Remarks by William R. Brody, President
The Johns Hopkins University "No Risks, No Rewards"
Monday, April 25, 2005
The Metropolitan Club, N.Y.C. — Noon [Introduction by Charles McLean] Thank you, Charles. Good afternoon. In the mid-1960s, at the height of the Vietnam War, the army had a real problem. Our forces were being attacked by the Viet Cong, who would no sooner attack than they would seem to melt away into the jungle. Our superiority in tanks and armored vehicles was useless; they could not penetrate dense Vietnamese vegetation. So a group of scientists looked around at what could get through the jungle and they got an idea. What our soldiers needed, they said, was a herd of jungle- smashing robotic elephants. And so they took our hard- earned taxpayer dollars and began designing one. Meanwhile, faced with the Soviet Cold War threat, another group of researchers on the federal dole were studying telepathy and psycho kinesis, the psychic manipulation of objects, to see if we could avoid a first-strike, surprise missile attack by reading the Soviets' minds and perhaps even altering the course of their missiles. These are true stories. And despite how it may sound, I am not intending this afternoon to talk about the history of crackpot ideas and the waste of your and my tax dollars. To the contrary, I want to tell you why I think the scientists who were trying to figure out if they could read minds or build the perfect robotic elephant, are in fact an unsung kind of American hero — the kinds of heroes I think we need more of today. I am delighted that the Metropolitan Club has invited me to participate in its lunchtime speaker series. It is a gratifying opportunity to talk to the leaders and opinion makers here in America's financial and cultural capital. And thank you again, Charles, for that very kind introduction. As Charles mentioned, for the past nine years I have led one of the nation's foremost research universities and academic medical centers. The Johns Hopkins Institutions are a nearly $5 billion-a-year enterprise with campuses around the world — in Baltimore and Washington, D.C., in Bologna, Italy, Nanjing, China and in Singapore. We are the number one recipient of federal research funding, and for the past two decades have been the number one university in the nation in terms of total research spending. Johns Hopkins scientists every day are making new discoveries from the sub-atomic to the cosmic, often taking daring chances on a hunch or a notion, or on what someone else has called a crackpot idea. I've had a crackpot idea or two of my own in my career, and the result is that I've been the co-founder of three different medical device companies. So I know something about the importance and the dangers of taking risks. And it is risk, really, that I want to talk about today. Risk is an intrinsic element of our daily lives. Every day, millions of people are playing games of chance. I'm not referring here to those who play Lotto, bet on the Super bowl, or go to Atlantic City. No, far more Americans are testing fate in areas ranging from finance — by buying and selling stocks; to business — by developing new products; to scientific research — by expanding the frontiers of molecular medicine or trying to find a cure for cancer. Our country was founded on the assumption of risk. Christopher Columbus 'got lucky' on his risky voyage and discovered America. The settlers of the west took enormous risks. In a different way, business pioneers like Henry Ford, John D. Rockefeller, Thomas Watson, and Bill Gates, venture capitalists like General George Doriot, Arthur Rock, and medical researchers like polio vaccine discoverer Jonas Salk, all achieved what they did because they were willing to accept the risks of failure. The history of the United States has been driven by pioneers, exploring the inner and outer spaces of our planet, of science, and of technology and commerce. If you look behind the discoveries that have made America great, you find people who were willing to risk it all for success, and many more who failed trying. But today, I'm worried that, as a nation, we've begun moving away from risk-taking. Increasingly, Americans are becoming unwilling to accept risk of any kind. We fear failure. Every outcome must be perfect; every baby born unblemished. Don't expect too much of our students, lest they fail. All Ivy League students should graduate with honors. Everyone who plays gets a trophy. Risk aversion is eventually going to drive America into second-class status in our increasingly global economy. Guaranteed outcomes mean lowering our expectations. And lowered expectations lead to mediocrity and sub-par performance. We need to ask ourselves: what's going on here? You may recall the time that good old Charlie Brown went to see Lucy, the psychiatrist who was always in. Lucy asks Charlie Brown: 'Are you afraid of responsibility? If you are, then you have hypengyophobia,' and Charlie Brown responds: 'I don't think that's quite it.' 'How about cats?' asks Lucy. 'If you're afraid of cats, you have ailurophasia.' 'Well, sort of,' says Charlie Brown, 'but I'm not sure.' Lucy continues: 'Are you afraid of staircases? If you are, then you have climacaphobia. Maybe you have thalassophobia. This is fear of the ocean, or gephyrobia, which is the fear of crossing bridges. Or maybe you have pantophobia. Do you think you have pantophobia?' 'What's pantophobia?' asks Charlie Brown, to which Lucy responds: 'The fear of everything.' 'THAT'S IT!' shouts Charlie Brown. I wonder if we're all becoming a little like Charlie Brown? Everywhere, our society sees risk — and more and more, we demand that something be done to eliminate it. But a wise person once told me: "Bill, in order to avoid making mistakes, you have to have wisdom." "OK," I said, "I want some of that wisdom how do I get it?" "Unfortunately," my friend replied, "in order to get wisdom, you have to make mistakes!" Thomas Edison, when asked how he could have persevered to make the incandescent light bulb when he failed 10,000 times, replied: "I have not failed. I just found 10,000 ways that won't work." Mistakes are the downside of risk-taking. And it seems as if we've become very unwilling to tolerate mistakes. We're willing to risk failure in our games, in extreme sports, in our competition on TV reality shows. But not in our business. Not in our research and development — not in our careers or in our medicines or homes, our schools or our personal lives. As a nation, we've become downright pantophobic. We are like the proverbial deer caught in the headlights, afraid to do anything. Being risk-averse is hurting our global competitiveness and stagnating our incomes. I serve as co-chair of the Council on Competitiveness's National Innovation Initiative. The Council on Competitiveness is a 20-year-old national forum of industrial, university, and labor leaders to promote, study, and advance American business competitiveness. In my work with the Council I have been introduced to a novel concept: the calculus of innovation. When we talk about competitiveness, what we mean is the capacity to increase the real income of ALL Americans by producing high-value products and services that meet the test of the world markets. It sounds fairly simple, but of course as we all know, it's not. American competitiveness is hugely important to all of us. It directly determines your and my standard of living. Competitiveness affects the kind of house we can afford, and the lifestyle we lead. Competitiveness determines how much sleep we will lose worrying about paying our bills. And, right now, in talking with parents of students, Americans are losing lots of sleep worrying about bills. So competitiveness is not an abstraction. It's not some future worry we have time to ignore in the present. Competitiveness is real, right now, and it's tremendously important. And this is where the calculus of innovation comes in. The calculus of innovation is really quite simple:
Knowledge drives innovation; Innovation drives productivity; Productivity drives our economic growth. That's all there is to it.
In recent years, productivity gains have accounted for about two-thirds of the annual growth of our GDP. Innovative application of technoilogy to business leads to higher productivity.
But there is no guarantee that these productivity gains will continue. And based upon studies I have seen at the Council on Competitiveness, it looks as though the innovation pipeline is slowly being squeezed dry. If current trends continue, the smart money is betting that the U.S. will fall behind China, India, and even a resurgent Western Europe. Here's why: First, we are losing the skills race. About one-third of all jobs in the US require science or technology competency, but currently only 16 percent of Americans graduate with some science or technology content in their college studies. That is, for instance, less than half the percentage of students graduating with science or technology backgrounds from Korean colleges. When Harvard polled its entering class recently, it discovered only one percent of their students expressed interest in studying computer science, yet information technology lies at the heart of many of our productivity gains. No wonder Bill Gates dropped out of Harvard after his freshman year. Today, foreign graduate students studying science and technology outnumber Americans in our universities. They're terrific students, but we make it difficult for them to get green cards when they complete their studies. More and more of them will go back home where opportunities abound. Europe now produces more than twice the number of scientists and engineers as the US; and Asia about three times the number. Just as worrisome as losing the skills race, we are beginning to lose our pre-eminence in discovery as well. Historically, innovation in science and technology has been the direct result of investments in basic research and development. America's longstanding commitment to generously fund R&D has been a major driver of our economic competitiveness. Overall R&D spending in the US as a percentage of GDP has remained constant — about 2.8%. So you might think everything is a-ok. But, statistics can be misleading as in this case. Industrial R&D in the US has grown over the past 40 years, but most of the money goes for development, a little for applied research, and almost none for basic research. Much worse is the federal scene for R&D: federal research and development spending peaked forty years ago — in 1965, at just under two percent of GDP. Today, it is now down by more than half — 50% decrease — to about 0.8 percent of GDP. And while government spending for medical research has increased, overall R&D spending, especially in math, physics, engineering and information sciences, which are the major drivers of productivity, continues to decline. As you would expect, these numbers have very real consequences. Science and technology articles published in western Europe already exceed those in the US, and by 2010, it is anticipated that the emerging economies of Asia will produce more patents and spend more on R&D than the United States. Everyone knows our country has a huge trade deficit. For years, however, we had a positive balance of trade in high-tech exports. In 1980 the US produced 31 percent of global high-tech exports; Japan produced 15 percent, and emerging Asia 7 percent. By 2001 the numbers had turned around. Now the US was producing only 18 percent, Japan 10 percent, and the emerging nations of Asia fully 25 percent of high-tech exports. Our once-positive balance of trade for high-tech items is now in deficit, and continuing to fall rapidly. Declining leadership in innovation suggests our standard of living will decline as a result. If we had the will, we could double federal spending on basic research in the physical and information sciences — the total one-time increase needed to do this would be less than the amount our national healthcare expenditures increase every three months. So why don't we adopt the Nike slogan, and "JUST DO IT!"? Part of the reason has to do with something called the St. Petersburg paradox. Our competitiveness is at risk, ironically, because we don't take enough risks. Let me explain: I want you all to imagine for a moment that you have just won an imaginary all-expenses-paid trip to Las Vegas. When you arrive, you head to the nearest casino to play the slots. It's crowded but you find two vacant one- dollar slot machines. Since we are in the era of runaway lawsuits, these slots now come with a disclosure statement that you must sign before plunking in your first silver dollar. You amble up to the first machine and read what's printed: "Warning: Gambling is a dangerous sport and could be injurious to your health. You may lose all your money and even your shirt if you are not careful. Forward-looking statements are not predictable of future winnings, but this machine pays, on average, $2.95 for every $3 you spend." That sounds well and good, so you check out the second machine. It has a similar statement except for the forward- looking clause, which reads: "this machine pays, on average, $6000 for every $3000 you spend." How many of you will choose to play the second machine rather than the first? Good, you all recognize that the odds are in your favor big time — if you play the second machine long enough, you should expect to reap substantial financial rewards. What's the important difference between slot machines one and two? Well, if you begin playing machine number one, after a very few silver dollars you will begin getting some money back. Lights will flash, bells will go off, and you will experience near-instant gratification. The problem is, as you play the net outcome is less than break even. You lose. Machine number two, on the other hand, requires patience. Someone who is willing to insert a significant number of one-dollar investments for a long term will earn a big payoff. There is no guarantee that when you've inserted $3000 you will win, of course. So there is a distinct element of risk. You may run out of dollars before you hit the jackpot. This is truly a case of 'no pain, no gain.' But if you have enough spare dollars to invest and you play the game over a long enough period, you will eventually double your money. All of you recognized that. Clearly, if you have the resources to play, machine number two is the way to go. You win. This is an example of what statisticians call the St. Petersburg Paradox, first identified by Swiss mathematician Nicholas Bernoulli nearly 300 years ago. Bernoulli considered games of chance with a positive expected value, in which the probability of winning is low, but the payoff is huge. The paradox is that, even though an eventual positive outcome is assured, most gamblers won't — or can't — stay in the game long enough to claim a prize. Now it may come as a surprise to the astute gamblers present that every day in our society, in business and finance, research and education, from shareholders to consumers, millions of Americans are opting to play slot machine number one, rather than number two. Americans are looking for the sure thing. They are settling for predictable outcomes rather than aiming for big jackpots. It's minimal risk, resulting in minimal rewards: call it the Play Safe option. And by playing it safe, we may be dealing ourselves out of the game. Throughout our history, we've made a fine art of devising systems to assess and reward risk. Along the way, we have become remarkably proficient at learning how to control and reduce risk as well. From vaccinations to seat belts, smoking cessation to bicycle helmets, we have used our smarts to systematically identify and reduce unnecessary risk. The trouble is, we may have fallen prey to the fallacy of believing if some is good, more is better — that because we can control risk we should therefore strive to eliminate it entirely. I believe that our current problem is that in trying so hard to tame risk, we've gone too far. Which brings me back to those researchers trying to learn to read minds and build a herd of mechanical elephants. These were both projects of a little-known federal agency called DARPA — the Defense Advanced Research Projects Agency. You may not have heard of DARPA, but you have certainly experienced some of the benefits of the research it's sponsored. In the 1960s, DARPA funded some research in computer science to build a network connecting computers at remote locations. The DARPA-net, as it was called, was apparently another crackpot idea, like mechanical elephants. It did not appear to have any practical utility. Stanford University was one of the grantees of this research while I was a graduate student there. As I am sure you have all figured out, the DARPA-Net was the forerunner of what has become the Internet. What you may not know is that two Fortune 500 companies were born out of projects on the DARPA-Net at Stanford. Workstations designed by a graduate student Andy Bechtolsheim led to the formation of SUN Microsystems. SUN, by the way, stands for Stanford University Network. And devices to route traffic on the network resulted in the founding of Cisco Systems. Of course, this was just the beginning, with Apple Computer, Netscape, Google, Yahoo and eBay building upon that foundation, decades later. The important point here is that DARPA was created just after the Soviets launched Sputnik with the express mandate to catapult American science and technology far beyond what the Soviet military was capable of achieving. The mandate was 'high risk, high payoff' and as one former director of DARPA told the Los Angeles Times recently, at DARPA in the 1960s "you could do really any damn thing you wanted, as long as it wasn't against the law or immoral." In other words you could take risks — big risks — on things like an unnecessary and potentially useless computer network system, and yes, on a herd of mechanical elephants. DARPA's current director, Tony Tether, estimates that 85 to 90 percent of its projects fail to accomplish their planned goals. But, he adds, that research sometimes spins off unanticipated technologies like, for instance, the Internet. DARPA is a government agency willing to fund pie-in-the-sky research with little apparent payoff, until, occasionally, it delivers a grand slam two or more decades later. Or perhaps I should say "was willing." Although DARPA is still very much alive and currently funded at more than $2.5 billion, the tone and outlook of the agency has, in recent years, shifted. As a sign of the times, I suppose, even DARPA is getting out of the basic research business. Recently the New York Times reported that at DARPA today the focus is increasingly on applied research leading to short-term results. In other words, more bottom-line thinking. Dreaming up something like DARPA-net, the grandfather of today's Internet, is too risky. The pay off is too far out in the future. Give us something we can use today, or tomorrow at the latest. Sound familiar? It's the St. Petersburg paradox fulfilled. The twin paradox is that now, at a time when we are being challenged as never before — economically by friends and militarily by foes — we seem no longer willing as a nation to accept the kinds of risk necessary to hit these grand slams. The change at DARPA is a symptom of a much more widespread retreat from bold risk-taking in America. So, if innovation and American competitiveness depends on taking risks, what can we do to ramp up our spirit of innovation? I recently visited the college professor most influential to me in my undergraduate days at MIT. A man by the name of Amar Bose. He was always drilling into our class — "I don't care what the answers are to the problems I am giving you...we already know the answers. What is important is how do you approach solving them. Because when you leave MIT you will be asked to solve problems no one has yet posed." And what did he do? Well as many of you no doubt know, Amar Bose left MIT to form a company to solve a problem no one had asked before: what makes a good loudspeaker sound bad, and vice- versa? How many of you here have a Bose Wave Radio, or have been meaning to get one? Clearly, in leaving MIT Amar Bose took a tremendous risk, and hit a huge home run. His unique acoustic solution led to the formation of the Bose company, now the leader in high end acoustic systems. Dr. Bose has steadfastly refused to take the company public. He says: "I invest 100 percent of the profits back into R&D. I could never do that as a public company." And that commitment to risk-taking research looks as if it is going to pay off again. Dr. Bose has just introduced a revolutionary new suspension system for automobiles that trade magazines are calling a major technological breakthrough. The Bose company began working on this idea in 1980, and it took years of a major investment in research and then development to make this idea reality. When I went to see Dr. Bose recently, he told me, "Bill, if I had been a public company CEO, I would have been fired three times." Fortunately, without Wall Street analysts tracking quarterly earnings to the penny, Dr. Bose could make the necessary investments for a long-term payoff. And make no mistake: Bose has just hit another home run. He put me in the test vehicle, which is mounted on a special platform that can simulate almost any kind of road. He must have pushed the button that said 'Baltimore City Streets' because the next thing I knew I thought my teeth were going to shake loose. Then he hit another button to engage the new Bose suspension system and suddenly it felt like I was gliding on air. This is the kind of innovative product that automobile manufacturers, whether in the US, Europe, Japan, Korea, or, even China and India, will ultimately have to adopt. It's a home-run: American ingenuity at its best. Unfortunately, this story isn't being repeated often enough in American companies these days. From my work with the Council on Competitiveness and in serving on the boards of various innovative companies, I have come to understand that to produce more home runs, we need to fix what I call the four 'shuns.' They are taxation, regulation, litigation and education. In each of these areas, we must realign our current policies to begin to better reward risk and penalize complacency. Here are a few ideas of what I think we should do: Consider taxation. This is the last place we think of for taking and promoting risk, but I think it's precisely the place where we need to start. If we pay Barry Bonds to hit home runs, why can't we do the same for corporations? Right now we have perverse incentives for corporations not to invest for the long term. The average stock in a public company is only held for slightly less than one year. And despite historically low tax rates for long-term capital gains, the largest holders of stocks in public companies are pension funds and endowments that pay no taxes, so they can buy and sell over the short-term without penalty. Let's require all investors to pay taxes on short-term capital gains, giving them the incentive to hold stock investments for the long term. Let's also move the holding period for long-term gains from one year to three or even five. Ultimately, we can use the tax code to reward the behavior of companies that make significant research investments and take significant risks. In doing so, we will make holding their stock over the long term a more desirable investment. Norm Augustine, now retired CEO of defense giant Lockheed Martin, told me that when he was the CEO of Martin Marietta, the precursor Lockheed Martin, he one day called in the analysts to announce a series of investments in research that he felt would propel the company way ahead of its competition. Much to his surprise, as soon as he had finished his presentation, the analysts ran out of the room, sold the stock and the price plummeted — and continued to drop over the next 18 months. Puzzled about the negative reaction to this news, Norm asked one of the mutual fund analysts why the stock had dropped. He was told: "Everyone knows it takes 8 to10 years for research to pay off. But our shareholders only hold stock less than one year. Our fund doesn't invest in companies like yours that have such shortsighted management." Next, comes regulation. No doubt about it, bureaucracy is the enemy of innovation. Of course, we need oversight of many things, like drugs, pollution, and corporate conduct. But we need to remember an important precept: perfect is the enemy of the good. We can never obtain a zero-risk society. Americans are paying a high price for the increasing burden of a well-intentioned but ineffective bureaucracy. All too often, regulation follows a predictable chain of events. First, there is a high profile news story about a crisis or tragedy — like the collapse of Enron. Then a growing chorus of voices insists that this must never, ever happen again — that the risk is too great. Congress feels the pressure to act, and soon — often in remarkably short time — a bill is readied that promises to prevent further events of this kind by imposing a new regimen of oversight and regulation. It's the classic response when the cow is out of the barn — do something, do anything! — in this case, close the door. And so we end up with a whole new layer of oversight and monitoring, never mind the cost. Enron begat the Sarbanes-Oxley Act of 2002, meant to protect investors by improving the accuracy and reliability of corporate disclosures. Sarbanes-Oxley (SOX) has many positive attributes. Yes, it may produce more accurate corporate reporting. But everything in moderation. This well intended piece of legislation is sucking billions of dollars out of the productivity of American businesses — and I have yet to find a CEO who believes it will prevent another Enron from occurring. Yet, no one speaks out against it because, after all, who wouldn't want more accurate corporate earnings statements. The question that should have been asked is: is the extra risk reduction with SOX worth the billions of dollars required? Next is the issue of litigation, an increasing burden for all of us. The Constitution and its Bill of Rights define our fundamental human rights that no government can nullify. But I think you will agree with me that it never intended to guarantee Americans the right to sue anyone for any reason at any time. Yet such is the system we have today. A tort system with no rules and no predictability (other than high costs), provides little societal benefit. What it does do is sap productivity and creativity from businesses as they become mired in lawsuits ranging from asbestos abatement to zero-growth planning initiatives. More than a decade ago, NY attorney Phillip Howard wrote a breakthrough book, The Death of Common Sense: How Law Is Suffocating America. Howard got a lot of attention for his views, but since then little has changed. As a nation we have consistently lacked the will to insist that the law work for the benefit of American society as a whole, and not just special interests or groups with a narrowly-focused agenda. And here is my prediction: we won't be able to appreciably alter our legal system until the American public accepts the idea that we cannot — and should not try to — eliminate all risk. Zero — risk is not simply impractical; at its core it is downright indefensible. Finally, the last 'shun' is an issue near and dear to my heart: education. It's the bedrock of our competitiveness, the foundation of our future economy. Yet in recent years we seem to have lost our will to educate all of our youth. As a society, I believe it is our most sacred duty to teach all of our children to read and write, to become proficient in science and math, and to reason. This is not rocket science — but it is hard work. It is especially hard to do exceedingly well. Ever wonder what country has the best overall reading scores for its children? You may be surprised to know it is Finland, which has a fierce commitment to universal education. In a recent ranking of the world's most competitive economies, guess which country placed number one? Finland. The link, I think, is obvious. When I was in Singapore this past January, I learned something interesting. Singapore K-12 students score among the top in the world in science and math. One mother I happened to meet told me that her school age daughters view English and history as their most difficult subjects, with math and science as the 'easy' subjects — and that was pretty universal for Singaporean students. Meanwhile, many of our schools have been dumbed down, lest they induce psychic injury in our students and incur parents' wrath for giving C's, D's and F's. While we must build self-esteem in our students, it is most important that we set very high expectations for what they are to learn. Passing students who did not learn is harmful to them, and to our society. We should provide modest financial incentives to reward those who do well in K-12 and scholarships for those who go on to college in science and engineering fields. We can also show our respect for brainpower by paying our teachers more and giving them modest incentives for how well their students do in science and math subjects. We are training our children for a lifetime of careers, not jobs, and they need an elaborate skill set to compete with the incredible talent pool being developed in places like China, India, Korea, Singapore and Russia. First among those skills we need to teach is the value and importance of taking intellectual risks. But this is not happening. American society as of late has developed a serious cognitive deficit. It goes by the acronym, FEWMUS, which stands for: "Forgot entirely what made us successful." America, after all, was built by taking on high-risk propositions. We can identify risks. We can control for some of them. But we cannot eliminate risk in our lives — not if we want to succeed as a nation. Can you imagine pioneers of the 19th century traveling to St. Louis to get on a Conestoga Wagon for a trip to California? They'll be traveling over a route that has never before been traversed, led by a guide who has little experience dealing with the elements that they are about to encounter? They start to get in the wagon, when they see a bright yellow sticker on the driver's seat. "Warning!" it says, "Traveling across the U.S. by horse-drawn wagon is dangerous. The vehicle in which you are riding has not been crash-tested by the National Transportation Safety Board. It has no airbags, no seat belts or other safety devices. You could be maimed, killed, scalped by Indians, freeze or starve to death. We cannot guarantee that you will reach your destination safely." In life, I've learned, there is ultimately no guarantee that we will get to our intended destination safely. But one thing is for sure: if we're not willing to risk trying, we'll never get there at all. Thank you for giving me this opportunity to talk with you today.
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