One of the myths of capitalism is that it's all about incentives.
We believe, naively, that if you if you align the incentives right, things will generally work out. But that's an incomplete view of reality.
It's also about disincentives.
We shouldn't have a piece of the upside unless we have a share of the downside. This is the foundation of Hammurabi’s code.
If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.
The very nature of compensation, as practised today, adds to risk. Nassim Taleb writes:
If you give someone a bonus without clawback provisions, he or she will have an incentive to hide risk by engaging in transactions that have a high probability of generating small profits and a small probability of blowups. Executives can thus collect bonuses for several years. If blowups eventually take place, the managers may have to apologize but won't have to return past bonuses. This applies to corporations, too. That's why many CEOs become rich while shareholders stay poor. Society and shareholders should have the legal power to get back the bonuses of those who fail us. That would make the world a better place.
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