the porous city



email me



Incentive schemes that reward successful managers with huge bonuses, without penalizing them for losing years, skew behavior towards risky investment strategies: "...appearing to create excess returns but in fact taking on hidden tail risks, which produce a steady positive return most of the time as compensation for a rare, very negative, return."

Dealbreaker's refutation is pretty unconvincing. First, I doubt that most traders have enough equity to counteract the effect described above. Second, banks being "long volatility" just means that they make more money when the market moves. That has nothing to do with the risk inherent in an investment strategy's distribution of payouts. One can have a trading strategy that capitalizes on volatility but still hedges risk effectively (I mean, it's not easy...)

My guess is that in most banks it's senior management whose equity compensation ratio is enough to make them take the long view. Therefore you'll see more blowups at poorly managed banks, or at pure-play investment vehicles.

last timestamped: 13:19:48 10-Jan-2008
in categories:Commerce/Investing





No html.

what's the second letter of your name?

Crowdsourcing, Web, Wearables, Storage, Visual, PIM, Development, a11y, Business, OS, MacOS, Shopping, Javascript, RSS, WRX, Android, Web analytics, Net, Mobile, Medical, s60, Data, Product Management, Social, Hardware, barcamp, Security, Collaboration, Automobile, Energy, Open, Audio

Clothes, Boston, Sports, Life hacks, Personal care, Food & Drink, Agriculture, Transportation, Games, L.A., Minnesota, Politik, Toys, Statistics, Activism, NYC, San Francisco, Housing, Quizzes, Bicycling, Podcasts, Berlin, Travel, Law, CrowdFlower, Video, Geography, Friday, History, Feminism, Surfing

Reviews, Making, L.A., Streams, House, Good tracks, Booking, Business, Hip-hop, Mailing lists, Lyrics, Labels, Videos, Boston, Mixes, Events, Shopping, Musicians, History, Mp3s

Heroes, Meditation, Stories, Exercise, Languages, MOTAS, Health, Subcultures, Family, ADD, Working with, Friends, Gossip, Me, Vocations, Weblogs, Enemies, Life hacks

Real Estate, International Development, Microfinance, Personal finance, Investing, Non-profit, Taxes, Management consulting, Personal services, IP Law, Web, Macroeconomics, Shopping, Marketing and CRM, Insurance

Spoken Word, Outlets, Humor, Literature, Visual, Animation, Desktop wallpaper bait, iPad bait, Comix, Events, Poetry, Rhetoric, Burning Man, Movies, Sculpture

Process, Architecture, Furniture, Algorithmic, Data visualization, Cool, Type, Web, IA, Presentations, User experience, Tools

Physics, Statistics and Data, Environment, Psychology, Networks, Zoology

Vagabond '08, Kingdom of Siam, Uganda, Kenya

Photos I Wish I'd Taken, Friends, Moblog


Internet classic


One Acre Fund

Subscribe to this site's rss feed