Bad incentives: it's the incentives (see "Invisible Hand") that make things work properly! To the extent that the incentives are wrong, these are the regulation

Bad incentives: it's the incentives (see "Invisible Hand") that make things work properly! To the extent that the incentives are wrong, these are the regulations, the aberrations that make things deviate from the free market. It's fairly common for traders managing (or depending how you look at it, gambling) other people's money to be paid a percentage of the total money under management (for the sake of argument, let's say 0.5%) plus a much larger percentage (10%) of the upside. That this leads to perverse incentives is, I hope, obvious to everyone here - I've literally sat down with traders and run best guess numbers incorporating the risk of getting fired (or losing investors, shutting down the fund, etc.), difficulty finding another gig doing the same thing vs. the potential gains, and the mathematical conclusion is almost always the same: go all-in, take on as much risk as you can possibly manage, and you'll do better personally than if you invested safely. The only real question is a moral one, i.e. do you care enough about doing what's right to actually try to preserve your client's money rather than gamble it away for a shot at a bigger prize? [Interestingly enough, I've found that most do, the problem is that there's a small subset that don't give a shit, and their abuses taint the entire field] This type of risk-seeking unquestionably played a role in the recent collapse, I don't really see how that can be denied - sure, government incentives triggered the initial housing market buildup and drop, but IIRC that was initially only a 4% correction, it was only because of how massively leveraged the financial sector had become w.r.t. credit that such a drop had any impact on anything at all. Do you really think the payment incentives in the financial sector are helping the market work properly? Or do you think that those payment schemes (a nibble of the principal and a chomp of the upside) are somehow caused by government meddling? IMO, the problem is that it's a mistake to assume that the negative effects of "government meddling" end with official government. Any time you put a group of people together and have them agree on rules and regulations, especially ones about how to distribute money amongst themselves, you run the risk of creating incentives where individually self-interested actions actually work against the group. This applies to corporations, clubs, families, teams, etc., just as much as it does to governments.