![\"\"](\"https:\/\/www.mathewbinkley.org\/wp-content\/uploads\/2011\/07\/net-negative_net-positive.png\" "\\"net-negative_net-positive\\"")
<\/a><\/p>\nThe first investment is a net-positive investment.\u00a0 You’ll never lose money.\u00a0 The second investment is net-negative.\u00a0 Nine out of ten years you’re doing better than the boring guy, but that tenth year wipes out all your profit and leaves you in the hole.<\/p>\n
Given that, an owner would always choose the dull, boring investment to avoid losing his business (and thus his retirement).\u00a0 But what if you’re not the owner?\u00a0\u00a0 What if you’re a manager instead?<\/p>\n
Here’s why incentive matters.\u00a0 The manager has a strong incentive to gamble and choose the net-negative investment.\u00a0 He has a 9 in 10 chance of beating the boring guy in any given year, and is more likely to be promoted or receive a competing job offer based on his “superior performance” before<\/strong> the doomsday hits.\u00a0 And if he’s wrong, it’s the company’s money, not his.\u00a0\u00a0 Heads he wins, tails the company loses.\u00a0 It’s incompetence and short-term thinking masquerading as success.<\/p>\n This dynamic appears in many places in life, including politics.\u00a0 Politicians love making promises today that don’t have to paid until tomorrow.\u00a0 Think about it from their perspective:\u00a0 If you’re reelected every 2 years, you’re probably not going to be the one in the hot seat when the bill comes due 10 years later.\u00a0 Heads they win, tails the public loses.<\/p>\n This dynamic also occurs in business, but unlike politics, business has found ways to minimize it, by requiring managers to own shares in their company (and thus think like owners), or by vesting bonuses over 3-5 years (and forcing them to think long-term).<\/p>\n So my open question to the reader is:\u00a0 how can we impose similar restrictions on\u00a0 politicians, to make them act more like owners instead of managers?\u00a0 Complicating factor:\u00a0 the average voter is even more focused on the short term\u00a0 than the average politician.<\/p>\n","protected":false},"excerpt":{"rendered":" Imagine\u00a0 you own a business and are depending on it for your retirement.\u00a0\u00a0 You are faced with two possible investments:\u00a0\u00a0 One that returns a dull, boring 6% return year after year, or one that 90% of the time makes 12%, … Continue reading