Posted by Kenneth Anderson: Risk Taking: http://volokh.com/archives/archive_2009_07_26-2009_08_01.shtml#1249070328
As I've mentioned in some earlier posts, I've been doing a read of literature on the crisis, books coming out now - but at my kid's last swim meet, I took along instead Michael Lewis's [1]Liar's Poker. That book, from the 1980s, holds up better than just about anything from that period. He does a better job of explaining the incentives and disincentives of the secondary tier players inside institutions better than anything else I've read. There's astonishingly little in that book that isn't still relevant today - partly because today's crisis is a credit crisis, and he was describing bond trading in the 80s, when it underwent a revolution that reformed corporate finance. In some sense, we are living out today the revolution of credit of the 1980s. One section of that book that seems especially prescient to me - and is not really about finance directly - is his discussion of the how being a successful trader requires incredible fast, raw intelligence to make snap decisions about risk - but also a short attention span. This was all written before the internet, blogging, tweeting, all this stuff of instant novelty (as XKCD puts it in a slightly different sense, "[2]constant novelty saps my initiative"). He describes Mike Millken - accurately, from everything I have read - as being the rare person who combined both instant raw trading abilities with the ability to formulate and pursue a long term strategy about an industry and a company and a market, rather than simply reacting with the next trade. These are really different skills in business, and everything else, and I wonder if the nature of incentives in the overall human capital markets are not favoring trader skills over institution builder skills ... many of the finance people I know don't understand deep-down what I even mean by institution building skills and don't value it, except insofar as they are able to ... trade it. Instantly. One of these days I want to recount a conversation I had recently with a bunch of military officers, and their questions about risk taking in their profession and risk taking on Wall Street. I need to explain this in much more detail, and don't have time now - but the conversation caused me to rethink the basic psychology of those students I've known going to Wall Street in the last few years. I used to think they were risk takers. I no longer do. The military guys were frequently people who would describe themselves as risk-takers, trained as officers to control and channel the impulse, to the point that many of them would not seem, as personalities, as "risk takers" - quite the contrary: but as one of them said, when you have to make command decisions about lives and kinetic energy, what seems to be a cautious personality is actually something really different, risk by definition. Whereas my students going to Wall Street in the last few years - I don't now think they were risk takers. Not one of them has ever opted for a corporate track - too risky, in fact, too many years invested for a middle tier payoff and a constricting career track. Wall Street, from the standpoint of the individual involved, is safer - it's where your friends are, for one thing, and the payoffs are greater and shorter term. And that's so even if you are betting huge amounts of money - it's other people's money - and if the payment structure pays you upfront, then no problem. Really, really different from the incentives and personalities of the military officers I had this conversation with, leading men in fields of fire and making decisions just as snap about the uses of deadly force. (This was originally an update to the earlier post on bonuses, but I thought it made better sense as its own post.) References 1. http://www.amazon.com/Liars-Poker-Rising-Through-Wreckage/dp/0140143459/ref=sr_1_1?ie=UTF8&s=books&qid=1249070244&sr=8-1 2. http://xkcd.com/597/ _______________________________________________ Volokh mailing list [email protected] http://lists.powerblogs.com/cgi-bin/mailman/listinfo/volokh
