The Incentives Catastrophe

The same policy mistake caused both the Wall Street meltdown and the BP spill.

By Eliot Spitzer
Posted Wednesday, June 23, 2010, at 3:00 PM ET

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Incentives matter. In fact, they determine outcomes. It's obvious, but we usually forget this law until after the fact, after the crisis, when we ask almost naively: "Why did they act that way?" The law of incentives is what links the Wall Street cataclysm and BP's ongoing eco-disaster: In each case, we socialized risk and privatized gain, creating an asymmetry that created an incentive for private actors to accept and create too much risk in their business model, believing that at the end of the day, somebody else would bear the burden of that risk, should it metastasize into a disaster.