Why It’s Smart to Be Reckless on Wall Street

"Why It's Smart to Be Reckless on Wall Street"

Article Summary:
Original Article by Chris Arnade of Scientific American

A guaranteed way to get paid if you work on Wall Street is to find a best friend at a competing bank or hedge fund and take opposite sides of the same large bet. In a year, one of you will have a huge profit, while the other will have lost both both a profit and a job. The sum of both your profits will be zero, but the sum of what you get paid will be positive. Split the pay, Arnade explains.

That 'asymmetry' in pay (money for profits, flat for losses), Arnade describes rewards short-term gains without regard to long-term consequences. The results are the reliance on excessive leverage, banks that are loaded with unclear financial products and flawed trading models.

Regulation is largely toothless if banks and their employees have the financial incentive to be reckless.

"The incentives are clear. If you make a bunch of money you get personally wealthy. If you lose then you just go home and look for a new job," Arnade explains.

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