

Why fund managers have an incentive to take overly high risks - Tichy
http://www.nytimes.com/2007/05/24/business/24scene.html?ex=1337659200&en=5cbb330f07f907a4&ei=5090&partner=rssuserland&emc=rss

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nostrademons
I had a similar WTF moment when I read how Buffett was picking the new manager
of Berkshire Hathaway. It seems to go against everything he's taught in 30
years of letters from the chairman. He's written _specifically_ about how
short-term incentives like this lead to poor performance over time.

It makes me wonder if there's something else at work. Maybe Buffett plans to
_watch_ what the managers do with the money over 2 years, ignore the results,
and pick the one whose actions best fit Buffett's investing style. The
"contest" aspect is to see how managers react to temptation - after all, they
will face incentives like this every time they need to write Berkshire's
annual reports. Buffett wants something who will do the right thing even when
the incentives are not aligned with it. This way, he can weed out the ones
that will prioritize short term gain over long term health when people ask for
short term gain, and select only the ones that actually know what they're
doing.

