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Elon Musk on Regulators

The Federal Aviation Administration had a meeting with Elon Musk they won’t forget. Musk met with them to discuss some approvals for the work one of his companies, SpaceX, was doing. The meeting reads like an episode of Dilbert. The FAA responded in the type of double-speak that only governments seem to master. So what did he do? He told one of the experts they were wrong.

“His manager sent me this long email about how he had been in the shuttle program and in charge of 20 launches or something like that and how dare I say that the other guy was wrong,” Musk says in Ashlee Vance’s book Elon Musk: Tesla, SpaceX, and the Quest for a Fantastic Future.

“Not only is he wrong,” Musk says, “let me rearticulate the reasons. We’re trying to have a really big impact in the space industry. If the rules are such that you can’t make progress, then you have to fight the rules.

And then he nails the fundamental problem with regulators.

There is a fundamental problem with regulators. If a regulator agrees to change a rule and something bad happens, they can easily lose their career. Whereas if they change a rule and something good happens, they don’t even get a reward. So, it’s very asymmetric. It’s then very easy to understand why regulators resist changing the rules. It’s because there’s a big punishment on one side and no reward on the other. How would any rational person behave in such a scenario?

The asymmetry he’s talking about is loss aversion. And it doesn’t stop at regulators, it extends into other areas as well. The same principle applies to most CEOs, managers and leaders. If you want to predict behavior, take a close look at the incentives.

As Keynes said: “Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally.”