Caution: Banks Ahead!!

People are normally loss averse, meaning we don’t like to lose things, especially money. This fear of loss or fear of consequence is in many ways good for society. It restrains us from  making potentially disasterous decisions and prevents us from acting immoral. Imagine living in a world where murder was not considered a crime and murderers could not be convicted. Society would descend quickly into a state of chaos and entropy. Without  laws, order would dissolve and our sense morality would become corrupt, causing us to act without conscience .

The presence or lack of incentives which causes individuals to engage in risky behaviour is known widely as moral hazard. It is a world wide phenomenon which can be found in almost every aspect society, however it has now become almost synonomous with the banking sector. Throughout the financial crisis of 07/08 large banks and investment firms such as Bank of America and JPMorgan Chase, as well as countless others across the globe, received generous government bailouts, which has deprived tax payers of hundreds of billions. What happend to loss aversion, risk management and sensible investing?

Quite simply, they all vanished because there was no possibility of losing! Being “Too big to fail” meant that large corporations and financial institutions could engage in extremely risky behaviour without incurring the cost of heavy losses.  Rougue traders, dodgy hedgefund managers and unscrupulous CEOs knew that if their risky endevours paid off then they would stand to make a fortune and if they ended up losing, well then the government would step in to kiss their boo boos and make everything better.

Is it acceptable to privatize profits and socialize losses? To take enormous risks yet not be accountable for any?  Is this simply a failure of capitalism or more worryingly a confirmation that our sense of morality can be easily discarded for personal gain.

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One Response to "Caution: Banks Ahead!!"

  1. socialeum says:

    Appreciate you sharing, great post.Thanks Again. Really Cool.

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