Friday 28 January

This week, Mohammad Presents

Bankers’ Bonuses: How should bankers be paid? How much should they be paid?

It is now three years in a row that the bankers’ remuneration packages have received a lot of attention in the public and political sphere. For the past two years the heads of Britain’s five big firms have tried to be seen to exercise pay restraint, for instance waiving their bonuses or donating them to charity. That ceasefire will end this year1. This season promises to be as gory as ever. An expected £7 billion ($11 billion) bonus round in the City of London will be paid just as a wave of public-spending cuts are about to bite2.

I usually tend to think performance pay is essential for incentivizing workers in order to exert unobservable effort. In the case of financiers the unobservable effort may not be single dimensional meaning that they are choosing both the returns on investment and levels of risk3. Looking at bonuses this way raises some specific questions:

1. Who is responsible for the decision of how much to be paid to bankers?

Some would say the government since bonuses are paid from profits buoyed by public subsidies (direct bailouts, bailout guarantee and implicit zero interest subsidy)4.

Others would argue it is in our interest to let the banks decide this because good managers must be paid to clean up the mess and maximize the value of public share and also tightening rules domestically leads to outflow of capital5.

2. How should the optimal compensation package look like?

Some argue that bonuses are essential but they should be paid as shares of the company or should be based on long term performance measures. Thinking in favor of this argument we should bear in mind that managers at Lehman Brothers and Bear Stearns owned lots of shares yet ran their firms aground6.

Other might argue that maybe we don’t need this much of innovation in the banking sector and caps and taxes on the bankers are in the public interest even if they lead to a shrinking of the talents in the sector.

References:

1. http://www.economist.com/node/17909825?story_id=17909825

2. http://www.economist.com/node/17902729?story_id=17902729

3. This idea is originally from Tim and Maitreesh recent working paper on the optimal structure of bonuses.

4. http://www.economist.com/node/17417754?story_id=17417754

5. http://www.economist.com/node/17902729?story_id=17902729

6. Ibid.

Other sources:

http://www.johnkay.com/2011/01/26/the-war-on-moral-hazards-begins-at-home

http://news.bbc.co.uk/1/hi/business/8540020.stm

http://www.youtube.com/watch?v=5lIbWtOvRo8&feature=mcv

Friday 21 January

This week, Francisco presents

“Get rich or die tryin’“: Are we addicted to risk?

“Get rich or die tryin’“ is the title of debut album of rapper 50 Cent and it seems to be the motto of more and more people. Using a revealed preference argument, this make us believe that a significant number of people have preferences where the only satisfactory outcome is the maximum.

And it may be that this kind of behavior/preference is not restricted to a few individuals. We can think that the society as a whole have the same kind of behavior in several different situations:

· We take high risks to find new energy sources (e.g., risky oil drills and nuclear plants);

· We create new financial instruments, sometimes without careful thinking;

· Firms use high-risky/predatory strategies in litigations;

· War.

Are we addicted to risk?

Based on:

http://www.ncbi.nlm.nih.gov/pmc/articles/PMC2528783/?tool=pubmed

http://www.ted.com/talks/naomi_klein_addicted_to_risk.html

http://www.informaworld.com/smpp/section?content=a713937548&fulltext=713240928

http://en.wikipedia.org/wiki/Get_Rich_or_Die_Tryin'_(album)

Friday 13th of January

This week, Jason will introduce our discussion on “How should you have been educated?“

What children should be doing with their time is a topic on which many people, including children themselves, hold strong views, and the same has doubtless been the case for many centuries. Most adults believe that much or all of this time should involve 'education', which many (though surely not everyone!) would define as 'preparation for adult life'. But what is actually seen by the majority of people to constitute an appropriate education seems to vary widely across space and time.

One current trend in many places is towards more regimented activities and more time on academic subjects (and examinations on these) for young children, and away from unstructured play, as discussed for the US in this New York Times article. (link: http://www.nytimes.com/2011/01/06/garden/06play.html) In the UK, the new Education Secretary apparently believes (link: http://www.timesonline.co.uk/tol/news/politics/article7052010.ece) that one should look to the past for the appropriate way to educate children: "Most parents would rather their children had a traditional education, with children sitting in rows, learning the kings and queens of England, the great works of literature, proper mental arithmetic, algebra by the age of 11, modern foreign languages. That’s the best training of the mind and that’s how children will be able to compete."

Meanwhile, Boris Johnson, the mayor of London, bemoans (link: http://www.guardian.co.uk/politics/2010/mar/17/boris-johnson-lobbies-tories-latin-curriculum) the decline of Latin teaching in the UK's state schools. Time for you to introspect – given your current place in society and life, look back on the various elements of your childhood education (from before school through the end of high school, both inside and outside school – so this also includes ‘play’ and ‘extracurricular activities’ of various kinds). Which elements did and didn’t constitute a ‘good’ education for you, given what you know about your adult life now?