Incentive

I am short on the Nifty and even as I write this note I see the Singapore Nifty down 30 points. I should rejoice but I am worried. You see, I have this untested belief that if the Nifty opens down then there is a great chance that it will reverse during the day and actually turn what was a profitable day in the beginning into a loss making one. (BTW just as an aside, I need not have written "untested belief" in the previous sentence because something is labeled a belief precisely because it is untested. Once tested and proved to be correct then it ceases to be a belief and becomes a fact)

Despite this fear that Nifty might move up during the day, I continue to remain short and will cut my short positions and go long only above 5565.

I have written all this and yet I remain unsatisfied. I have not even managed to fill up a page on Bloomberg and that just wont do. So I will need to comment on something that is totally unrelated to the markets. Today, I specifically wanted to talk about CEOs who are smart enough to foresee potential future problems and their incentive to take corrective action which requires a definite pain for the short term.

If you think about it, the way our corporate incentives are structured there is zero incentive for the CEO to take any action which requires short term pain to prevent potential future problems. This is can be shown in the form of a nice quadrant (I love quadrants) and is attached with this mail. So really the way corporate incentives are structured, the CEO gets praised only 25% of the times for taking action- a poor probability you will agree.

CEO does not taken the painful short term steps. Potential problem materialises and company gets into trouble: But CEO is not in trouble since nobody else had seen the potential problem too and everybody in the industry is in the same boat. Everybody applies to the Govt for a bailout and all are saved!	CEO takes the painful short term steps. Future problem happens but company is saved due to the CEOs foresight: CEO is praised as a visionary
CEO does not take painful short term steps. Potential problem does not materialise: No problem for the CEO	CEO takes painful short term steps. Future problem does not materialise: CEO is dubbed an idiot by shareholders and general public.

As you can see, taking Action can lead to either praise or grief. But not taking action is never penalised. Clearly, there is therefore greater incentive to not do anything about any potential problem until it emerges in the public consciousness as a “Clear and Present Danger”

This problem of incentives gets even worse when it comes to democratically elected politicians. There is again very low incentive to sell anything painful in the short term for future benefits. No wonder that countries across the world have got themselves into such big fiscal mess.

Looks like, I am getting into the realm of management thinkers and gurus, which is not such a bad thing considering that some of them get paid lot of money to peddle this kind of stuff. Tell me what is the incentive for somebody to trade and make an honest living when one can do this sort of quadrants and make a good living?