The Skin in the Game as a Risk Filter

Nassim N. Taleb and Constantine Sandis
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Nassim N. Taleb: Department of Finance and Risk Engineering
Constantine Sandis: Oxford Brooks University

A chapter in Future Perspectives in Risk Models and Finance, 2015, pp 125-136 from Springer

Abstract: Abstract Standard economic theory makes an allowance for the agency problem, but not the compounding of moral hazard in the presence of informational opacity, particularly in what concerns high-impact events in fat tailed domains (under slow convergence for the law of large numbers). Nor did it look at exposure as a filter that removes nefarious risk takers from the system so they stop harming others. red (In the language of probability, skin in the game creates an absorbing state for the agent, not just the principal). But the ancients did; so did many aspects of moral philosophy. We propose a global and morally mandatory heuristic that anyone involved in an action which can possibly generate harm for others, even probabilistically, should be required to be exposed to some damage, regardless of context. While perhaps not sufficient, the heuristic is certainly necessary hence mandatory. It is supposed to counter redvoluntary and involuntary risk hiding - and risk transfer - in the tails.

Keywords: Moral Philosophy; Hedge Fund; Agency Problem; Fund Manager; Corporate Manager (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:spr:isochp:978-3-319-07524-2_4

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DOI: 10.1007/978-3-319-07524-2_4

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