Bonus and individual incentives

According to Financial Times, Wall Street's bonus pool rose for the first time in three years. It was caused by the increase in trading volumes due to the boom in the global financial markets. The bonus rates have been cut several times since the 2008 Financial Crisis, as bankers have been blamed for their misconduct and their damage for the global economy and society. The bonus cuts have been seen as a part of punishment.

However, recently the boom in financial markets will increase investors, traders and bankers' incentives to act actively in financial markets. Moreover, because bonus still exists, bankers and traders want to build up volumes in order to boost their bonuses, especially when the proportion of profits and revenues received by bonus pool decreases, building up volumes becomes extraordinarily important. Usually when quantity increases, quality will decrease, as when more human capital (including time, human capacity, knowledge, and etc.) are used for building up volumes, the quality of decisions is very likely to decrease. This can cause an accumulation of omitted risk over time.

During the boom period, as long as no one pays attention to the omitted risk and the prices increase, such problem will not appear. And the quality problem of decision making seems insignificant, as the majority of the decisions made during the boom seems to have no problems based on their short-term outcomes. While we enter a recession, these investors, banks and traders become very cautious and risk averse, they rather take more time to make one crucial move than rush to seek a large number of opportunities. When they spend more time on making each decision, the quantity will definitely decrease but their decision making quality is very likely to improve. However, their decision making quality is still difficult to be fairly judged. Unlike the boom period when the positive side is overestimated, during a recession, the negative factors will be overestimated as well.

Bonus can increase individuals' incentives to seek for short-term profits; however, it may worsen the quality of decision making as it focuses too much on short-term effect. In addition, due to the outcomes are long lasting and appear differently at different time periods, quality evaluation is difficult to be fair and accurate.