What Do Fishermen and Investment Bankers Have in Common?

Icelanders love taking insane risks. In 1973, when a volcanic eruption threatened to wipe out a town on the island of Heimaey, they bet they could stop the lava flow by shooting it with millions of gallons of frigid Icelandic sea water. Unbelievably, they won. Nobody in human history had beaten a volcano before, and nobody’s done it since.

That’s the same fearless, impassioned spirit in which Icelanders go fishing. It served them well–for many years, fishing was Iceland’s primary industry.

Then they discovered investment banking.

Michael Lewis’s absolutely must-read article takes the story from there, riffing on–among many other things–a classic paper on the economics of fishing to tell the tale of Iceland’s rise and fall in global finance, and how it fits into the bigger picture:

Fishermen, in other words, are a lot like American investment bankers. Their overconfidence leads them to impoverish not just themselves but also their fishing grounds. Simply limiting the number of fish caught won’t solve the problem; it will just heighten the competition for the fish and drive down profits. The goal isn’t to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention.

Government intervention saved Icelandic fishing, but not its banks. Maybe we can set up an exchange: We’ll teach Iceland what we know about banking regulations, and they can teach us about volcano monitoring.

tao yin's daughter

if we limit the number of fish caught, the rest think they have a free lunch only to learn in hindsight (when it is too late) that their vanity and greed will be the cause of the downfall of us all. I know this from experience.let the punishment fit the crime.

people need to understand the price that not only they, but that we all pay for failure to comply with the law.

In positive terms- we all gain from a mutual orientation of our activiities and the respect for each and every individual human being that this presupposes.

Jason K

"Could you explain why "[limiting the number of fish caught] will just heighten the competition for the fish and drive down profits"?"

Let's say there is a cap of 1 million cod. The logical thing for any fisherman to do is spend all that he can afford in time and equipment to catch as much of that 1 million as fast as possible, until the marginal cost of catching more fish equals his profit. He does this because every fish caught by someone else is one less fish for him to catch. As a result, he will make the bare minimum profit on each fish. If he doesn't do this, he risks someone else catching the fish before he does and him making even less money. It becomes a red queen race (continuous escalation) where people work harder and harder, spend more and more money, to stay in the same relative place.

"Also, what does this mean: "The goal isn't to get fishermen to overspend on more nets or bigger boats. The goal is to catch the maximum number of fish with minimum effort. To attain it, you need government intervention"?"

It means that the goal is to achieve maximum efficiency. This won't occur if fishermen have to spend effort and money protecting their ability to make money from other fishermen. Maximum efficiency is frequently not the result of unregulated markets.



An ungated report on the Heimaey eruption is available at


@np: Simply limiting the catch often boils down to: "Fishing stops for the season once the fleet catches X tons."

If you already have a boat, that is sunk cost, and you need to be sure that *your* share of that X is as high as possible -- so you go out earlier, stay out longer, invest in more equipment, etc.

So does everyone else, and your share doesn't actually increase -- but your costs have. So have your risks, because the entire season is much shorter, and a single bad day matters more. (Being done sooner could be good if there were other jobs to do the rest of the season -- but there often aren't, and you just spent your savings on extra nets.)

A per-boat or per-fisherman quota can avoid some of these problems. (Someone else will probably explain why they have their own problems.)

wanda tinasky

"I don't think we have much to teach regarding banking regulation." - Ben D

Really? How about, oh I dunno, maybe how not to allow the banking sector to outgrow the rest of the economy by a factor of 10? Last I checked, the dollar was still being traded. At least we keep our bubbles manageable. Our economy may have crashed, but theirs is a smoking crater. I mean, did you even read that article?

Chad Bergeron

How are they alike? Both are praying for a miracle so they can keep everyone fed.


I loved the article and all the comments, but I don't get how spraying water on lava is risky behavior. When you have no other options to accepting a loss, no behavior with a chance above zero is risky. The risk is already in place. It's what comes later that alters it.

Similarly the residents of Salt Lake City built an artificial sandbag river bed through town to channel snowmelt away and avoid flooding. It was a huge amount of work. There was some chance it would fail. But the only other option was knee deep water throughout the city. Flooding was the risk. The only "risky behavior" would have been ignoring it.



In regards to the Salt Lake City story, antoher option would have been to move out of the way of the the annual snowmelt. nature always win. Man's hubris never conquers.


I agree with the people here who say the US should not be giving any lessons on banking regulations.
Wanda, perhaps you should take into account the fact that the population of the US is 1,000 times the size of the population of Iceland. Basing your opinions about Iceland on that Vanity Fair article would be like me basing my opinion of the US on USWeekly and OK! magazine. It was that bad.
Also, if you could really keep your bubbles manageable they would not become bubbles in the first place.