Sunday Letter

Eye for an Eye

“If a man destroy the eye of another man, they shall destroy his eye. If one break a man’s bone, they shall break his bone.”
– Law #196, Code of Hammurabi

Dear reader, The Code of Hammurabi dates from about 1754 BC, and is one of the oldest deciphered writings in the world. It was authored by King Hammurabi of Babylon, from Mesopotamia.

It is one of the earliest examples of a fundamental law, or constitution. Unlike some countries’ modern constitutions, the Code was relatively simple, and was based upon three fundamental concepts: reciprocity, accountability, and incentives.

In this way, Hammurabi ruled over his kingdom for almost 43 years.

Code of Hammurabi, Laws #:

  1. If a builder builds a house for a man and does not make its construction firm, and the house which he has built collapses and causes the death of the owner of the house, that builder shall be put to death.
  2. If it causes the death of the son of the owner of the house, they shall put to death a son of that builder.
  3. If it causes the death of a slave of the owner of the house, he shall give to the owner of the house a slave of equal value.
  4. If it destroys property, he shall restore whatever it destroyed, and because he did not make the house which he builds firm and it collapsed, he shall rebuild the house which collapsed at his own expense.
  5. If a builder builds a house for a man and does not make its construction meet the requirements and a wall falls in, that builder shall strengthen the wall at his own expense.

In simple terms: an eye for an eye (the Code is where the term comes from, predating the Bible).

In essence, if your actions cause someone harm, that same harm will be done to you. Law #229 states that if you build a house for a man, and it collapses killing that man, you would also be put to death. In this case you would be unlikely to want to cut small corners to save some money: you would want to make sure that house is solidly built, with a wide margin of safety.

Contrast this to modern construction firms, whose liability is often only fiscal. Indeed, with limited liability companies and directors’ and officers’ insurance, individuals are almost never personally liable.

Most incentives in our modern financial system work the other way around: “heads I win, tails you lose”. Bankers who work for large institutions care little about the reputation of the institution if things later go wrong. Chances are they will have moved on to another firm within a few years, with their bonuses safe in hand.

So ask yourself: do the counterparties you work with have “skin in the game”? In what way are they accountable for their performance? Is their performance even measurable?

As Charlie Munger says, incentives are super-powers. It pays to make sure that you aren’t incentivising people in the wrong direction.

Yours Sincerely,
Henry Chong

Code of Hammurabi, at the Louvre