Nassim Taleb: Yeah
Erik Schatzker: This time around you said – I need to come on and teach people a lesson about risk management. And it has to do with the Code of Hammurabi. The Babylonian king, this is what he said in 1700 BC I want to read it to everybody.
Nassim Taleb: Yeah
Erik Schatzker: So they understand what you’re talking about.
“If a builder builds a house and the house collapses and causes the death of the owner of the house, the builder shall be put to death.”
And similarly right. “If it causes the death of the son of the owner of the house.” A son of that builder shall be put to death.
This is effectively, an elaboration on of an Eye for an Eye.
Nassim Taleb: No, no… Not really. Its, its in business you have the upside. You got to keep the downside.
Like the Romans figured out the best system. The best risk management rule ever.
Erik Schatzker: Hammurabi’s Code
Nassim Taleb: If you build. Yeah. If you build. That part of Hammurabi’s code. And the Romans implemented it.
If you build a bridge and your the engineer. You got to spend a few nights under the bridge. Okay so
Erik Schatzker: To make sure it stands
Nassim Taleb: Yeah. But the idea is, is a deterrent. Because that way the engineer doesn’t cut corners. To save money on corners. He cannot hide risk anymore
Erik Schatzker: So how does that apply to Wall Street?
Nassim Taleb: Well it’s very simple. The banks are in the business of hiding risk.
They hide risk… ah, ah they sell ah black swan exposures, tail events.
They hide risk. Ah they make steady money. They keep bonuses.
And when the thing collapses. You and I pay the price
Erik Schatzker: The socialization of losses. Is what the people have decided to call it?
Nassim Taleb: Exactly, exactly.
So capitalism is about incentives. But also about dis-incentives.
This rule okay, prevails in every single civilization. And has prevailed in the US for a long time.
Its, it, we, we have, we did break that rule in symmetry… With the, that model of bailing out companies and paying their executives a lot bonuses.
So it allows you to take the risk, okay. And, and it allows you to the risk. And if the house collapses, someone else dies and you still get a bonus!
Erik Schatzker: So how does it translate then? How does Hammurabi’s code translate for the modern age?
Nassim Taleb: You have symmetry.
If you make a bonus. If you have an upside, you have to have a downside.
If you don’t have, okay the downside. You cannot make a bonus.
It means very simply. If you are a banker and we will bail you out someday. We are exposed to bailout. You cannot earn more than a civil servant of corresponding rank period. That’s a simple rule
Erik Schatzker: So either that or you take the bonus that you already paid him back?
Nassim Taleb: It, it, or, or you cannot. I mean you cannot have Clawbacks unfortunately in America.
Otherwise so many people would have paid back their ah… I mean there are several hundred million dollars of bonuses paid back by bankers.
Unfortunately we don’t have Clawback. But we should going forward.
Bad bankers who have been subjected to bailouts, okay. Or can be possibly bailed out in the future
Erik Schatzker: Because their bank is too big to fail
Nassim Taleb: Go work for a Hedge Fund. Hedge Fund nobody bails out hedge funds. Go work for a Hedge Fund
Erik Schatzker: And what do the banks do that? Instead of trade and take risk
Nassim Taleb: That’s… I mean the IMF. A lot of people are working in businesses that help society and get no bonus.
The military they have all downside. They I mean their life okay. They are exposing themselves to death. The risk of death and they don’t get a bonus.