The one-sided bet rears its ugly head once again

by Andrew Gelman on November 3, 2011 · 4 comments

in Political Economy

The story of notorious speed-limit-violater and gambler-with-other-people’s-money Jon Corzine should remind us all of the problem with asymmetrical bets.

Corzine’s behavior has been linked to the idea of “too big to fail” (see link above)—-and I agree these can make things worse—-but I think the fundamental problem would arise even in a world without bailouts. The fundamental problem seems to be that the laws put people like Corzine in a heads-I-win, tails-you-lose situation. If he makes his bet, he wins billions, but if he loses his bet, he doesn’t have to pay billions. Sure, he lost his reputation, but he’s not having to pay billions of dollars back to people.

None of this is new but it’s worth keeping on the front burner, given that it happens over and over again (with or without government bailouts).

{ 4 comments }

Moby Hick November 3, 2011 at 10:42 pm

Yep. This is what convinced me to support absurdly high marginal tax rates and capital gains taxes.

Thomas November 4, 2011 at 12:19 am

How was Corzine going to make billions if MF’s best paid off?

Andrew Gelman November 4, 2011 at 7:36 am

I don’t know—but I’m glad it didn’t happen!

Boonton November 4, 2011 at 11:12 am

How would he have made lots if his bet paid off? Well he would have a huge bonus, he probably has some type of stock options in his employment contract so he would have reaped the rewards from MF’s share price zooming up. And of course he would have had a reputation as an ‘innovator’…someone who took a sleepy company that simply took small transaction fees for processing trades in the financial market into a powerhouse ‘Master of the Universe’ company boldly making bets.

The problem comes no in the failure but in the success. If he was successful he wouldn’t have been seen as someone who just happened to get lucky making a risky bet, he would have been seen as a seer in the financial markets and his pay would have skyrocketted accordingly.

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