and then they come after you to pay up for the crimes of the managers. And you say, "I didn't know. You know, I just bought some shares. I didn't know who these guys were." And they would say, "Well. tough luck. Pay up or go to debtors' prison." That's what they would potentially do. And they had debtors' prison. There was a different idea there, but the idea is if you invested in this company, you are responsible and we're not going to forgive you. So when New York State passed the law, there was a lot of controversy and a lot of people in other states said, "This is crazy. People are not responsible for what they invest in and what happens. This is going to lead to a wild transgression of our laws and our - Massachusetts passed a law, similarly around the same time, reaffirming that shareholders are responsible for what they invest in, you are a party to the crime. So what happened? Well, almost all of the business went to New York and New York became a mecca for business. And eventually, gradually, state by state, they all did it. They all passed limited liability laws. There were a few spectacular failures, you know corrupt businesses. But so many good businesses started this way. So I think this was an invention, and it was an experiment in human nature. The problem is that people, if you are responsible for everything you get involved in, then you won't do it. You won't supply capital to some business. David Moss was a graduate. I mentioned him before, a graduate student here at Yale who wrote his dissertation and then a book called, "When all else fails, the role of government in risk management." He describes this controversy in 1811. But the real genius of limited liability is that it makes it possible for you to make an investment in some enterprise and then it's just fun. There are no more - you can lose what you put in, but you know exactly what you put in. So what Moss said in his book is that it's really behavioral. You know, this is human factors engineering. Nobody knew when they tried limited liability what would happen. It might encourage corruption. It might not affect the supply of capital. But we discovered that investor psychology favors limited liability. That's because investors tend to- if they're not limited liability, they overestimate the minuscule probability of loss. Just as when they buy lottery tickets, they over estimate the minimal probability of winning. So he thought that what the limited liability did, is created a sort of lottery effect. People are basically you know, you're driven toward fun things and you don't like things that make you worry. So let's make it buying a share in some startup company is like buying a lottery ticket. And, now you probably won't get rich almost certainly won't get rich, but hey it's fun. And so, just like lotteries, I don't know why people- when I go to the train station, I have to stand in line at the little store there behind people buying lottery ticket. I can't imagine why me or anyone would buy those, because your chance of winning is so low. But people do buy and they just it makes their day, I guess they have fun. You buy a lottery ticket in the morning and then where do you turn on television? I don't know. There's some television clip that shows you them drawing the ball, and you're all excited and you're having fun and you lose. You think they keep losing, that they would stop that they don't. There's something- you wouldn't know this but that's human nature. The other thing about limited liability, is that it created the whole idea of holding a diversified portfolio. If you don't have limited liability, absolutely not. You should not hold a diversified portfolio. Especially if you have some wealth, they'll go after you. One of those companies is going to go down and they'll go after you. So, don't hold that diversified portfolio. Once they discovered that- once they did limited liability, then you could start enjoying your investment and diversify over many things. And we know that there is risk management power in the diversification.
