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Mon, 02 Apr 2012
The Hammurabi Rule
# 21:05 in ./general

Nassim Nicholas Taleb is always worth reading.

From the Sais Review How to Prevent Other Financial Crises (PDF) and Hammurabi's Code :

If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.

And thus, Taleb and Martin argue that financial agents need more "skin in the game".

This means that :

In other words, nobody should be in a position to have the upside without sharing the downside, particularly when others may be harmed. While this principle seems simple, we have moved away from it in the finance world, particularly when it comes to financial organizations that have been deemed “too big to fail.”

It's good to see smart people like Taleb, Kay and Haldane thinking hard about what went wrong and how to fix things. As Kay's said, we need to separate the "casino" part of the bank from the "utility". Human nature being what it is, you can't always trust people, especially when such large amounts of money are floating around and the reward structures are misaligned. Financiers should understand that without "skin in the game", then Hammurabi's Code might mean a sticky end ...

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