Monday, June 24, 2013

It works both ways

From the Irish Independent's Anglo tapes --

He [Bowe] also says: "If they (Central Bank) saw the enormity of it up front, they might decide they have a choice. You know what I mean? "They might say the cost to the taxpayer is too high . . . if it doesn't look too big at the outset . . . if it looks big, big enough to be important, but not too big that it kind of spoils everything, then, then I think you have a chance. So I think it can creep up." Mr Fitzgerald, the Director of Retail Banking, is heard saying: "Yeah. They've got skin in the game and that is the key."

Nassim Taleb --

Rule 5: Decision makers must have skin in the game. At no time in the history of humankind have more positions of power been assigned to people who don't take personal risks. But the idea of incentive in capitalism demands some comparable form of disincentive. In the business world, the solution is simple: Bonuses that go to managers whose firms subsequently fail should be clawed back, and there should be additional financial penalties for those who hide risks under the rug. This has an excellent precedent in the practices of the ancients. The Romans forced engineers to sleep under a bridge once it was completed.

The problem is that "skin in the game" logic quickly leads to the sunk cost fallacy -- we've already put in money, so we have to put in more -- and that's what Anglo banked on in its dealings with the Irish government.