How To Succeed In Business Without Really Trying

Tyler Cowen describes “writing the naked put” as one of the causes of the financial crisis:

If you don’t know options theory, just imagine betting against the Washington Wizards to win the NBA title every year. For a lot of years you’ll earn super-normal returns, but one year (not anytime soon, I can assure you) you’ll be wiped out. That is essentially the strategy the banks were playing. They were going “short on volatility,” so to speak. In the meantime they reaped high returns and some amazing perks for private life. It’s hard to just call the party to an end, even if you have a relatively long time horizon.

And of course if you can actually make the bet with other people’s money, leverage the hell out of that money, and then make your take-home pay in the form of fees taken from the annual gains rather than having too much of your money tied up the principle, you do even better. There’s probably not much of a regulatory solution to people making bad bets in this way. But between now and whenever the next bailout-requiring crash, I’d like to see much higher taxes on the super-wealthy. I’m not that concerned about preserving incentives for multi-millionaire financiers to keep doing their work.