Doing the Right Thing

“Give people the facts and they’ll do the right thing.”

-         Bono

I remember this Scientific American article stating why traders at investment banks take the crazy risks they take:

-         Fact #1: Bonuses depend on profits made: The more risks you take, the more profits you might make which would then translate into a bigger bonus. Ergo, take big risks.

-         Fact #2: Bonuses can be insanely high: Bonuses can run into millions. Even one good year can have you set for life; so who cares about the long term?

-         Fact #3: Sticking your neck out can be suicidal: If every trader at every other bank takes insane risks and makes money while the going is good, then you would get fired for playing it safe because hey, you bring in less money. How could everybody be wrong? How big an ego do you have to even think that?

-         Fact #4: Safety in numbers: If you follow the crowd and take insane risks and everyone then blows up, can you really be blamed? Nobody else saw it coming, did they? So why blame only poor you?

-         Fact #5: Losing a billion dollars can be worn like a war wound, with pride: Even if you bet big and lose big, like say, a billion dollars, you’re still very employable! Why? After all, how good must you have been for the bank to even allow you to bet a few billions, right? Surely such a guy just ran into bad luck; surely he deserves a second chance.

So Wall Street behaves the way it does because, as Bono said at the top of this blog, traders have the facts. Sad but true. Bono only got it half right though: people need both the facts as well as ethics to make them do the right thing.

Or if you’re not too optimistic about that ever happening, then the hope lies in the fact that the banks have the above facts too; and could use them to change their incentives system to reward long term performance, not short term profits.