Regulation versus transparency

With the financial meltdown comes the palpable call for more regulation.

Does that make sense? Or is that simply a basic human knee-jerk reaction? A basic human urge for control so we can feel safer? 

Really, it makes little sense. In itself it does not fix anything, it merely patches something broken, and we know it. In addition it hampers natural development towards something better.

To fix something one has to recognise the root cause, then do something about that.

Gather a group of people around a table, leave 10 € on the table saying it's yours. Would anybody pinch it in front of all? Not.

Now let the public freely wander through the same room at any time, would the money still be there next morning? Probably not.

Now tell the same public group that if they increase their holdings with 10 € within the next hour they will be paid another 10 € as a bonus. How long would the money remain on the table? Three minutes tops.

Transparency delivers instant ethical behaviour. Lack of transparency leaves all up to the individual. Lack of transparency combined with stupid bonus schemes, well, we know what happens then. 

Focus on transparency, regulating the life out of everything is counterproductive.

Looking for the root cause for lack of transparency? In my view double-entry book keeping can be seen as the biggest supplier of opacity. So I would suggest replacing that.

Double-entry fog clouding the view...

Comments

[Henning Petersen]

Transparency is enough to ensure ethical behaviour only when matters are so simple as a ten dollar bill on a table.

Remember Enron? All the information required to see the fraud was publicly available, released by the corporation itself. It took a whistle blower to get a reporter to look into it, and he had a hard time understanding what was going on.

The reason? Complexity and the cost of information.

Now how simple are those financial products that got us into the mess? Will transparency help? Certainly. Will it be enough? Very unlikely.

You're right about incentives, though. The only proper way to implement them is not to offer any.

[sig]

Henning, precisely - Complexity and the cost of information.

But that again is based on the datamodel and the capture method (Garbage in etc...) as well as the speed between the activity and the reporting.

All areas where double-entry book keeping stinks, made for paper based ledgers as it is. Start there and the rest will follow I say... :)