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Hot take: There's nothing inherently wrong with excessive risk taking. There is something wrong with a lack of consequences for having those risks fail.

bluepizza 3y ago
There is something inherently wrong with the excessive risk taking: financial markets go through fashions, moods, and phases. If a manager's particular risk taking style fits the current moods of the markets, this manager will seem like a genius. Once the moods changes and the manager start taking massive losses, oh, seems like this guy should be fired. But his replacement will be just someone kinda aligned to the current moods. Once they change, this one will also be fired. The financial system is unpredictable. Even the best and most refined models fall apart. Excessive risk taking must be curbed because regularly taking losses due to flawed predictions is not a professional way of managing money.
gumby 3y ago
If you can handle the consequence of failure, the risk is by definition not excessive.
Maarten88 3y ago
What should the consequence be for bankers who take too much risk, their banks' failure spreading to the wider banking system, sending the economy into a recession and millions of people into poverty? Consequences (claw back) is the least that should happen, but it doesn't help the victims and might still incentivize short term risk taking (I win vs you loose). The solutions that the article offers (only allow long term incentives, include the interest of the entire banking system) might actually stimulate better risk-taking behavior. The real economy is slow, bankers' incentives should be too.
- s1artibartfast 3y ago
  There should be no consequences. They should simply carry insurance for to make investors whole.
reese_john 3y ago
Banks are not hedge funds. There is a lot wrong with excessive risk taking by banks, that's why it's heavily regulated. Systemic risk is bad. But excessive risk taking by hedge funds might be _net_ good, since it reduces inefficiencies in the market by removing bad money managers and investors from the system.
danielmarkbruce 3y ago
Depends on your definition of "excessive".

bluepizza 3y ago

There is something inherently wrong with the excessive risk taking: financial markets go through fashions, moods, and phases. If a manager's particular risk taking style fits the current moods of the markets, this manager will seem like a genius. Once the moods changes and the manager start taking massive losses, oh, seems like this guy should be fired. But his replacement will be just someone kinda aligned to the current moods. Once they change, this one will also be fired. The financial system is unpredictable. Even the best and most refined models fall apart. Excessive risk taking must be curbed because regularly taking losses due to flawed predictions is not a professional way of managing money.

gumby 3y ago

If you can handle the consequence of failure, the risk is by definition not excessive.

Maarten88 3y ago

What should the consequence be for bankers who take too much risk, their banks' failure spreading to the wider banking system, sending the economy into a recession and millions of people into poverty? Consequences (claw back) is the least that should happen, but it doesn't help the victims and might still incentivize short term risk taking (I win vs you loose). The solutions that the article offers (only allow long term incentives, include the interest of the entire banking system) might actually stimulate better risk-taking behavior. The real economy is slow, bankers' incentives should be too.

s1artibartfast 3y ago
There should be no consequences. They should simply carry insurance for to make investors whole.

reese_john 3y ago

Banks are not hedge funds. There is a lot wrong with excessive risk taking by banks, that's why it's heavily regulated. Systemic risk is bad. But excessive risk taking by hedge funds might be _net_ good, since it reduces inefficiencies in the market by removing bad money managers and investors from the system.

danielmarkbruce 3y ago

Depends on your definition of "excessive".