Oil spills, financial crashes, and gambling with other peoples money

Free Slides from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ What Oil Spills and Financial Crashes Have in Common: Gambling with Other People’s Money Post prepared , June 6, 2010 Terms of Use: These slides are made available under Creative Commons License Attribution—Share Alike 3.0 . You are free to use these slides as a resource for your economics classes together with whatever textbook you are using. If you like the slides, you may also want to take a look at my textbook, Introduction to Economics , from BVT Publishers.

All Business is Risky ,[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Risking your Own Money as an Entrepreneur ,[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Recreational Gambling ,[object Object],[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Gambling with Other People’s Money ,[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Symmetrical and Skewed Risks ,[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Negatively Skewed Risks and Executive Compensation ,[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Example of incentive to take negatively-skewed risk ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Negatively skewed strategy B has higher payoff for the executive but lower payoff for shareholders Assume a bonus plan that pays 0.1% of net profit each quarter Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Not Just Top Executives ,[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Negatively Skewed Risks and the Financial Crisis ,[object Object],[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: pdclipart.com

Negatively Skewed Risks and the Gulf Oil Spill ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/ Source: www.whitehouse.gov

What can be done? ,[object Object],[object Object],[object Object],[object Object],[object Object],Post P100606 from Ed Dolan’s Econ Blog http://dolanecon.blogspot.com/

Oil spills, financial crashes, and gambling with other peoples money

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Oil spills, financial crashes, and gambling with other peoples money