Risk-taking and virtue

I've been thinking more about how we see the world if we use the older Aristotelian tradition of the virtues, following on my discussion of After Virtue below.

Why should anyone care? Is this not quite an abstract philosophical question remote from an economy beset by debt, unemployment, and the rancid remains of a vast financial crash?

We should care because it affects the incentives we live by and the kind of rules our lives follow, the kind of behavior we encourage and respect and therefore the kind of economy and society we have.

Something has gone terribly wrong with our incentives. And that is why going back to our fundamental assumptions about what we admire and encourage is a good idea.

Let's take a concrete example. The right and the business community often argues we need to reward risk-taking - for example, starting a business or investing in a risky venture. Or trading CDOs or swaptions.

But it does not have to be purely a matter of monetary incentives to take risks, or monetary compensation for successful outcomes.

Risk-taking is in many ways a version of one of the older virtues - courage. And it lies, like other virtues, between two vices. There is rashness or speculative excess on the one hand. And there is being too conservative, too cautious and unwilling to have any skin in the game on the other.

In McIntyre's scheme, the general virtue, like courage or honesty, is exercised in a specific practice - being an entrepreneur or investor, say - and embedded in institutions which provide external rewards.

The economic issue is getting people to take the right degree of risk. And it is that which the bonus incentives in the banks obscured. (It is more than just a principal-agent problem, in technical economic terms as well.)

So you get ought to get respect and a reward for exercising the virtue, not just - or even primarily - the monetary reward.

It makes risk-taking a matter of character and judgment, not just probability and math. That is also attractive.

Many of the explanations for the financial crisis come down to excessive incentives to take risks. So a different way to look at risk behavior matters, beyond just the expected payoff, value-at-risk or hedging strategy. Risk is not probability ( a theme I will return to later.)

Money and Virtue

One of our problems is virtue is invisible to money. The worst cowardly vicious thief can still be rich. Money is value-neutral. That is one of its advantages in a liberal society. Money can be a means to any end.

And that is why many groups - the great religions, the older professions and academia, the arts and sciences, aristocracy and military castes - have always been suspicious of money. It did not usually prove any worth, even if they still liked to have it.

Indeed, it could often undercut other values. Traditional societies tend to corrode quite quickly in the face of the vigor, energy and flexibility of monetary, commercial societies.

Merchants were looked down upon by the priestly and aristocratic castes of traditional societies. In India, for example, Brahmins and Kshatriyas looked down upon the Vaisya merchant castes, and all looked down upon the laboring Shudra castes.

These days we are very suspicious of distinctions of respect or status, or any incentives which are not monetary. Older ideas like honor or duty have faded away. And maybe often that is a good thing. Nationalism or ethnic identity sometimes rears its head.

But we have few incentives other than money - and perhaps celebrity and political power - to motivate people in broader society. Maybe that is where a lot of the problem lies.

It's another coffee shop question.

What should our incentives be?