How investment banking is like a video game

By Felix Salmon
December 9, 2009
Paul Kedrosky is nominally talking about a Swedish poker player, but really he could be talking about any number of i-bankers, hedge-funders, and private-equity types:


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Paul Kedrosky is nominally talking about a Swedish poker player, but really he could be talking about any number of i-bankers, hedge-funders, and private-equity types:

Isildur1 isn’t playing to make enough money to retire. He’s playing a video game, and trying to run up the highest score. That the score is denominated in dollars is only of nominal importance.

The question is whether and how, in a world populated by such men (and they’re always men), one can alter compensation to prevent untoward risk-taking. Isildur1 poses no systemic risk; the same cannot be said of Jimmy Cayne or Dick Fuld, or even Jon Meriwether, circa 1998. If they take their compensation in stock, and that stock rises quickly, that only serves to accelerate the rate at which their high score is rising, and to encourage them to take ever-greater risks.

The real problem here, I think, is that these men became so rich so early on in their careers that they’ve long since left the normal world of needing to make money so that they can spend it. Tying up compensation in long-vesting stock doesn’t change that: only a drastic cut in total compensation will solve this particular problem. And that’s one thing which is certainly not going to happen.

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Comments
5 comments so far

This completely makes sense. Love this insight.

When money becomes points in a competition rather than a medium of exchange for goods and services, it no longer has a declining marginal utility. If every extra dollar simply buys me another vacation home I don’t have time to visit, I don’t care about it so much. But if every extra dollar is like a point in a video game, every point has equal utility if it makes me win. Wanting a high score isn’t the same as wanting to be rich.

Posted by thefinite | Report as abusive

yes, if it is just an arms race, there’s no real problem with taxing the hell out of it as long as taxation is done through transparent rules. it won’t change relative rankings.

Posted by q_is_too_short | Report as abusive

This is why the answer to the question: “Why do you make so much money” is almost invariably “just a way of keeping score.”

Posted by Uncle_Billy | Report as abusive

Felix, TED had an excellent post about this a while ago: http://epicureandealmaker.blogspot.com/2 009/11/character-study.html

“There are people in the industry who, when you get right down to it, have no real interest in money. People who couldn’t give a flying fuck in a rolling donut whether they make $3 million, or $10 million, or $100 million a year, as long as they make more than the next guy. People who look at income, and bonuses, and aggregate net worth as a scorecard in the great game of life. People who want to make the most.”

Also, I think it’s worth noting that many of the legendary bankers (yes, there are some of those) did not take all the money off the table at all in their personal lives–Felix Rohatyn of Lazard and Sidney Weinberg of Goldman Sachs, while quite well-compensated, both took much smaller percentages as partners than they were entitled to on the basis of their contributions to the firm’s earnings.

Posted by megalomaniac | Report as abusive

I find investment banking to be more like playing Black Jack in a casino.

Posted by eddieblack | Report as abusive
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