I’m not sure that ‘high likelihood of failure’ situations necessarily yield negative welfare as you suggest. For example, objectively speaking, most startup founders work extremely hard creating an unprofitable company that then fails. But I don’t think it would be value enhancing for the founders to prevent them from founding companies—they seem to receive a huge amount of motivation from thinking about the small chance that they instead succeed in creating a very large and profitable company. Their incentive structure is not so much a negative feedback ‘avoid things that will be bad for the company’ as a positive feedback ‘do things that have a small chance of making the company very successful’.
I’m not sure that ‘high likelihood of failure’ situations necessarily yield negative welfare as you suggest. For example, objectively speaking, most startup founders work extremely hard creating an unprofitable company that then fails. But I don’t think it would be value enhancing for the founders to prevent them from founding companies—they seem to receive a huge amount of motivation from thinking about the small chance that they instead succeed in creating a very large and profitable company. Their incentive structure is not so much a negative feedback ‘avoid things that will be bad for the company’ as a positive feedback ‘do things that have a small chance of making the company very successful’.