Wall Street will feel better if we tax them

Relieve this poor soul of stress!

It’s well known that humans are risk averse: a long time ago, losing any food could have meant death, so we’re now really afraid to lose any money even if, in the long run, we would have a higher expected payout. In addition, money can be a strong motivator: if you pay me by the word, I will write much longer blog posts (read Dickens).  Past a certain point, however, money is a stressor: if I make $100 per word, I’ll start wasting too much time trying to figure out the most lengthy way through which I can arrange the words that will still, however awkwardly, form coherent representations of the electrochemical action in my head that expresses itself as thoughts, and I’ll eventually choose posts which I think will require the most words, and I’ll not write what I necessarily want to.

So Wall Street would experience a lot less stress if they didn’t have to worry about losing all their pay to a bad trade and then not being able to afford Dalton, South Hampton, and St. Tropez.  (To an extent, this is the same phenomenon that explains the apparent low value of time people in poor countries exhibit: if my time is worth little money, I don’t mind spending it in a manner which does maximize its monetary value.)  Adam Pasick at Reuters reports on this body of research and the attempt to help Wall Street help itself:

Ariely and his team took the so-called Yerkes-Dodson law and applied it to people and financial incentives. Subjects were asked to perform certain tasks and received a monetary reward. Sure enough, the money increased cognitive performance to a point, and then became a drag.

“Money is a two-edged sword,” he said. “It’s a motivator and a stressor.”

He tried pitching this idea to a Wall Street bank in the hopes of repeating the experiment with traders and other financial executives who are exposed to massive incentives and stresses every day.Their response?

“They said, ‘We are special people. We’re not like everybody else, we thrive on stress, this is how we work, how we function,’” he said. “I said, ‘maybe you’re right, but why don’t we test it out? Come to the lab.’ They weren’t that interested.”

As almost everyone else has learned since 2007, Wall Street is different than us: they can mess up and not face the consequences.