Risk Management, Roman Style
There’s an aqueduct in Segovia, in Spain, that’s stood the test of time. A lot of water has flowed over that bridge … two thousand years worth, more or less, since it was built by the Roman Empire. Back then risk management consisted of getting the chief engineer to stand underneath the structure when they removed the supports: now that’s a proper incentive.
Incentives stand at the heart of a lot of human behaviour in corporations but financial theorists have had a great deal of difficulty in understanding that an incentive is not necessarily the same as a financial reward. Although the ideas of psychologists and sociologists are slowly seeping through there’s still a long way to go before there’s a proper appreciation of what motivates people. In the meantime we’re stuck with Agency Theory, the sheer power of grim self-interest: it’s like real life but not as we know it.
Agency in Hammurabi
In fact the idea of making builders stand beneath their constructions when first erected goes back a lot further than the Romans, it can be found in the Code of Hammurabi, from Babylonian times, where the punishment for building a house that fell down was death. To be fair, most crimes in Babylonian times were punishable by death largely, it seems, because of a lack of imagination when it came to various punishments. Forcing offenders to learn about Agency Theory would have been one alternative.
The idea is that there are two parties involved in forming an employment contract (actually any sort of contract, but let’s talk specifics here) – a principle (the employer) and the agent (the employee). Supposedly these two parties have different objectives: roughly, the employer wants to grind the employee into the ground at minimal cost and the employee wants to shirk about while earning as much as possible. It’s the normal economic view of human nature: miserly and miserable....MORE