Liar's Poker[0], here we go again. This is the exact sentiment that plagued the finance industry in the 80's and lead to the bonus fiasco that exists today on the Street.
The question is what do we do about and is it the same? (I don't have an answer, just curious)
A couple of interesting notes:
1. In Raghuram Rajan's HAS FINANCIAL DEVELOPMENT MADE THE WORLD RISKIER[1]? he notes:
Therefore, the incentive structure of investment managers today differs from the incentive structure of bank managers of the past in two important ways. First, the way compensation relates to returns implies there is typically less downside and more upside from generating investment returns. Managers therefore have greater incentive to take risk.
2. Daniel Pink talks about the Candle problem[2] and two main points on his thesis:
- As long as a task requires only mechanical skill, bonuses work as they would be expected – the higher the pay, the better the performance.
- Once a task calls for even a rudimentary amount of cognitive skill, a larger reward often leads to poorer performance.
[0] - http://www.amazon.com/Liars-Poker-Hodder-Great-Reads-ebook/d...
[1] - http://www.nber.org/papers/w11728
[2] - http://www.spencertom.com/2009/10/25/daniel-pink-on-the-surp...
[1] http://www.amazon.com/Liars-Poker-Michael-Lewis/dp/039333869...
"Liar's Poker" by Michael Lewis http://www.amazon.com/Liars-Poker-Michael-Lewis/dp/039333869...
"Reminiscences of a Stock Operator" by Edwin Lefevre http://www.amazon.com/Reminiscences-Stock-Operator-Commentar...
"The Big Miss: My Years Coaching Tiger Woods" by Hank Haney http://www.amazon.com/Big-Miss-Years-Coaching-Tiger/dp/03079...
"The Professor, the Banker, and the Suicide King: Inside the Richest Poker Game of All Time" by Michael Craig http://www.amazon.com/Professor-Banker-Suicide-King-Richest/...
Michael Lewis - Liar's Poker
http://www.amazon.com/Liars-Poker-Michael-Lewis/dp/039333869...
Any corporate finance textbook, probably; Brearly Myers, Corporate Finance, https://www.amazon.com/Principles-Corporate-Finance-Richard-...
Watch the Yale/Stanford lectures opencourseware on Financial Markets with Schiller; http://oyc.yale.edu/economics/econ-252-11
Nicholas Taleb, Black Swan; https://www.amazon.com/Black-Swan-Improbable-Robustness-Frag...
Harry Markopolos, Nobody Would Listen, https://www.amazon.com/No-One-Would-Listen-Financial/dp/0470...
Michael Lewis, Liars Poker, https://www.amazon.com/Liars-Poker-Norton-Paperback-Michael/...
"Leveraged Sellout", Damn It Feels Good To Be A Banker, https://www.amazon.com/Damn-Feels-Good-Be-Banker/dp/14013096...