Banning banker bonuses

Nassim Nicholas Taleb

The New York Times

There’s one way to stop bankers from taking “risks that threaten the general public,” said Nassim Nicholas Taleb. “Eliminate bonuses.” No one employed by a company that “would require a taxpayer-financed bailout if it failed” should ever get a bonus, period. We need such a rule because bonuses give bankers a no-lose incentive to “game the system” instead of judging risk responsibly. We don’t lavish bonuses on our soldiers, who receive “promotions and the honor of a job well done if they succeed” and shame if they fail. By contrast, bankers receive big bonuses for short-term profits and bailouts for failure.

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Nearly 4,000 years ago, the Babylonians realized that such “upside-without-downside” reward systems lead to trouble. They enforced “the best risk-management rule ever,” declaring a builder could be put to death if he built a shoddy dwelling. By making it unattractive for builders to cut corners and fool inspectors, the Babylonians got stronger houses. To achieve more stability in our financial system, we don’t need such a draconian threat. One basic rule would suffice: “Bonuses and bailouts should never mix.”