Tuesday, March 1, 2011

Banker Bonus Deferrals Won't Help

Via The Atlantic.
First, money not in bankers' hands is viewed as more worthless with each year that passes. This is a problem for regulators who hoped deferred bonuses were the answer. If all bankers care about is what they get up-front, then they'll continue to seek short-term profit and ignore long-term risk: they'll consider any deferred payments marginal anyway, so they won't care of they're lost.
Second, it appears to provide a surprising observation on bankers' risk adversity when it comes to their own money. Their risk tolerance appears very low. Think about the example above where there's a 75% chance of receiving some money now or more money later. If you are more risk adverse, then you would prefer less money now, because you would not want to factor future uncertainty in as a variable for pay out. Bankers don't appear to be comfortable with the risk time poses, even though the expected value of the payout is nearly double.
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