e that any chances of
serious loss should be balanced by such chances of exceptional gain,
as would raise the _expectation_ of profit well above the normal
return on secure investments. The more risky the project seems the
greater, generally speaking, must be the _expectation_ of profit
required to induce people to undertake it.

If we suppose business men to calculate reasonably, it follows that
the average profits in any industry over a long period of years,
reckoning in the losses of the concerns which disappear altogether,
are likely to be higher, the more risky is the industry. Such a result
will not, of course, occur in every case. Even when the calculations
are reasonable, they may be entirely falsified by the event. Moreover,
business men may not calculate reasonably on the information which
they have. But, unless we suppose their judgment to be subject to a
prevailing bias in one direction, i.e. to be unduly optimistic as a
general rule, _we_ should expect, and in any case _they_ must expect,
profits above the ordinary in a risky industry.

This conclusion is sufficiently important. Far too many people, though
they admit it when it is expressly stated and dismiss it even as a
tiresome commonplace, are apt to neglect it when the occasion for
applying it arises. For example, the great importance to any industry
of good management is generally recognized, and the consequent
desirability of paying adequate salaries to the managerial staff. The
importance of securing a supply of capital is very widely recognized,
and the practical necessity of paying a fair rate of interest is thus,
however grudgingly, conceded. But the "residuary profits," as they
are called, which accrue at present to the owners of a business, are
denounced in some quarters in a sweeping fashion, which seems to
ignore altogether the all-pervading element of risk. People speak as
though you might appropriately limit profits in every industry to some
uniform percentage on the capital employed, without making it clear
whether you would even be allowed to make up in good years for the
losses incurred in bad. The effect of introducing any such crude
device into our present industrial system could only be to paralyze
enterprises of an unusually risky kind, which, so far from being
pushed to an excess at present, are more probably curtailed unduly
from the standpoint of what is socially desirable. Like the fixing of
a low maximum price for a commodity