Investment bankers, traders and fund managers especially, are so badly incentivised that they couldn’t but fail.
- They cannot tell for sure who will be good and who will be bad so you can trick your way into a high paying contract. Skill and morals have a way of being inversely related. This, therefore, gives execs a way of disavowing responsibility for their underlings when they go bad.
- The boss is right when things go right and absent when things go wrong. The way around this is to tighten the responsibility of emails and conversations i.e. if you want your boss to have to have read something, send it with a particular level of importance. These emails therefore become critical and he/she can never claim to have missed it because it didn’t seem important. Similarly, for conversations. If its not in writing it never happened. This should be assumed by courts and no discussion of conversations should ever waste investigation’s time again. No point. Yourwordagainstmineism has never once produced any interesting improvement in humanity.
- Luck is more important than skill. If you do well in your first few trades, you manage more money and snowball. They say a manager gets promoted to their level of incompetence. The way around this is to regularly computer test the applicants for higher positions using algorithms that mimic the unpredictability of the real world thereby not gambling with real money and gaining insight into the reasoning skills of traders.
- Resigning is too cushy. The more power you have, the more the bank (which is based almost entirely on luck and reputation) has to lose if you publicly leave. There must be something wrong. He must have mismanaged our money. Run! Bankers pensions should be tied to external factors and kept at rates which are human.
- Managers salaries should be a combination of equity and debt in the fashion of increasing the amount of equity that they are payed for every € of debt that the company is stuck with. This way, the more debt that they take on, the more that their interests become aligned with that of the companies.
- Keep capital preserved rather than given away in constant amounts. Give dividends as a % of earnings to benefit shareholders in the medium term because bad periods of external market forces can be weathered while good periods will see bumper dividends.
- Get better at valuing the decisions made during a managers time in charge rather than what benefits accrue during that time. Net interest income can flatter a manager if interest rates are currently low and so longer term maturities are being repaid at more profit with only external forces having had any effect.
- Question the high returning aspects of your bank/business as much as you question the poorly performing aspects. This is especially difficult and especially important. If a bank receives 90% of their questions from outside on CDSs and CDOs this is because they have already failed. Don’t miss the next failure that seems to be bucking the trend now. Performing much better than average is as much a sign of shit coming down the line as performing below average. Time should be spent in even amounts on those aspects that are performing terribly, performing brilliantly and those that are average.