By NASSIM NICHOLAS TALEB, NY Times
Excerpt
The ancients were fully aware of this upside-without-downside asymmetry, and they built simple rules in response. Nearly 4,000 years ago, Hammurabi’s code specified this: “If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.”
This was simply the best risk-management rule ever. The Babylonians understood that the builder will always know more about the risks than the client, and can hide fragilities and improve his profitability by cutting corners — in, say, the foundation. The builder can also fool the inspector; the person hiding risk has a large informational advantage over the one who has to find it.
Banning bonuses addresses the principal-agent problem in economics: the separation between an agent’s interests and those of the client, or principal, he is supposed to represent. The potency of my solution lies in the idea that people do not consciously wish to harm themselves; I feel much safer on a plane because the pilot, and not a drone, is at the controls. Similarly, cooks should taste their own cooking; engineers should stand under the bridges they have designed when the bridges are tested; the captain should be the last to leave the ship. The Romans even figured out how to deter cowardice that causes the death of others with the technique called decimation: If a legion lost a battle and there was suspicion of cowardice, 10 percent of the soldiers and commanders — usually chosen at random — were put to death.
