De Economist

, Volume 157, Issue 2, pp 209–213 | Cite as

The Forgotten Risk: Financial Incentives

  • Gerrit Zalm
Article

Summary

The number of risks that are taken into account by risk managers has grown over the years, but they still have a blind spot for the danger that remuneration schemes and financial incentives can lead to more risk taking. Such an effect constitutes a regime change, making standard statistical analyses of previous data obsolete. Common remuneration contracts for hedge fund managers and bank traders provoke risk taking and lead to volatile results. The incentive structure of rating agencies sheds doubts on the quality of their judgment. Risk managers should address the behavioral effects of incentive schemes, both inside and outside their firm. Incentive schemes should be corrected in such a way that only long-term results pay off.

Keywords

Behavioral effects Incentives Remuneration schemes Risk taking 

JEL Code(s)

G29 G32 M52 

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Copyright information

© Springer Science+Business Media, LLC. 2009

Authors and Affiliations

  • Gerrit Zalm
    • 1
  1. 1.CEO, ABN-AMRO BankAmsterdamThe Netherlands

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