incentives
The Agency Problem
The rule
The person deciding often keeps the reward and quietly passes the loss to others. So always ask who really carries the fall.
Where it flips
Thinking every manager is a hidden cheat makes you distrust honest people and do everything yourself, often worse. The fix is to look at how they are paid and what they personally lose, rather than assume bad faith.
Many managers are paid for gains they take now, while the risks they took land on someone else later. A fund chief pockets fat bonuses in good years. When a hidden bet finally blows up, it is the clients, or the public, who pay. The one enjoying the reward and the one carrying the risk are not the same person. Always trace where a bad result would truly fall.
A worked example
A scheme manager loads up on risky bonds to post a flashy 22% year and earns a big bonus. Two years later the bonds fail, the fund value sinks, and it is Aarohi's savings, not his bonus, that vanish. [illustrative]
How to spot it
- ·A big bonus now, with risk that shows up later
- ·The manager is shielded from the losses you take
- ·Gains kept private, losses shared with clients
Nassim Nicholas Taleb · Skin in the Game