TruePath

Should 'Bad' Financial Contracts Be Replaced with 'Blessed' Ones?

Insisting that intermediaries be substantially invested in the funds they manage seems like a bad idea for several reasons. Also, I'm unconvinced it would be any more effective than having reputations on the line.

First of all one's appetite for risk changes depending on one's situation and age. If you insisted that all fund managers were heavily invested in their own funds then experts in high risk parts of the market might be forced to retire once they reached they age they could no longer handle that level of risk. Also, some intermediaries are experts in financial instruments that would be of no use to an individual, e.g., derivitive contracts used to offset certain kinds of exposure.

Secondly, I think you underestimate the pressure of reputational effects as oppossed to monetary effects. In fact, I think much of the problem is exactly that people respond more strongly to reputational effects than to monetary ones. Money is just one form of status after all. This reputational craving can encourage people in the financial industry to seek the best practices and other common practices as a means of insurance that guarantees they never lose their reputations as they only take a hit if everyone does. Given the strength of these effects I suspect it will override any monetary incentives created by forcing people to invest in their own funds.

Finally, I fear this would have the unintended consequence of attracting risk-seeking individuals to these positions. After all if you demand they put a large chunk of their money in their own funds you've effectively forced them to put all their eggs in one basket (if they fuck up their job they lose their job and savings). Yet, it seems that exactly what you don't want to do is further bias these positions towards risk-prone individuals.