Exercising the 'Traders Option'
The problem of risk-asymmetry and risk vs. reward in the world of finance.
As current events in the financial markets unfold, there has been some criticism of the levels of remuneration paid to senior bankers and other financiers. There is a common perception of a significant imbalance between risk and reward.
Some of these arguments reminded me of a phenomenon known as the 'Trader's Option' within the banks in the City, which has often been a key factor behind the well-publicised cases of Rogue-Traders.
One answer is to reward executives according to their 'Risk-Adjusted' performance, unsuprisingly executives often tend to resist being 'risk-adjusted'. However it is worth bearing in mind that whilst 'Rogue Traders' can do quite a lot of damage, 'Rogue Senior Executives' can do considerably more !