Comments on: The Rhetoric of Bearing Risk

By: engels

engels — Tue, 02 Jun 2009 18:01:44 +0000

Ambinder wonders ‘what happened to the once inviolate principle of rewarding risk-takers’? Is this not in any case about the stupidest question you can ask round about June 2009? I dunno, maybe a similar thing that happened to the once inviolate principle of spreading democracy in the Middle East by Shock and Awe…

By: engels

engels — Tue, 02 Jun 2009 17:36:38 +0000

Spelling could also do with more government support as always.

By: engels

engels — Tue, 02 Jun 2009 17:34:14 +0000

Katherine: yes, it’s a bit like saying that philanphrophy ought to be encouraged—by the government compensating rich philanphropists for 100% of any donations they make.

By: Tim Wilkinson

Tim Wilkinson — Tue, 02 Jun 2009 08:44:54 +0000

Yes, the ‘reward’ is actually an incentive built into the system. Not a discretionary tribute to virtue. It may be desirable to have systems which set up incentives for certain kinds of risk-taking (though actually the size of the risk – both of the probabilities and of the benefits/losses – is very relevant, as is background wealth thus marginal disutility of loss). More accurately a system may be set up so as to affect the cost-benefit analysis of economic actors. Risk is always a probability distribution over more than one possible outcome. (there’s also risk-aversion to be considered, which is VERY sensitive to the size of what is risked relative to wealth .

Yes, there’s nothing inherently good – or rewardable – about taking risks. Otherwise I’d be a professional coin-tosser (UK readers: rather than just a…yes, yes). So yes the point is stoopid – and should be framed, if it must be at all, in terms of whether the administration is interfering illegitimately in the (ahem) smooth running of the system, or frustrating legtimate expectations either unfairly or in a way that jeopardises the ‘incentives that make capitalism work’.

By: Katherine

Katherine — Tue, 02 Jun 2009 08:13:25 +0000

The more I think about this, the more annoyed I am getting. This kind of “risk-takers should get rewards” bollocks is exactly what was/is wrong with the whole banking cock-up – and continues to be, with bailouts aplenty.

The taking of a risk does not mean the getting of a reward. The bloody meaning of risk taking is that you sodding well take a risk that you get nothing. To say anything else is to entirely turn the meaning of “risk” on its head. Gah, I’m getting incoherent.

By: George W

George W — Mon, 01 Jun 2009 16:28:46 +0000

I don’t always agree with the economics of this blog (and that’s when I can understand it) but this post certainly sounds right to me.

By: Henry

Henry — Mon, 01 Jun 2009 15:49:38 +0000

Bloix – fair enough – this is not an argument that I believe in myself – what I was trying to do was to say something like ‘even if you grant for the sake of argument that there is a normative case there, this set of claims makes no sense.’

By: michael e sullivan

michael e sullivan — Mon, 01 Jun 2009 15:42:18 +0000

First I agree completely with henry’s thrust. The rewards for risk-taking come when the company does well and most of the benefit accrues to stockholders. When the company declares bankruptcy is the risk part of the risk taking, where if you don’t lose more than others, where exactly was the additional risk?

One thing not yet mentioned in this discussion is that stockholders do get risk mitigation from the government in the form of… wait for it… bankruptcy.

Before modern bankruptcy laws, an equity holder could be saddled with debt over and above the value of his assets. A failed entrepreneur might spend the rest of his life in debtor’s prison, rather than merely liquidating and giving creditors what’s left, or turning over ownership to said creditors in a reorg and afterwords being free of the debt.

But today, under normal corporate conditions, your stock value can never drop below zero.

By: Tim Wilkinson

Tim Wilkinson — Mon, 01 Jun 2009 15:34:28 +0000

#32, #36: And that company’s not just an association with ‘limited’ liability (i.e. no liability, just sunk costs), but a legal person – a psychopath, as The Corporation aptly characterises it, if not a perfectly functioning one. This Golem has lots of human-like rights, but will obligingly fall on its sword when its 10%-generating ability comes to an end, taking all its unsatisfied debts and its few other responsibilities with it.

And generally no-one has to answer for the company’s crimes, still less for what would be crimes if a human being with normally functioning brain had done them. The stockholders have no direct control. The upper management (whatever they are calling themselves these days) can almost always claim, often accurately, that they have no personal involvement sufficient for criminal liability – at least if they have 1. any discretion, 2. some ability at designing incentives and 3. a moderately numerous workforce. And the workforce have no liability because they don’t have the big picture (though they might get done for human crimes – possibly as a scapegoat). So the company just pays a fine as the downside of its psycho risk-benefit analysis.

How cool is that! I want one!

By: Ginger Yellow

Ginger Yellow — Mon, 01 Jun 2009 15:31:17 +0000

Not to mention the dividends they continued to extract while the company was making multi-billion dollar losses.

By: dsquared

dsquared — Mon, 01 Jun 2009 14:27:02 +0000

Katherine in #32 has it exactly right. The “plain unadorned stockholders” have done really well and been rewarded massively by society for their risk bearing, by getting zero. They formed a company, borrowed a huge amount from the bank, acquired large amounts of labour on the basis of pensions promises and so on – and now they’re being allowed to walk away having lost no more than their original investment! That’s a fantastic deal!

By: Bloix

Bloix — Mon, 01 Jun 2009 14:13:04 +0000

” You could perhaps make a case on normative grounds that people who took a higher risk should get a bigger share of whatever is left. ”

No, you can’t. The sentence doesn’t even make any sense. The meaning of “took a higher risk” is that they agreed to get a smaller share, or no share, of “whatever is left” if things went badly. If they get a “bigger share” then they didn’t take a “higher risk.”

By: mpowell

mpowell — Mon, 01 Jun 2009 10:50:01 +0000

This point has already been made in 2 and 29, but I just wanted to reiterate. It doesn’t really matter what Ambinder really ‘meant’. To worry about the fate of ‘risk-takers’ in the context of bankruptcy proceedings is just to mark yourself out as a complete ignoramus or as a servant to the interests of those ‘risk-takers’ (ie, powerful). I think with Ambinder its equal parts of both, but we don’t even need to get into the particulars of this particular situation (which will only make his position look far far worse, actually) to note that Ambinder has already shredded any credibility his argument may have had.

By: Tracy W

Tracy W — Mon, 01 Jun 2009 08:48:05 +0000

It sounds to me like the bloke has misunderstood the argument about the relative priorities of secured creditors versus workers. It’s based on faulty logic, but more of a problem with the learning process than anything more fundamental.

By: Katherine

Katherine — Mon, 01 Jun 2009 08:18:05 +0000

“poor unadorned stockholders”! Snort. He (and everyone else) seems to have forgotten that stockholders are enormously protected already – by the so-called “corporate veil”.

A company goes bankrupt, say, with massive debts to third parties. Can those third parties go after the investors (who, after all, were the prime movers behind the creation of the debt) for the whole of the money owed to them? No, they cannot. The investors are only liable for the amount that they put in.

This is the whole point of the limited liability company. That’s the protection for the “poor unadorned stockholders” right there.