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Comment by wmf | Hacker News Reader

This is true, but the downside is capped: a bonus can't go below zero. Thus traders may become insensitive to the amount of money they lose and thus increase risk.

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Thus traders may become insensitive to the amount of money they lose and thus increase risk.

They're already doing that.

you could improve the compensation algorithm to adjust for risk.

You can hide risks.

You can hide compensation.

A bonus can go "below zero" if you need to get a >0 bonus just to reach your market salary.

But it can only go as far below 0 as the amount in salary you sacrificed in exchange for a potential bonus.

Yyyyes...? What is your point?

Edit: To clarify (since someone downvoted me), you are making a true statement, but I don't see how it is in conflict with anything I'm saying, or what other point it supports.

What Taleb is saying is still true. If I have a 400k market salary and I give up 200k of it for the right to 1% of the profits I generate, then I still maximize the expected value of my compensation that year by maximizing the size of my bets. I could bet a billion dollars on a coin flip, get 9.8 million (after recouping foregone salary) on heads and lose 200k on tails. Moreover, there is a well established history of traders that lost large amounts of money finding gainful employment regardless. See Boaz Weinstein, for example.

Based on those figures, earning a profit worth a bonus of 400,000 and losing far more the following year breaks even with respect to salary, so there's hardly an incentive to ensure consistent trading success to average well above market salary. If you can adopt worse trading strategies than martingaling a roulette wheel and still come out far ahead on salary, the incentive scheme isn't well designed.

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