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December 04, 2013


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Tragedy is alpha plus time.


Is a story here about management incentives?

If XYZ PLC invents something vastly profitable, does the boss who authorised the research get much for it? And maybe the boss is earning so much that doubling his/her salary is much less than twice the utility of keeping the job. So management will do pretty much anything to keep the appearance of steady earnings and dividends. Blue sky research which may never pay off (and which may not benefit him much if it does) is irrational from the boss's perspective. [Doesn't really fit with the usual story of overconfident bosses.]

Not sure how that works on the downside if I'm right that management has an overly strong incentive to keep their jobs. Maybe it's rational to try to keep your job by keeping steady/increasing earnings at all costs because (a) you may get away with cutbacks or (b) they may bite your successor.


«All these cases show that increasing short-term profits can come at the expense of more exposure to bad tail risk, and less exposure to good.

Now, this isn't necessarily irrational. Tail risk doesn't often materialize - that's why it's called tail risk. And if RBS can cause inconvenience to customers without them withdrawing their business, then it is a rational strategy, of monetizing consumer surplus.»

What I call the base Blissex Second Principle is that all non-trivial financial fraud is a form of under-depreciation, either of capital or of risk; the extended Blissex Second Principle is that viceversa is usually true, that is under-depreciation is usually not a mistake but deliberate financial fraud.

And it is almost always currently something that the beneficiaries get away with.

Under-depreciation of capital or risk is a way to reclassify some chunk of explicit or implicit capital as profit.

Astute and self-dealing business manager, especially in the financial sector, are usually looking hard for the opportunity to under-depreciate capital or risk, as it is the easiest way to huge personal riches. Slight variants of this enrichment model even have their own nicknames, "capital decimation partners" or "picking up pennies in front of steamrollers".


Transparency. Businesses publish their profits but not their other key metrics which might indicate vulnerability. For obvious reasons! But this mis-sells to shareholders and also makes workers vulnerable.

The ability of companies to silence their employees, preventing them from discussing company and industry practice should be curtailed.


"Businesses publish their profits but not their other key metrics which might indicate vulnerability."

And the majority of media commentary is about businesses' profits and their other key metrics.

Samuel Conner

Someone much wiser than me wrote that we need to kill the microeconomist that lives inside each of our heads.

At an aggregate level, investment in basic infrastructure does produce profit; someone is producing the things invested in.

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