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> We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10%

> We're not keeping negative score And that's problematic for banking. Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4% (for them EV is +5%). As a result, they are able to attract more depositors by providing higher rates that bank that went with option (2). Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out completely. Everyone behaves according to incentives, with the result being that money is used on ventures with -15% expected value instead of +4%.

em500 4y ago
I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.
- kilotaras 4y ago
  > Shareholders could lose 100% of their investment, their EV is not +5%. Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive. > Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job. Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job. This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
  - em500 4y ago
    I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company. AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
    - kilotaras 4y ago
      > depositors get back 100% up to the FDIC limit Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part. I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.

em500 4y ago

I don't see your example works. Shareholders could lose 100% of their investment, their EV is not +5%. Bank employees could get higher bonusses, but also run higher risk of 0% bonus and losing their job, not sure how you get to 5% EV or that some strategy is obviously better.

kilotaras 4y ago
> Shareholders could lose 100% of their investment, their EV is not +5%. Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive. > Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job. Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job. This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
- em500 4y ago
  I still don't get what you're trying to say. If a startup fails, equity holders lose everything, same as in bank failures. But startups don't have depositors. Bank depositors always get 100% up to the FDIC limit, but depositors are not equity investors, they're (very senior) debt holders. The price they pay for the safety is generally lower interest rates than junior creditors or preferred shares. For the other parties involved (employers, shareholders, other creditors) their risks and rewards aren't all that different from any other large company. AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
  - kilotaras 4y ago
    > depositors get back 100% up to the FDIC limit Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part. I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.