The concept emphasizes the necessity of individuals bearing personal risk and sharing the potential consequences of their actions. This principle argues that those making decisions should be directly affected by the outcomes, aligning incentives and fostering responsibility. For instance, a CEO whose compensation is heavily tied to company performance is more likely to make strategic choices that benefit the organization in the long term, rather than prioritizing short-term gains that could ultimately be detrimental.
The importance of this principle lies in its ability to mitigate moral hazard and encourage sound judgment. By ensuring that decision-makers have something significant at stake, it promotes accountability and reduces the likelihood of reckless or self-serving behavior. Historically, societies have recognized the value of aligning interests, as evidenced by traditions of shared risk and reward in various fields, from agriculture to finance.
