When a CEO adjudicated a dispute between his star trader, who had produced $50 million in profits every quarter for the past ten quarters, and his risk manager, who had opposed the trader's risk taking all along, the natural impulse would be to side with the trader. The risk manager was often portrayed as the old has-been who did not understand the new paradigm—and the risk takers had the track record to prove it.
This is kind of what scares me the most: Who is actually motivated to keep the firm afloat vs taking on bets against very unlikely but disastrous events? not CEO, not shareholders (most at least, who want to see earnings especially vs competitors), certainly not those compensated immediately for taking on the risk. maybe the risk management team is the only group in any sort of position of relevance who are motivated to keep rm afloat or decades… but even within that role there's certainly opportunity to shut up and get big bonuses for a few years, especially if that wins favor with executives (and thus promotion, bigger bonuses etc.).And if few or no one in actual power is incentivized to keep firm afloat, who is motivated to keep the entire economy healthy?
