Incentives: Lottery Tickets to Losses
If you design a system that is gameable, a certain percentage of people will game it.
Here is a guaranteed way to get paid well if you work on Wall Street. Find a best friend at a competing bank or hedge fund and take opposite sides of the same large bet. In one year’s time one of you will have a huge profit and get paid well. The other person will have lost and perhaps be fired. The sum of both your profits will be zero, but the sum of what you get paid will be positive. Split the pay. This scheme is one of the more fanciful ways to exploit Wall Street’s compensation structure that pays absurdly well in the good years and just okay in the bad years. Losing money never means having to give anything back.
* * * * *
Here is a more conventional blueprint to personal wealth via Wall Street. Join a business that has an established track record. Start small, building up a few solid years of making decent profits. Do this for six or seven years. It’s called “milking the franchise.” Soon you will have respect and, most of all, expanded limits on what you can trade. Wait for a year when everyone is bullish. Then swing big. Really big. Don’t take judicious risk; take the most risk the firm will allow you. Follow the momentum, piling into trades others are doing. If you win, since you followed the herd, Wall Street will be flush with cash and you will get paid well, tens of millions well. If you lose you may get fired, but since everyone lost they will understand. This strategy is certainly not in the long-term interest of the firm, but it’s the smartest strategy to benefit the trader.