For a few thousand dollars I learned from this to make proper risk management a major theme of my life for more than fifty years thereafter. In 2008 almost the entire world financial establishment didn’t understand this lesson and had overleveraged itself.
I think this is still the wrong perspective on 2008. Aside from home buyers, the entire financial hairball was due to individuals seeking high-risk returns knowing that their worst outcome would be job loss if their firm tanked. Limited downside (loss of future earnings not current wealth) and huge upside (they didn’t put many limits on themselves selling CDSs, buying and repackaging crap loans etc). The folly of his analysis here is in assuming that the individuals had the same incentives/risks/interests as the companies they represented. Truth is far from this as a company must ensure long-term health and revenue to survive. An employee (or even partner of an LLP) earns income every year and gets to keep it even if their firm implodes. They’re actually motivated to bet the firm and take high-risk returns now and bank them before some other bloke does the same thing first.
Ok, he gets to agency problem just a bit after this. ;)
