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Yeah, but it's totally rational, if you look at it another way. The potential upside is that I make $250 M or $2 B dollars and reap some kind of bonus, right?
by chubot 11y ago
Yeah, but it's totally rational, if you look at it another way. The potential upside is that I make $250 M or $2 B dollars and reap some kind of bonus, right? And the downside is that I lose my job and somebody ELSE loses the $250 M.
If you don't care about anything other than yourself, why wouldn't you make that bet?
I don't think a lot of the traders are purposely thinking this, but the incentives are set up so that people who act this way are rewarded and start to dominate the decision making process.
- charlesdm 11y agoProbably. But honestly, not losing your investors capital is priority #1. tl;dr Don't do stupid stuff like this.
- leereeves 11y ago> not losing your investors capital is priority #1 Recent evidence suggests otherwise.
- lordnacho 11y agoWell, this is exactly what happened. One astute investor asked the only really important question (have you got your own money in this fund?) and managed to avoid the calamity. Everyone else got soaked. Actually, if you speak to traders for any length of time, this kind of thinking comes out. The standard on the options trading floor is this: I can buy options, and make money only if there's a crisis. I can sell options, and make money most other years. If I buy, and all the other desks sell, and there's a spike, all the money I make will be lost by the others. If I sell with everyone else, and there's a spike, we can all say we did what the other people did when we are looking for a new job. If I buy and there's a normal year, I'll lose and everyone else will gain, I'll look like an idiot and get fired. -> Sell options, and act like you know when to get out of that position.
- hkmurakami 11y agoI wonder how much of an analogy we can draw to raising outside capital to fund your own venture.
- lordnacho 11y agoFund: You get paid if nothing happens, traditionally 2% but probably lower on average these days. If things go well, you get 20% of the high watermark profits. If they go south after that, you don't pay it back. You're always paid in cash. VC: You get paid a salary that's below what you'd probably get in an established company, plus you get equity. But the investors will typically try to get preferred stock, in case things go badly (liq pref). If things go well, you can sell some shares at each subsequent round, but of course you have less after each. And some of the investors will want board seats, which means a degree of control.