On Wall Street, it seems, the more aggressive and reckless the stock trader the more money he’s going to make – the bigger the bonus. And, even if he loses a lot of money, it’s not his money and he’s then potentially valuable to another trading firm if he does in fact actually get fired for losing said money.
The incentives are horribly skewed towards risky trading. The stock trader who loses money might go to jail if they’re caught doing something illegal (even jail time is rare though), but if they’re just making risky trades, which the firm he works for is supporting and aware of, then the money he’s lost is not going to come out of his personal bank account in the end:
The incentives are clear. If you make a bunch of money you get personally wealthy. If you lose then you just go home and look for a new job.
Losing lots of money is hardly the career ender that outsiders imagine. If traders lose big then they will get fired, but they will now have experience. If one loses really big then one has almost a badge of honor. One could not be allowed to lose $1 billion unless one was really important.
Wall Street is littered with traders who have “blown up” at multiple establishments or funds. There are enough to fill up a town about the size of, well, West Hampton. (ScientificAmerican)