Skin in the Game!

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Skin in the Game!
Jos Nieland, Teacher, Netherlands

To ensure proper handling of risks by managers in both commercial and public organizations, it's important to make them put skin in the game.
"Skin in the Game" means we can (still) give a responsible person an upside (bonus, high salary) if he/she makes the right decisions, but there should be also a downside (bonus malus, punishment, dismissal) if he/she makes the wrong ones. In short: No Bonus Without Malus.

Making various managers put skin in the game helps a lot to combat agency problems and moral hazard.
Consider the difference between bankers, scientists, doctors, consultants and civil servants on one hand, who all have little if any downside but a lot of upside, and on the other hand soldiers and entrepreneurs who have a lot of downside if they make the wrong decisions.

Taleb argues that never in history the balance between downside and upside in the Western world has been more in disequilibrium as has been the case over the last decade.
Do you agree this has been a major cause for the current market conditions? And if so, what solutions can we recommend to legislators?



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